Liquidity is your company’s lifeline. With it, you have a fighting chance of achieving your vision, but when you’re out of money, you’re on the course to ruin.
It’s no secret that the startup funding environment isn’t what it was a year ago. As interest rates have climbed, debt has become more expensive, and the bar for securing it has only grown taller. According to CB Insights’ latest State of Venture report, total venture funding declined 34% in Q3 2022 compared to the previous quarter.
The fundraising environment isn’t getting easier, and that’s adding even more pressure on founders and startup teams to make the most of their current cash reserves. Treasury management is one way to do that.
Whether you need to extend the runway you’ve secured so far or just closed an extension, here are a few reasons treasury management should be at the top of your list of priorities as a founder and what you can do today to get started with it if you haven’t already.
Your office space isn’t the only thing impacting your runway
Your cash reserves mean nothing if you aren’t able to access them in time to pay for your ongoing expenses.
Inflation has made everything more expensive, meaning your current cash reserves won’t go as far as they would have a few years ago.
For example, recent price hike announcements by major cloud providers show that cloud computing — one of the biggest expenses startups incur — isn’t immune to the effects of inflation.
An active cash management strategy to optimize your reserves using fixed-income instruments can add days, weeks and months to your runway, giving you the resources needed to support your company’s growth strategy and get you to your next funding round.
The Fed isn’t finished
Many people do not realize that high rates may be around longer than everyone expects. As its fourth consecutive 75 basis point rate hike shows, the Fed certainly recognizes this.
However, this environment presents an opportunity for startups with cash reserves. Higher interest rates positively impact returns paid on U.S. treasuries and other types of fixed-income assets. With the right strategy in place, you can use a higher-rate environment to your advantage.
Bespoke treasury management is more accessible than ever
Only large global organizations used to have dedicated treasury management teams and services, and your company had to have tens of millions of dollars before bankers would even talk to you.
Fintech innovation has since democratized bespoke treasury management, and corporate treasury advisers today help growth-stage companies manage liquidity while optimizing day-to-day cash as interest rates climb.
Develop a cash management plan
Founders should recognize that cash management should be a priority and ensure investors are confident they are using resources correctly in a tough economic environment.
How can you put a cash management strategy into action? Here are three steps I typically recommend to our treasury clients:
Assess liquidity needs to determine your investable assets
Liquidity should be one of your most important considerations when developing a treasury management strategy. Your cash reserves mean nothing if you aren’t able to access them in time to pay for your ongoing expenses.
Start by calculating how much cash you’ll need to have on hand on a month-to-month basis and develop a strategy that will allow you to easily and quickly transfer funds in and out of your treasury accounts to cover expenses.
Keep your corporate cash in short-duration, short-maturing assets
With the Fed giving no signs of taking their foot off the brake, you must assume long-duration assets will continue to feel the negative impact of rising rates.
The last thing you want to do now is subject yourself to even more interest rate risk — as rates climb, the portfolio of assets you have might decrease in value. You can combat this by shortening the duration of your treasury assets to ensure that cash continues to turn over.
Monitor the market and the Fed’s moves
It’s foolish to think anyone can pinpoint when the market will bottom out — either in equities or yield. The only real indicator you can and should rely on is the Fed.
That said, until the Fed says rate hikes are on hold, yields will keep climbing higher. As such, it’s crucial to stick to your plan, but also to continually review your investment policy on an ongoing basis. What worked last month from an investment standpoint may not work next month.
If you feel this process sounds complex and requires significant time to get right, you are correct. However, the rewards for effectively managing your cash reserves are too significant not to dedicate time and resources to developing a sophisticated treasury management strategy. With economic headwinds showing minimal signs of slowing in the coming months, treasury management should be a top-line item at your next leadership meeting, if it isn’t already.