Finance & Investment Protocol
It is customary for every legal entity to define a finance and investment protocol, known also as a finance and investment policy. Corporations and nonprofit organizations, particularly, need a written statement that outlines procedures and requirements for borrowing, lending and investing money. Even private trusts define the basic rules under which money in the trust must be managed. Such stated protocol protects future financial affairs from mismanagement and serves as a measure of how prudently managed the finances have been in the past.
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Portfolio Goals
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The first task in writing a finance and investment protocol is to define financial goals. A pension fund might have safety of principal combined with the highest achievable return on investment as its goal. Accumulation of capital in safe cash-equivalent investments may be the goal of a corporate acquisition fund. Goals should be defined in terms of sources of money, risk tolerance, intended use of money and intended return on investment.
Restrictions
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A good policy statement indicates who is to participate in setting the finance and investment direction, who makes the daily decisions, who carries out the transaction activities and how they are recorded. It also indicates what types and qualities of instruments are authorized for borrowing, lending and investing activities, and any credit ratings or licenses required of the agents or brokers involved in the transactions. Other restrictions concern the minimum and maximum maturity of the portfolio and the allocation percentages of the different asset classes to be included.
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Record Keeping
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Detailed records and a clear paper trail are vital for any finance and investment activity. This protects the portfolio because it allows errors and omissions to be easily tracked and fixed. It also protects the administrators of the portfolio because violations of prudent financial management practices will be revealed in an audit, as will adherence to prudent standards of operation. In a litigious society where seemingly insignificant details sometimes decide million-dollar lawsuits, detailed and accurate records are a necessity.
Reporting
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With any money management task, the hierarchy of authority and reporting responsibilities must be clearly defined and followed. Set dates for required reports to supervisors, board members, beneficiaries and governmental authorities as needed. Define the format of all reports, the method for transmission and whether strict confidentiality is mandated.
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References
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