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The Cash Investment Policy Statement (IPS) The Cash Investment Policy Statement (IPS) allows a company's board of directors to understand and define how surplus cash is managed, and delegate written authority allowing a treasury department to invest a company's cash on a daily basis.

The Cash Investment Policy Statement (IPS)

by Britta Hion, Director, Head of International Corporate Cash Sales, BlackRock

The management and control of surplus cash is a critical treasury department function. The Cash Investment Policy Statement (IPS) allows a company’s board of directors to understand and define how surplus cash is managed, and delegate written authority allowing a treasury department to invest a company’s cash on a daily basis. For corporate treasurers who have yet to establish or have not recently evaluated their existing cash investment policies, now is the time.

What is an IPS?

An IPS is a document designed to identify the goals and objectives for a company’s investment portfolio(s), as well as allowable parameters for achieving those goals. Having a documented policy for the administration of the company’s cash is among the most effective means of risk management, serving as a clear and constant reminder of the firm’s goals and ability to tolerate risk. We believe the IPS should be part of every firm’s risk management protocol, incorporated into an annual board review process (typically by the audit committee) and updated on a regular basis.

In short, an effective IPS provides a means for communicating the objectives for and permitted level of risk in a company’s cash portfolio. The IPS should provide guidelines for those responsible for management of the company’s cash, whether that is an internal or external manager.

Getting started

Before developing an IPS, it is important to conduct a thorough evaluation of the company’s cash needs and to pinpoint its risk profile. Effective forecasting of liquidity needs and assessment of risk tolerance allows for the best opportunity to achieve excess returns within a cash portfolio.

It is important to assess company priorities. To that end, ask the questions: what is the general course of the company and where is cash likely to be deployed (e.g., toward acquisitions, to fund operations or more likely toward capital expenditures)? Of equal importance is obtaining a good understanding of the company’s outlook, taking into account the organisation’s view of the economy and the industry in which it functions. When constructing a cash portfolio, it is important to understand how and when the company may potentially need cash. Forward knowledge of a cash need—be it months, weeks or just days ahead—can have a beneficial impact on expected returns.

From there, treasury and finance staff are better equipped to judge the overall makeup of the company’s cash, a central concept that every corporate treasurer needs to understand when developing an IPS. In fairly simplistic terms, a company’s cash can fall into three distinct categories:

  • Operating cash, working capital required to meet daily needs of the business.
  • Core cash, which is generally earmarked for unknown future needs of the company.
  • Strategic cash, the stable balance sheet assets not intended for specific expenditures. While still conservative by nature, strategic cash—which typically has a longer time horizon than operating cash or core cash—might have more of a total return objective.

Important considerations

Each company’s cash investment policy will be as unique as the company itself and a firm’s specific situation will dictate the policy constraints and benchmark for the cash portfolio.

While a company’s investment policy ultimately will be customised, there are several important factors that all corporations should take into account when developing a policy.

Risk tolerance

Risk tolerance is arguably the most important criterion upon which to begin building a cash investment policy. As a first step, company management must determine if the key priority is preservation of capital or maximisation of returns. As a next step, consider whether, within each category above, there is an ability to weather any deterioration in liquidity.

Risk can come in many forms—for example, short-term volatility, technical pressures (supply/demand) or headline risk, to name a few. The impact on the company’s cash portfolio can differ based on the ability to navigate these variables.

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