An IPS is an integral policy document for any organization to reduce corporate cash management and investment risks. It outlines an entity's cash management processes and strategies, and its investment goals. Without such policies and procedures in place, organizations are more likely to make emotional, imprudent, and even illegal decisions.

This article briefly discusses the purpose and components of a strong IPS, the pitfalls associated with a poorly drafted or non-existent IPS, and the best practices that companies should implement.

What is an Effective IPS?
An organization’s IPS acts as a predetermined mandate that helps ensure that corporate cash management and investment decisions follow specific guidelines. An effective IPS serves as the company's compass in an unpredictable financial landscape. With strategic risk management, diversification, and pre-determined decision-making mapped out ahead of time, an IPS can shield companies from situations such as bank-failure chaos. By integrating cash management protocols within an organization’s IPS, companies can eliminate concentration risk, optimize cash resources, and meet short-term obligations by setting objectives, defining strategies, and providing guidelines for cash custodians and risk management in order to reduce or eliminate liquidity risks.

An IPS holds immense importance in the realm of investment decision-making, especially in a dynamic and unpredictable economic landscape:

  • It offers a structured approach that anchors investment decisions within a pre-determined framework.
  • It assists companies in navigating through uncertainty, preventing hasty and irrational actions motivated by fear or greed.
  • It provides significant safeguards, establishes protocols for managing risks, and ensures that investments are consistent with the organization's risk tolerance.

Many companies would have avoided imprudent and rash decisions during the Silicon Valley Bank crisis if they had had an effective IPS.

Various stakeholders provide input into an organization’s IPS, including executive management, boards of directors, and prominent investors (preferably with the assistance of an experienced financial advisor and corporate cash management specialist). By encouraging openness and responsibility in decision-making processes, an IPS can instill a sense of trustworthiness and assurance that the organization will not be caught flat-footed, will make fundamentally sound and legal decisions, and will not be placed in the position of asking questions like: “Should we move the corporate money into our personal accounts so we’re not last in line on the bank-run?”

An IPS not only ameliorates the difficult decisions management and Boards face in times of chaos, but also acts to protect management and Boards from potentially biased or illegal suggestions proffered by investors, who might not share the Board’s motivations or obligations to a company’s various constituents.

Crafting and Implementing an Appropriate IPS
When crafting and implementing an IPS, several key considerations must be kept in mind:

  • Investment objectives should align with the overall goals and risk appetite of the organization so that suitable investment opportunities can be identified within an organization’s framework, while simultaneously including flexibility and adaptability to address changing market conditions.
  • Adjustments should be made if unexpected circumstances or shifts in market trends arise, and clear communication and transparency should be upheld to ensure all stakeholders are aware of investment decisions being made.

To effectively implement an IPS, it is crucial to engage all relevant stakeholders who would be impacted by the policies, set realistic timelines and milestones for implementation, and conduct regular monitoring and review to ensure its continued effectiveness.

The Pitfalls and Consequences of an Improperly Drafted IPS and the Mishandling of Cash or Treasury Management
Poorly drafted investment policy statements can hamper their effectiveness and lead to unfavorable outcomes. Some of the worst practices include:

  • Lack of clarity and specificity, which can create confusion and result in ill-informed investment choices.
  • Failing to align an IPS with investor goals or organizational objectives, causing dissatisfaction.
  • Neglecting regular monitoring and review processes.
  • Overly complex or rigid guidelines that impede the IPS’s effectiveness by making it difficult for organizations to adapt to changing market conditions or seize new investment opportunities.

An effective IPS must prioritize clarity, align with investor goals, establish monitoring processes, maintain flexibility, be reviewed regularly, and be revised as necessary to achieve favorable financial outcomes in an ever-evolving market landscape.

The same holds true for an organization’s cash management policies. Poor forecasting and liquidity management can lead to unexpected cash flow problems that make meeting financial obligations impossible. Companies must properly manage the risks associated with holding liquid assets such as stocks or bonds in their portfolio. Finally, a lack of centralized control and oversight can pose major obstacles to effectively overseeing cash flows.

Mishandling cash or treasury management can have dire repercussions for companies, from minor setbacks to the complete collapse of an operation. Companies should recognize the significance of regularly reviewing and revising their IPS while adhering to prudent cash and treasury management principles in order to protect investors’ assets and mitigate risks.

How to Protect Your Organization
There are various measures an organization can take to protect itself, including the clearest and most obvious: by crafting and implementing an effective and fulsome IPS. A successful IPS will include investment objectives and constraints that outline what the organization aims to achieve through its investments and any limitations on how it can do so. It will outline a comprehensive risk management strategy that identifies potential risks and outlines the steps needed to mitigate them, such as diversifying investments across multiple asset classes or hedging against certain risks via financial instruments like derivatives. A robust asset allocation framework should be established, outlining how assets will be allocated across different investments to achieve desired returns while minimizing risk. Finally, ongoing monitoring and performance evaluation of investments should be conducted.

There is No One-Size-Fits-All IPS
An IPS can and will vary based on each company and its stage of development. The IPS of a startup or early-stage business typically aims to prioritize capital preservation and liquidity concerns, while at the same time supporting business expansion. As a company expands and gains market traction, its IPS may become more aggressive, prioritizing capital appreciation, long-term growth, diversification, and expansion. Companies with established market positions typically adopt a more balanced IPS, seeking stable returns while protecting capital and mitigating risk.

In today’s unpredictable economic environment, investment policy statements are an essential tool for all types of businesses, no matter their size or scope. Recent events involving small and regional banks like SVB demonstrate the significance of having an in-place safeguard like that provided by a carefully drafted IPS. Moreover, an IPS tailored to a company’s specific needs, growth stage, and overall goals is crucial to ensure that organization’s continued success.