Risk Management - Are NFPs doing enough to protect their cash assets?

As global financial structures change are Not for Profits doing enough to protect their cash assets? The Head of Charities & Not for Profits at Global Treasury in Sydney, Kris Flegg takes a look at risk management, treasury policy and the Australian Not for Profit sector:

We have witnessed structural changes in global financial markets that have resulted in the beginning of a number of financial shocks and an outlook for much higher levels of volatility than we’ve seen for a long period.

Despite their recent experiences and with a forecast that deserves a cautious approach many NFPs have not yet implemented an Enterprise Risk Management (ERM) plan for their cash assets.

The result of this is unnecessary operational risks and the possibility that cash assets are being deployed into investments which carry with them risk well beyond that intended and well in excess of the risk appetite of the organisation.

There has never been a more critical time to manage cash assets wisely.

What is a Treasury Policy?

A Treasury Policy is a document which establishes an organisation’s objectives in the investment of its cash assets, the organisation’s appetite for risk in respect of those assets and guidelines for the proper investment of those assets.

It is not uncommon to find organisations without treasury functions investing cash in high risk equity or bond funds with little or no understanding of the risk of face or capital value loss, or investing with fund managers on whom no due diligence has been conducted or with credit unions, building societies or banks with below investment grade credit ratings.

What is the approach of organisations outside the NFP sector?

Sophisticated organisations have policies and procedures which usually include precise delegations. The policy and procedure documents are usually simple and short and easy to reference. They describe the issue (management of cash), the role of cash assets within the organisation, the organisation’s intentions in respect of the management of cash in a multi dimensional perspective covering the risk of making or losing money on the face value.

They will also cover the organisation’s appetite to trade investment/credit risk for yield, the requirement for appropriate due diligence on the entities to which the organisation’s funds are to be entrusted and the risk of having all of the organisation’s funds invested with one manager, bank or institution.

Why is the issue of Treasury policy extremely relevant to NFPs?

A policy is good practice as the role cash in NFPs differs greatly from private firms or corporates, and there are serious implications that arise from this. As the majority of funds for a charitable organisation come from donors, grants and government agencies, there is a greater need for accountability to stakeholders.

Donors and agencies are now demanding assurances that their funds will be used to directly support the good works they were intended for and not subjected to unnecessary investment or operational risk in the interim. Giving of time and money is discretionary and those who give will only continue to do so whilst they have confidence in the system of governance. A documented and well defined policy and procedure is a demonstration to stakeholders that the Board and Management of an organisation have the foresight and capability to undertake their fiduciary duties.

The PWC Transparency Awards Jury Report May 2010 says "An area noted for particular attention in the NFP sector is the articulation of a policy for management and protection of funds raised surplus to an organisations stated or operational requirements”

Does a good investment policy constitute a Treasury Policy?

I am often told by organisations that they have ‘conservative’ investments polices that will protect the cash assets by only investing in ‘recognised’ institutions. Even the most well written investment policy generally will not provide sufficient procedural elements that are necessary for boards to fully prepare for unexpected events.

An investment policy may touch on elements of a Treasury Policy such a credit rating requirement for deposit institutions but unlikely to include a ratings downgrade plan, defined operational procedures or a diversification requirement for deposits.

The question could be asked if this level of diligence is required for a well regulated banking system such as Australia. If we are living in an era where there are concerns of the financial stability of entire countries, prudence would dictate that policy be established to protect cash assets held at financial institutions regardless of the current opinion on their strength or stability.

Taking the necessary steps

It is not difficult or expensive for an NFP to have good Treasury Policies and Procedures developed for them. However it is a task that is very important to undertake as it strengthens the corporate governance and financial management of an organisation. I would encourage those with a role responsible for the financial governance of an NFP to consider that within the current environment, enough has been done to fully protect and preserve what their organisations cannot afford to lose.

Global Treasury is an independent firm consulting to a range of organisations on treasury policy and risk management. For deposits over $1m, Global Treasury clients access a Treasury desk that gives advice, market intelligence and buying power to place deposits through a panel of banks. Global Treasury gives NFPs the opportunity to install best practice approaches to managing cash that reduce risk and help them get better outcomes.

Global Treasury provides ProBono policy services annually to the sector.

To discuss further or receive the full article ‘The Case for ERM for Cash Assets’ please contact Kris directly

Email krisflegg@globaltreasury.com.au

Phone (02) 8999 2715

Website: www.globaltreasury.com.au

Disclaimer: This document is intended to be for information purposes only and has been prepared without taking account of your organisations objectives, circumstances or individual needs. It is therefore important before acting on information contained in it; you should carefully consider its appropriateness to your own objectives, circumstances or needs. Any advice provided in this document is general in nature and we recommend that before you consider acting on this information you seek specific independent advice as to the appropriateness of any information contained in this document to your own needs.