How debt and investment management runs, step by step

Debt and investment management starts with a policy the board approves and ends with accounting entries and reports. Treasury staff use the policy to decide where cash sits and when to borrow. A separate operations function confirms and settles each deal, and accounting records the results for management and lenders.

The steps in order

1. Set the policy. The treasurer drafts an investment and borrowing policy. It names permitted instruments, minimum credit quality, concentration limits and who may authorise each kind of deal. The CFO reviews the draft, and the board or its finance committee approves it. Every later step is measured against this document.

1. Keep the banking and dealer panel in order. Treasury owns relationships with banks, brokers, custodians and lenders. This covers account mandates, authorised signatory lists, know your customer refreshes and fee reviews. Legal usually joins when a new institution is onboarded. Out of date signatory lists are a frequent audit finding.

1. Build the cash position. A treasury analyst pulls balances from bank portals. Expected receipts and payments come in from accounts payable, payroll and the business units. Combined, they show whether the group holds a surplus or faces a shortfall.

1. Decide whether to borrow or invest. The treasurer or treasury manager reads that position and chooses. A shortfall might mean drawing on a revolving facility, issuing commercial paper or sweeping cash between entities. Surplus funds go into deposits, money market funds or short dated securities that the policy allows. Larger decisions need CFO sign off.

1. Check issuer and counterparty exposure. Before booking, someone outside the dealing seat tests the proposed deal against limits by issuer, bank and country. Small teams give this to the treasury accountant. Larger ones have a middle office or risk function. Any breach is escalated to the treasurer and logged.

1. Execute the trade. The dealer places it on a trading platform or a recorded phone line. In many companies the dealer is also the treasury manager. Trade details are entered in the treasury management system at once.

1. Confirm and settle. Treasury operations matches the counterparty confirmation against the booking. Releasing payment requires a second approver who took no part in the trade. Mismatches are resolved with the bank before value date.

1. Handle foreign currency deals. Business units report their exposures, such as supplier invoices in another currency or expected export receipts. Treasury nets these across the group and hedges what remains with spot or forward contracts. Confirmation follows the same discipline as other deals. There is an added risk of paying away one currency before the other arrives.

1. Manage interest rate positions. Floating rate debt leaves the company open to rate moves. The treasurer proposes swaps, caps or a switch to fixed rate borrowing. When hedge accounting is wanted, the treasury accountant prepares documentation at inception and tests effectiveness at each reporting date.

1. Record and report. The accounting team posts interest accruals, fair value movements, realised gains and fees. They reconcile the treasury system to bank and custodian statements. Reports then go to the CFO and the board. Lenders receive covenant compliance certificates on the schedule set in each facility agreement.

Questions to ask the people who run it

Written procedures describe the intended flow. The people at the desk know where it bends. Ask them directly:

• Who built today's cash forecast, and which inputs arrived late or were estimated?
• When a deal would breach a limit, what actually happens? Has anyone ever traded first and sought approval afterwards?
• Which banks stay on the panel only because of an old loan or a personal relationship?
• Can the person who releases a payment ever be the one who agreed the trade, for example during holidays?
• Are any positions tracked in a spreadsheet outside the treasury system? How are they reconciled?
• Which business units report currency exposures in advance, and which call only when an invoice falls due?
• When did anyone outside treasury last read the investment policy?
• What do lenders ask for that is not on the standard reporting calendar?
• When a settlement fails, who fixes it and where is the failure recorded?

The answers often show informal steps that keep the process working. Removing those steps without a replacement can break things.

Where redesigns tend to go wrong

Segregation of duties is the control most easily weakened by a well meant change. Merging the dealing and settlement roles to save effort, or letting one system user both book and approve, creates exactly the gap auditors look for.

Policy drift is the other trap. A new instrument, bank or hedging approach brought in during a redesign must be added to the approved policy first. Otherwise every deal using it is technically outside policy, however sensible it looks.

Finally, the accounting step depends on how deals are captured upstream. Changing booking fields or the trading platform without involving the treasury accountant tends to surface later as reconciliation breaks at period end.

APQC's Process Classification Framework® (PCF) is an open standard developed by APQC, a nonprofit that promotes benchmarking and best practices worldwide. To download the full PCF or to view definitions and measures, please visit www.apqc.org/pcf.