n the banking and corporate finance sectors, the stages of creating a treasury portfolio must be carried out with thorough and solid planning to provide optimal results.
Unfortunately, most practitioners still build portfolios without a strategic approach. Therefore, in the following article, let’s delve deeper into the steps involved in remaining resilient in all market conditions.
7 Steps to Strategically Building a Treasury Portfolio
There are seven stages involved in creating or compiling a treasury portfolio. These stages begin with the analysis process and continue through investment evaluation. For more details, see the explanation below.
1. Needs and Objectives Analysis
When compiling a treasury portfolio, you need to start by determining what goals you want to achieve.
The objectives in this case can vary and depend on the needs of the institution, whether it wants to build liquidity, manage interest rate risk, or want to earn returns.
Once the objectives have been established, we can then begin formulating a strategy. For example, a conservative, moderate, or aggressive strategy. The type of strategy chosen will determine the next steps, including instrument selection.
2. Risk Profile Assessment
In this second stage of creating a treasury portfolio, it is important to assess how much risk the institution or company can accept.
This is because each company has different tolerances according to its business structure and the expectations of stakeholders.
Furthermore, regulations from the Financial Services Authority (OJK) and Bank Indonesia (BI), as investment regulators, must also be taken into consideration. This is to ensure that the portfolio not only aligns with objectives but also complies with existing regulations.
3. Asset Allocation
Once the risk profile is fully understood, it is time to determine how funds will be allocated across different assets.
Typically, funds are divided into short-, medium-, or long-term instruments. Asset allocation should be carried out with diversification in mind to prevent risk from being concentrated in a single instrument.
4. Selecting the Right Instrument
Once the allocation has been mapped, the next step is to select appropriate instruments. This process requires a thorough evaluation, particularly regarding the instrument’s liquidity and the level of returns offered.
By choosing the right instruments, a portfolio can achieve optimal results according to investment goals.
5. Investment Execution
In the fifth stage of creating a treasury portfolio, transactions will begin to be implemented or executed.
Transactions are carried out, either in the primary or secondary market, by ensuring that the purchase is in accordance with the right strategy.
At this stage, coordination is crucial for risk management and record-keeping. Accuracy in this process will significantly impact the portfolio’s performance and reliability.
6. Performance and Risk Monitoring
The treasury portfolio that has been implemented must be monitored or its performance monitored to ensure it is in line with the target.
This monitoring includes the evaluation stage of actual returns, changes in asset value, and potential risks that may arise due to market fluctuations.
For this stage, we can use analytical tools, such as duration analysis, Value at Risk, and stress testing, which are useful in understanding portfolio sensitivity to market changes.
7. Periodic Evaluation
Apart from monitoring , evaluation is also important to do because market conditions are constantly changing.
Evaluation aims to ensure whether portfolio movements are appropriate or need to be adjusted.
If drastic changes occur, this is where we can change the asset allocation to stay in line with our goals and risk profile.
Benefits of Building a Good Treasury Portfolio for Companies
Following the steps to building a sound treasury portfolio offers numerous benefits for companies, particularly in supporting business growth. Here are the various benefits in full.
1. Maintain Cash Flow Stability
A treasury portfolio will help companies maintain stable cash flow and liquid assets that are useful in fulfilling obligations, such as paying debts and day-to-day business operations.
2. Optimizing Returns
One of the main benefits of building a portfolio is none other than to optimize returns.
If the portfolio is designed properly, the use of assets can be optimized to provide additional contributions to the company’s income.
3. Managing Financial Risks
A well-diversified portfolio can play a significant role in managing financial risk. When market conditions are volatile, a well-structured portfolio can reduce the risk of loss and protect asset value.
4. Supports Long-Term Financial Planning
A treasury portfolio can provide a comprehensive overview of a company’s financial position.
This will be extremely useful for company management in making long-term strategic decisions, particularly regarding business expansion or new investments.
Design an Effective Treasury Portfolio Strategy with PasarTrainer
Building a treasury portfolio isn’t something to be taken lightly. Effective and thorough planning is essential to achieving optimal returns.
Register for Pasar Trainer’s treasury portfolio management training to receive intensive training in strategic portfolio development. Also, participate in a series of other equally valuable treasury training courses that effectively support company investment optimization.