A good treasury policy should be durable. It should not need rewriting because interest rates move, grants are delayed, or counterparties downgraded. Its job is to establish a framework within which those events can be managed, setting objectives, risk appetite, limits, liquidity requirements, and other arrangements.
Durability is not the same as being static, as a policy may need recalibrating if the charity's balance sheet, funding model or borrowing requirements change materially. Therefore, one of the most important aspects of the annual review is testing whether the framework remains appropriate rather than simply updating dates and carrying last year's limits forward.
The Charity Commission expects investment approaches to be kept under regular review and says policies should reflect matters including objectives, timeframe, liquidity needs, attitude to risk and monitoring arrangements. In our experience, the strongest policies translate those principles into usable guardrails without becoming too prescriptive or brittle.
Start with cash, not the counterparty list
Many policies start with approved banks, funds and deposit limits. A better starting point is what the money is for and when it could be needed as operational cash, restricted funding, project cash, general reserves and longer-term funds should all be managed differently.
The policy should therefore connect to cash flow forecasts, the reserves policy, budgets and strategic plans. It might define what counts as liquid and establish the access required over different time horizons and what metrics are used for monitoring.
Can you explain why every limit exists?
A £2 million bank limit, six-month maximum tenor or minimum credit rating may look prudent. But why those numbers?
Limits should have a defensible link to the charity's capacity to absorb loss, counterparty quality and diversification. A robust credit assessment can look beyond ratings to financial statements, capital and liquidity metrics, credit default swap and bond-market pricing, share-price signals, resolution and bail-in structures and external support.
The policy can set eligibility criteria, diversification requirements and maximum exposures, while approved counterparties and investment durations respond more quickly as credit conditions change.
A policy can also be too restrictive. Very conservative limits can force cash into unnecessarily short maturities, narrow the usable investment universe or add administrative burden without a commensurate reduction in risk. At the other extreme, overly generous limits can create concentrations and introduce risks that are difficult to justify.
A good policy absorbs change
One purpose of a treasury policy is to make adverse events manageable before they happen. If a bank experiences credit deterioration, sensible diversification and counterparty limits should mean that the exposure is already contained. The framework should then be clear about the response, such as suspending new investments, shortening maturities, reviewing existing exposure and escalating the issue.
The same principle applies elsewhere. A deterioration in cash flow should be manageable because liquidity requirements were established in advance. Cash flow forecasts, counterparty assessments and dealing decisions should be able to change within the policy. Policy changes should generally reflect changes in strategic needs, risk appetite, permitted instruments or governance.
But this is where policy meets the real world. A policy gives you a framework, but treasury management is managing within that framework in relation to real-world events. How does the charity monitor the changing credit risk environment? Does this monitoring include fast-changing events? What external expertise is necessary to fill the gaps in internal capabilities?
Borrowing and investment should be considered together
Where a charity has debt, borrowing and surplus cash should be viewed in the aggregate, in detail, and in the interplay. Holding £10 million of cash while drawing £10 million of a revolving facility may be rational if the cash is committed or the facility provides valuable flexibility. It may also create an avoidable cost of carry.
The borrowing framework should go beyond approval limits. It can address fixed and variable rate exposure, refinancing concentration, short-term borrowing, committed facility headroom, covenant monitoring and lender diversification. For larger portfolios, limits on the proportion of debt maturing within particular periods can prevent a refinancing cliff from building unnoticed.
Short or variable borrowing may reduce initial cost but increase interest-rate and refinancing risk. Long-term fixed borrowing offers greater certainty but can reduce flexibility. The cheapest debt is not always the best debt.
Keep purpose and performance in view
Performance should be judged on more than yield. Reporting can consider liquidity, diversification, credit quality, maturity profile, return against an appropriate benchmark and compliance with limits. For borrowers, debt cost, refinancing profile, covenant headroom and interest-rate exposure are equally relevant.
A treasury policy is best thought of as a set of guardrails rather than a script. If it is too rigid, it can become obsolete quickly; if it is too loose, it offers little protection. The aim is a framework robust enough to withstand normal change, with periodic review focused on whether its assumptions, limits and governance remain appropriate and embedding a need to monitor the wider economic and credit environment.
Arlingclose supports charities with independent reviews of treasury and investment policies, including liquidity, counterparty credit methodology, investment limits, borrowing and refinancing risks, governance and performance measures, as well as providing market intelligence and proactive advice. If you would like to discuss how your current policy compares with market practice, please contact [email protected].