Treasury Management: Why It's More Important Than Ever

Treasury management is in again, precipitated by the collapse of SVB. In the past, treasury management was something that only large companies could justify, as it was slow and time-intensive if done in-house, and expensive if outsourced. Fintech changed that. Now, startups can quickly spin up treasury management programs to minimize risk and maximize returns. So what is treasury management, why is it a hot topic, and how can finance teams take advantage of these new tools? We dive into all of this and more. 

The Essential Components of a Treasury Management Strategy

There are four core pillars to a treasury management strategy: financing, returns, protection, and liquidity. Financing (i.e. debt) is fairly straightforward. The others are more nuanced and influenced by the asset allocation a company opts for. The team’s ability to forecast short-and-long-term capital needs, risk appetite, and perception of the current economic climate all play a role in their treasury management strategy.

• Financing - startups that are not cash flow positive, and do not have positive unit economics, need to raise funding to satisfy their operating requirements. For growth companies, the primary forms are equity financing, revenue based financing, and venture debt. To borrow, startups leverage their existing assets – ownership, cash, AR, future revenue, etc.
• Returns - Startups often have more cash than they need in any given month, so they, look for ways to maximize their money. They may decide to purchase securities through money market funds or set up treasury bill ladders. The additional value they create by leveraging their excess cash is known as their return or yield. Returns are important as they stretch a startup's cash, adding precious runway.
• Protection - While protection comes in many forms, the two most commonly known are SIPC and FDIC insurance. These kick in if a member bank or institution faces insolvency, but doesn’t protect from asset volatility or loss of value. Companies usually have enough cash to exceed these insurance limits, and thus often work with multiple banks, or participate in sweep networks to safeguard their cash.
• Liquidity - Not all assets can easily be turned into cash immediately, meaning startups have to balance their yield-bearing investments with their short-term cash needs for things like payroll, rent, and utilities. Cash is of course the most liquid asset, as startups can spend it in real time. Physical assets like buildings are illiquid, as it takes significant amounts of time to convert them into cash. Bonds, securities, outstanding receivables, and inventory are somewhere in between.

Treasury Management’s Transition from “Waste of Time” to “Existential”

Over the past year, there has been a significant shift in the perception of treasury management. What was once considered a “waste of time” is now seen as an “existential need” for startups. Why such a sudden change? The shift in the economic landscape.

In Q1 2022, cash was cheap, and venture debt deals hit a two-year high. As the Federal Reserve stepped in to curb inflation through rate hikes, capital became more expensive and VCs pulled back. Unable to find more cash, founders first responded by cutting costs across the board and locking down debt financing. As rates rose, they turned to interest-bearing accounts to maximize their idle cash and buy a bit of extra runway— something seen as a “waste of time” by VCs not six months earlier.

Then, the collapse of SVB this month highlighted the importance of deposit insurance and keeping a diverse mix of assets. Before that black swan, deposit insurance was rarely a focus for VCs or founders. Why? Well, had federal regulators not stepped in Sunday to back all Silicon Valley Bank deposits, those with balances over $250k (>90% of depositors) would have been wiped out. Overnight, founders learned the importance of parking cash in multiple banks and across multiple asset classes to maximize their protection—the basis of treasury management.

Treasury comes out of the basement and back into the light

Historically, treasury management required significant effort and resources to execute properly, in most cases companies required dedicated teams to perform the duties. That in turn meant it just wasn’t practical for early stage startups to make it a priority - especially in a low interest rate bull market.

They would calculate how much money was needed to run day-to-day operations and set that aside. Then they would open accounts with various banks and brokerages, to separate the operating and idle cash. Every few weeks, they would forecast their needs based on the current spending, liquidate the required holdings to make up the difference and transfer cash back to their operating accounts. In instances where the business was turning a profit, they’d do the opposite: transfer money from the operating account to the various brokerage accounts and allocate funds across various securities.

The manual, under-optimized, expensive, and opaque treasury management process was something that only companies with large cash holdings could justify. And even for companies who made the time to focus on it, execution was hard: money gets stuck in limbo, and online transfers for large amounts of money isn’t always smooth (or fast).

Fortunately, the traditional Treasury Management players in the financial service space are in for a shakeup - courtesy of your favorite fintechs. And that shakeup in turn has made it possible for earlier stage companies to painlessly benefit from the value of a sound treasury strategy.

Enter Arc Gold - Treasury Management on Autopilot

At our core, we believe that all startups, both big and small, should have access to the same set of financial tools to grow their businesses. Arc Gold does just that—unlocking treasury management for companies of all sizes. It’s built with a simple and elegant front-end, on top of a robust backend of some of the most reputable banks and brokerages in the country - Goldman, Evolve, and BNY Mellon.

Through the platform, startups can diversify their cash holdings across cash and brokerage accounts that generate up to 4.96% APY²(as of 3/21/23) and are eligible for $500k in SIPC coverage and a combined $5.25M in FDIC coverage¹. Beyond that, startups can fully cover the rest of their cash by buying 1, 3 or 6 month Treasury Bills (netting 4.97% at the time of this article)².

If you’re ready to minimize your risk, while maximizing your yield, check out Arc Treasury.