The Importance Of T-Bills In A Startup’s Treasury Management Strategy
Treasury management has transitioned from a “waste of time” to an “existential need” over the past year, especially so in these last few weeks. One critical part of that strategy is capital allocation across both account types and asset classes. With the coupon rate on T-bills quickly approaching 5.00%+ APY, and the Federal Reserve pushing for more rate hikes throughout 2023, we expect the lion’s share of startups' excess cash to go into T-bills. But why? And why are T-bills so important to startups’ treasury management strategy? We cover the answers to these questions and more below—let’s dive in!
Treasury Management: The Basics
Treasury management is the process of optimizing a startup’s financial performance by minimizing risks and maximizing returns. The goal is to ensure the company has enough liquidity to meet its short-term and long-term needs, but not so much liquidity that it misses out on meaningful upsides from potential investments.
To accomplish this, individuals responsible for this function forecast how much money they think the business will need to run day-to-day operations and set it aside. Then they open accounts with various banks and brokerages, to separate the operating cash from the investable cash. Every few weeks, they re-forecast the business’s needs based on the current spending, liquidate holdings to make up the difference, and transfer capital to the operating accounts.
The four core pillars to a treasury management strategy include 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.
Treasury management can be handled either in-house or it can be outsourced to firms that specialize in it. Historically it was slow and time-intensive if done in-house, and expensive if outsourced, but with the recent emergence of Fintechs, that has changed. Startups can spin up comprehensive treasury management strategies in a matter of minutes and automate their cash sweeps with the help of technology.
Treasury Bills: The Basics
Treasury bills, also called “T-bills” are forms of debt issued by the U.S. Department of the Treasury. T-bills are short-term securities (meaning they mature in less than one year) and pay out a coupon upon said maturity date. When interest rates rise, the coupon, or interest paid out rises. The same is true between the length until maturity and the coupon rate—the further out the maturity date, the higher the coupon rate. Individuals and startups purchase T-bills to safeguard and grow their idle cash, as there is a fixed and guaranteed rate of return, and a near-zero probability that the investment goes under.
Startups typically purchase t-bills of varying maturity dates to balance their returns with their working capital needs. When startups establish a formal structure of T-bills with varying maturities it’s known as a “t-bill ladder”. Check out this guide for a more in-depth look at maximizing yield with treasury bill ladders, and this guide for a step-step process for structuring t-bill ladders to balance returns & liquidity.
T-bills Importance in a Startup's Treasury Management Strategy
As mentioned above, the goal of a treasury management strategy is to minimize risks and maximize returns. This is accomplished through a variety of actions, which include the allocation of capital. Prior to this year, most startups allocated their funds across primary accounts, which they used for day-day operations, and savings accounts, which they used to store excess cash. With interest rates on the rise, startups transferred their excess cash from savings accounts with traditional banks to high-yield accounts with Fintechs, which generate infinitely more returns (100x+ in some cases).
More recently, with the collapse of SVB, the importance of sweep accounts came to light. Sweep accounts enable startups to distribute their cash across a network of partner banks to maximize their FDIC insurance coverage. Sweep accounts are certainly better than traditional savings accounts, in terms of both coverage and returns, but leave startups wanting more.
Enter Treasury bills. Treasury bills generate higher returns than savings and operating accounts and are backed by the U.S. Department of the Treasury, which has never defaulted on its debt. When structured properly, Treasury bills enable startups to capitalize on the upside of rising rate environments, while effectively covering 100% of their excess cash. The only downside is the limited liquidity (e.g. the date of maturity) and the principal losses that may ensue due to the sale of the T-bills prior to maturity.
Ultimately, startups should consider T-bills one of the tools in their metaphoric treasury management tool belt. When structured properly, T-bills can produce consistent predictable returns for startups. When structured improperly, they can be disastrous—causing not only principal losses but also complete cash lock-ups and inaccessibility of reserves. Check out this guide for tips on how to properly structure T-bill ladders to balance returns & liquidity.
Final Thoughts on the Importance of T-Bills in a Treasury Management Strategy
The collapse of SVB this month highlighted the importance of deposit insurance and the need for startups to hold a diverse mix of assets. Having an appropriate treasury management strategy is crucial for minimizing losses and maximizing returns. On your journey, if you decide to purchase T-bills, just remember to buffer your forecasts and keep 50%+ of your funds in T-bills that mature in under 6 months and you should be well on your way.
If you’re looking for a partner to help put your treasury management strategy on autopilot, check out Arc Gold. You’ll receive up to $2.75M FDIC insurance, $500k of SIPC coverage, access to venture debt and working capital, and you’ll generate returns of up to 5.44% APY.