Liquidity is the the company lifeline. With liquidity, you have a fighting chance to achieve your vision, but when you run out of cash, it's the road to failure.
It's no secret that the startup funding environment isn't what it was a year ago. As interest rates have risen, debt has become more expensive and the bar for securing it has become higher. According to him latest report on the state of investments Total business financing decreased 34% in the third quarter of 2022 compared to the previous quarter.
The fundraising environment isn't getting any easier, and that's adding even more pressure on founders and teams to make the most of their current cash reserves. Treasury management is one way to do it.
Whether you need to expand the runway you've secured so far or simply close an expansion, here are some reasons why treasury management should be at the top of your priority list as a founder and what can be done starting today .
Cash reserves mean nothing if they cannot be accessed in time to pay current expenses.
Inflation has made everything more expensive, which means your current cash reserves won't go as far as they would a few years ago.
For example, recent price increase announcements by major cloud providers show that cloud computing, one of the biggest expenses incurred by start-ups, is not immune to the effects of inflation.
An active cash management strategy to optimize reserves using fixed income instruments can add days, weeks and months, providing the resources needed to support your company's growth strategy and lead you to your next funding round.
The rate hike is not over
Many people don't realize that high rates can last longer than everyone expects. As the fourth consecutive 75 basis point rate hike shows, the Fed certainly says so.
However, this environment presents an opportunity for startups with cash reserves. Higher interest rates have a positive impact on the yields paid on US Treasury bonds, for example, and other types of fixed income assets. With the right strategy in place, a higher rate environment can be used to your advantage.
Tailored 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 be in the tens of millions of dollars before bankers would even talk to a client.
Fintech innovation has democratized bespoke treasury management, and today's corporate treasury advisors help growth-stage companies manage liquidity while optimizing daily cash as interest rates rise.
Develop a cash management plan
Founders must recognize that cash management must be a priority and ensure that investors are confident that they are using resources correctly in a difficult economic environment.
How can you put a cash management strategy into practice? Here are three steps I typically recommend to clients regarding treasury management:
1.- Evaluate liquidity needs to determine your investable assets
Liquidity should be one of the most important considerations when developing a treasury management strategy. Cash reserves mean nothing if you can't access them in time to pay your running costs.
Calculate how much cash you will need to have on hand each month and develop a strategy that allows you to easily and quickly transfer funds to and from checking accounts to cover expenses.
2.- Maintain corporate cash in short-term and expiration assets
Given that the financial market shows no sign of letting its foot off the brake, it must be assumed that long-duration assets will continue to feel the negative impact of the rate hike.
The last thing to do now is expose yourself to even greater interest rate risk: as rates rise, the value of the available portfolio of assets could decrease. This can be combated by shortening the duration of treasury assets to ensure that cash continues to circulate.
3.- Monitor the market and the movements of financial regulators
It is foolish to think that anyone can tell when the market will bottom out, whether in stocks or in yields. The only real indicator you can and should trust is the Regulators.
That said, until they say rate hikes are on hold, yields will continue to rise. As such, it's crucial to stick to a plan, but also to continually review your investment policy. What worked last month from an investment standpoint may not work next month.
If you think this process sounds complex and time consuming to get right, it is. However, the rewards for effectively managing cash reserves are too great not to spend time and resources developing a sophisticated treasury management strategy. With economic headwinds showing minimal signs of slowing in the coming months, treasury management should be a front line item at the next leadership meeting, if it isn't already.
