A treasury policy is a set of clear guidelines that helps your organization manage key risks, set limits and define accountabilities within treasury operations. It serves as a roadmap, outlining essential risk management practices and establishing how performance should be evaluated.

Unlike procedures, which detail specific steps, treasury policies focus on the broader principles that direct treasury activities, ensuring alignment with the organization's goals and risk tolerance.

Treasury policies are important because they provide the foundation for effective control over financial and operational activities. By clearly assigning responsibilities and defining acceptable behavior, they promote accountability while mitigating risks.

Treasury policies also ensure compliance with regulatory requirements and support good governance by delegating authority and ensuring treasury operations are consistent, transparent and aligned with the organization’s objectives.

Finally, formalizing a treasury policy affirms that everyone involved understands the best practices for managing the organization’s treasury activities.

Now, let’s get into the five steps for how to create a treasury policy.

Step 1: Determine the primary objective of each treasury function. 

Start by clearly defining the primary objective for each treasury function, such as investment management or foreign exchange (FX) risk management. This helps set the scope for your policy or section of a broader treasury policy.

By identifying the objectives up front, you can focus the policy discussions, making it easier for stakeholders to understand how the policy will impact their activities. Plus, including the objectives in the formal policy ensures they are communicated across the organization, helping to align practices with desired outcomes.

It's also important to recognize how treasury functions are influenced by other areas. Identifying connections with other relevant activities and policies, such as how liquidity management and cash flow forecasting affect short-term investments, ensures consistency across departments.

Step 2: Develop the policy through support, consultation, structure and drafting.

Before you start writing, it’s important to initiate three actions to help you develop the treasury policy. First, you need to build support for the policy. 

Securing authorization and support for the process is essential. Start by appointing an individual or group to take the lead and primary responsibility for the process. This is usually filled by general managers of the business units (BUs) that will be directly impacted by the policy. Having representation (staff and managers) from all the affected BUs makes it easier to create a policy everyone will support from the outset. 

Second, be sure to consult with all interested parties about the policy. Rather than focusing on current policies, map out what’s actually happening in practice. For every key activity, create a flowchart or workflow diagram — visual aids help everyone see the big picture of what’s working and what’s not. It also helps those involved explain the day-to-day process, spot potential risks and identify areas where improvements can be made. This way everyone is on the same page, leading to more helpful discussions about what needs to change. 

Third, a structure for the policy needs to be agreed upon. This is a critical step because it ensures consistency, clarity and effectiveness across the organization. When thinking about the structure, be sure to reflect on the company’s practices and culture, and seek to strike a balance between high-level policies and detailed procedures.

Defining key elements — such as objectives, scope, guidelines, roles, responsibilities and performance measurement — creates a roadmap for managing treasury activities. It also outlines controls to ensure compliance, sets expectations for handling exceptions and includes a review cycle to keep the policy up to date.

When it’s time to start drafting the treasury policy, the development team will need to either create a new basic policy or modify an existing one. The policy should be consistent and logical — something the entire organization can easily follow. Some tips for the drafting stage include: 

• Use clear, concise, simple language.
• Address the rule itself, rather than how to implement it.
• Engage relevant team members to understand existing processes and ensure any operational concerns are addressed.
• Establish clear lines of authority.
• Designate expert resources to interpret the policy if questions arise.

Step 3: Get approval from all stakeholders.

To get approval for your treasury policy, it's important to involve all key stakeholders in a formal review process. Start with senior treasury staff to ensure the policy is practical, includes necessary controls and aligns with its objectives. Then, have other functional managers, such as accounting and legal, and any other departments affected by the policy review it.

Larger organizations will likely need an internal audit or compliance group to check for regulatory and financial control compliance. Depending on the policy’s impact and on existing levels of authority, you may need to acquire formal approval from either the board of directors or a designated executive.

Step 4: Develop and implement procedures that enact your policy. 

Once your policy is approved, the next step is developing clear procedures to implement it. Policies guide the creation of standard operating procedures (SOPs), which help ensure compliance with the policy. Be sure to connect procedures directly to the governing policy and communicate how they support the organization’s goals. Involve managers and employees in the process to foster ownership and increase compliance.

Keep the procedures clear, concise and easy for everyone to understand. Avoid overly restrictive rules and provide alternatives, when possible, such as manual steps to take in the case of a system failure. Make sure the information is accurate and up to date and includes step-by-step instructions for completing any necessary forms. Additionally, make sure the document is structured to allow users to quickly find what they need.

Step 5: Set up a schedule for periodic review of the policy. 

Over time, there may be changes within your organization that make your policy irrelevant or ineffective. The timing and structure of the periodic reviews should be outlined in the policy itself and based on internal protocols, regulatory requirements, and the organization's size and type. A best practice is to include a revision-tracking section in the policy to document updates and maintain historical context.

Be sure to also reevaluate your policy after any major change, such as a company reorg, changes in banking services or new regulatory requirements. Compliance reviews are also key. These reviews may be part of internal or external audits, with the responsibility for compliance testing assigned to an objective party outside the relevant functional area, ensuring a thorough and unbiased evaluation.

Using these five steps to create a treasury policy — defining key objectives, involving the right stakeholders, securing approval, developing detailed procedures and establishing a plan for regular reviews — creates a solid foundation for effective treasury management. By taking the time to create a well-crafted treasury policy, you’re empowering your team to operate efficiently while maintaining control, accountability and adaptability in a dynamic financial landscape.

Treasury Policy Templates

AFP members have access to Member-Only Tools, which include a short-term investment policy template and a fraud policy template.

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