Key takeaways
- Be aware of the security and creditworthiness of the counterparty you’re considering investment with
- Know your cash flow: consider how liquid your investments portfolio is to cover day-to-day expenditure and unexpected expenditure that arises
- Link the yield with security and liquidity: the more risk and the longer the time horizon when your investment matures, the greater the yield to expect
- You must understand your legal powers in your respective country when investing
- Always ensure that your investment is ethical
How safe is the investment?
The security of the investment is the first aspect you should consider. When investing public money, protecting the principle of your investment should come first. You should ensure you have an effective process for undertaking due diligence on the counterparty you are investing with to assess their creditworthiness and the probability that they could default on repayment of your organisation’s investment.
This could come in the form of looking at the credit rating relevant to the specific investment or at an institution’s credit rating and setting your organisation a standard of credit rating, which you will only accept for that certain investment. External advice from professional advisors should also be considered as part of a due diligence process.
Do you know your cash flow requirements?
Considering your organisation’s liquidity is vital when investing. As a minimum, you should prepare a cash flow forecast and compare your actuals over a period to gain an understanding of your organisation’s cash flow needs. The preparation of cash flow projections on a regular, timely basis provides a sound framework for effective cash management.
This should be considered in relation to your current investments portfolio – how much of your portfolio is short and long term? Is there also a premium/penalty for early redemption on your investments? Ensuring you have enough liquid cash investments to cover forecast expenditure is crucial for effective treasury management.
How will you assess and appropriate yield for the investment?
Once you’ve assessed the security and liquidity of the investment in relation to your business cash needs, you can then consider how much yield you should be set to generate.
Because you reflect on how long you want to invest for and who you are investing with, riskier investments should give you a greater yield to compensate for you taking on greater risk, and investing for longer should yield greater interest on an investment, as you are exposing yourself to a greater interest rate risk. For example, if you invest for 12 months at a fixed rate and the base rate interest in your country rises, as the market responds you could be losing out on investment yield.
It is important to spread this risk over long and short maturity of investments: in the case of a rate drop you can benefit from a longer fixed deal. Spreading this risk exposure is an important part of investment strategy and decision making.
Do you have the legal power to make this decision?
You should know what your legal power is to invest with regard to your respective country’s legal framework. You must understand this in order to avoid making an investment decision that could be illegal; potentially creating a complex legal situation.
Have you considered the ethical implications?
Finally, consider the ethics of the investment. When investing public money you must be careful not to invest in something that is harmful to the environment or in an illegal activity.
Questions for you
- Before making a decision do you weigh up the pros and cons of the potential outcomes?
- Do you remain level-headed in challenging situations?
- Do you approach problems with an air of cautiousness and an analytical mindset?
Further information
CIPFA Treasury Management Network – join for the latest advice, guidance and updates on treasury management.
TISonline Treasury Management Stream – a comprehensive guide to the investment of local authority funds, debt management and treasury management practices.
Pride of place: knitting together investment strategies – article from Public Finance.
Commercial property: sound investments – article from RICS.
Investment, joint venture and trading: How councils seek income – article from Local Government Chronicle.
