Prudent Reserve

• Every organization must set aside a prudent reserve so the nasty surprises such as dead computers and broken machinery don't harm daily operations or scuttle important opportunities. Your prudent reserve can be from one to six months' operating expenses in size, depending on factors such as seasonality of your business or the estimated cost of replacing key machinery or other operating assets. Prudent reserve should be treated as cash and kept in the safest short-term investments such as U.S. Treasury bills, FDIC insured bank certificates of deposit or money market mutual funds that invest only in the safest securities.
  
  

Acceptable Risk

• The Prudent Man Rule is the standard for a fiduciary's handling of money. It instructs the money manager "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested." This means that, should shareholders or board members take umbrage with your management of the organization's money, a court of law will examine your transactions to see if they meet the requirements of the Prudent Man Rule, so the level of acceptable risk outlined in your investment policy should be extremely low.
  
  

Authority

• Your investment policy should also outline in detail who has the authority to make decisions regarding the investment of daily cash and long-term funds. Traditionally, the money manager is the treasurer of the organization and reports to the CEO and board of directors. An investment committee can make decisions regarding longer-term investments, but the money manager should be given authority to invest daily cash.
  
  

Reporting

• One of the most important elements of an investment policy is the reporting schedule and the identification of who should receive the reports of transactions and returns. Results of money management activities traditionally are reported at the monthly board of directors meeting, but informal daily or weekly reports to the CEO are standard procedure. These reports should be in the form of beginning balance, money in and money out, followed by a list of transactions, interest income and ending balance.