This article is the first in a two-part series on Treasury Management for startups. Also see part-two, Low-Risk Investment Instruments for Venture-Backed Startups, and download Burkland’s sample Treasury Management Policy.
Over the past year we’ve seen major changes in the overall macroeconomic landscape as well as the startup funding environment:
- In January 2022, interest rates were near 0%, yield curves were normal, and there was no discussion about bank risk. Startups were seeing strong valuations and plentiful funding from VCs and other institutional investors.
- Fast forward to today, and the picture is completely different. Short term US Treasury interest rates are over 5%. The yield curve is inverted. There are significant concerns about individual bank exposure and even some discussion about potential systemic risk in the wake of the SVB crisis. For startups, this has led to a much more difficult funding environment and significant need to reduce risk and preserve cash.
One of the key things startups should do to address this moment and prepare for the future is implement an active treasury management policy. Burkland has a sample Treasury Management Policy that can be customized by a startup’s board of directors and implemented by the management team.
Purpose of a Treasury Management Policy
- Assure preservation of principal
- Maintain liquidity sufficient to meet cash flow requirements
- Put excess cash to work; add to cash runway with idle cash by earning a market-based return on LOW-risk investments
An active approach to treasury management can help startups reduce financial risk by diversifying across institutions and instruments, while at the same time putting excess cash to work.
In this article, I’ll break down the important dimensions of a startup’s treasury policy. In part-two, I provide a short list of low-risk financial instruments for diversifying capital.
Dimensions of a Basic Treasury Policy
1. Multiple Bank Accounts
- Hold several accounts with specific purposes, such as an operating account, a backup account, and interest income-focused accounts.
- Select operating account:
- Primary account for day-to-day transactions
- Easy integration with QBO / Ramp / Bill.com / other tech stack apps
- Other considerations: customer tech support; suitability for small business needs; wire / ACH daily limits / ability to customize multiple authorization levels / fees / business credit card services
- Select a 2nd (and possibly 3rd) bank based on offering and competitiveness of cash/treasury management tools (ICS accounts, MM funds, T-bills, laddering)
- Designate a “redundancy” account at a different institution from the other accounts
- Note the largest banks often have three groups relevant to this topic that do not necessarily operate as an integrated unit:
- Standard banking (retail and small business); very limited in offerings
- Wealth management: access to a wider set of treasury tools, but will be a separate account from above
- Commercial banking: typically serving much larger companies (although this is starting to change)
- See Choosing the Best Banking Partners for Your Startup
- Select operating account:
2. Cash Use Designation (Operating vs. Idle vs. Reserve)
- A 12-month budget with cash use, runway, and factors impacting variability is a must-have:
- What is a reasonable amount (measured in months) of cash to keep immediately available?
- How much of a buffer should be maintained to absorb potential variability?
- How much can be put into 30-day instruments (better rates than cash sweep funds)?
- Balance spread over 3-mo, 6-mo, and potentially 1-year instruments, depending on cash needs outlook and uncertainties from above analysis
- Projection should outline, on a monthly basis, target balances in cash (immediately available), 30-day, 3-month, 6-month, and 1-year instruments
- Risk diversification should address both institutions and instruments. See sections 4 and 5 below.
4. Approved Instruments
- Instruments should be in-line with the objective of earning market-based returns on near risk-free instruments
- Must distinguish between those held directly by the company vs. the bank (or another institution)
5. Approved Institutions
- Credit ratings and potential risk exposure of institutions where funds will be held
6. Reporting and review
- Performance measurement and risk-review/compliance on specified periods to board following formal BoD adoption of Treasury / Investment policy
Download Burkland’s sample Treasury Management Policy
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Good treasury management reduces risk, maximizes cash, and builds confidence with your Board of Directors and future investors. Talk to a Burkland startup CFO about your treasury management needs.