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Context: Setting limits on the size of funds transfers that individuals on a treasury team can approve is a basic part of effective risk management, good governance and sensible treasury policies. The question is how to determine the dollar amounts. For context on the issue, NeuGroup Insights reached out to members with longtime experience in treasury.
Whom do you trust? One of our veteran treasurers said trust is a major piece of the equation, both in selecting which team members can approve wire transfers and in determining the limit amounts. “The number is inconsequential compared to the trust factor,” he said.
- His trust depends in part on the person’s level of experience and training. For a more junior member, the number “is big enough that they’re approving the things that come from the AP group from our shared service center. And small enough that I’m not worried we’re going to break the bank.”
How big are the wires? Setting limit levels requires knowing the amounts that treasury has had to approve in the past. “When thinking about approval levels, you may have a treasury director that can approve payments up to a certain dollar amount, an AT up to an amount above that and then the treasurer above that,” a different member said. “When you think about the appropriate dollar amounts for each of those people, you need to understand the dollar range of payments to be made.”
- “To set the approval levels, you look at the history of payments over a certain time period (i.e., one month, one quarter, etc.). You don’t want to have a situation where the treasurer needs to approve all payments over $250,000 and they then find themselves approving 90% of the payments. You need to strike an appropriate balance to establish what they need to approve.”
Member question: “What limits for approving/releasing funds transfers within treasury do you have by level? Do you delineate limits between external transfers vs. intercompany account transfers?
- “I am working on proposing increasing limits to approve/release wires handled by treasury. Although I have no limit as treasurer, the head of [treasury] operations only has $5 million, so there are a lot of wires that I end up releasing. We also have an additional director with a $500,000 approval/release limit.”
Peer answer 1: “Given that the sizes of organizations are different, I think instead of looking at the dollar amount, you need to look at the dollar size distribution of the payments and decide what the appropriate approval levels are. The backdrop is that by the time the payment comes to treasury, it would have gone through an internal approval process.
- “By setting the level too low, as you said, you end up releasing everything. Also, you may want to have separate approval levels for reoccurring payments, such as debt principal and interest payments since those are known upfront.”
Member response: “Good suggestion on looking at payment distribution, which we are in the process of doing to derive a recommendation. In terms of internal approvals, many of our payments are for treasury related items, so we are usually the ones who have approved the item for payment.”
Peer answer 2: “The treasurer and assistant treasurer have unlimited limits, primarily due to the potential for large internal transactions and milestone payments. A third individual in treasury has unlimited limits for internal transactions but has an external limit of $25 million.”
