Treasury Management Throughout the Lifecycle of a Startup
These days startups need to be more efficient than ever before with how they allocate their capital, mitigate financial risks, and manage cash flow. If you’ve recently raised capital, or even if you haven’t, you probably know this all too well. We often get asked about the role of treasury management in this process, and how founders without robust finance teams can duplicate the results of a full-fledged treasury management program. Essentially founders want to ensure they have the proper mix of highly liquid accounts to satisfy short-term working capital needs and less-liquid, higher-return accounts to maximize their idle cash. In this guide, we break down the basics of treasury management, highlight tips for setting up effective treasury management programs with limited resources, and the evolution of treasury management programs throughout the lifecycle of a startup—let’s dive in!
What is treasury management?
Treasury management is a comprehensive approach to managing a startup’s finances. It involves all aspects of financial management, from forecasting and cash flow management to capital planning, capital allocation, and risk management. Treasury management focuses on optimizing the company’s financial performance by minimizing risk and maximizing returns, while simultaneously ensuring that the company has enough liquidity to meet its short-term and long-term needs.
What do startups need treasury management for?
Startups leverage treasury management services to manage their working capital and liquidity, limit their FX and interest risk, and more.
- Working Capital: Treasury management helps startups ensure that they have the proper amount of working capital during a period. Having too much or too little working capital could negatively impact its ability to pay bills or invest in new projects.
- Liquidity: Treasury management helps startups maintain enough liquidity to satisfy short-term, planned obligations as they arise, and unplanned or unexpected events that occur.
- FX Risk: Treasury management can help companies avoid impacts on earnings, by managing their FX (foreign currency) exposure and risk. Note: this isn’t relevant for most startups.
- Interest Rate Risk: Treasury management can help mitigate naturally occurring interest rate fluctuations. This typically applies to both capital stored in debt instruments like T-bills to ensure they don’t miss out on the upside, as well as variable interest rate debt that the company has on its books, to ensure that it can afford increased P&I payments.
The other major responsibilities of treasury management teams may include cash flow forecasting (both variance analyses and scenario planning), processing vendor payments, acting as a “collections department” for outstanding accounts receivable, and for large international companies that frequently work with importers, exporters, insurers, and credit agencies, they oversee trade finance.
What is the realistic role of treasury management in a small team?
Most of the startups we talk to have a very small (if at all) team dedicated to treasury management. While there are many things that treasury management can help startups with, there are really only a few items you should focus on:
- Forecasting and planning for short and immediate-term cash needs
- Streamlining vendor payments leveraging bill pay and other automated payment
- Generating a reasonable yield on your deposits
- Preserving your capital
As your cash reserves increase, the more sophisticated your treasury management program should naturally become. At the Series B stage, founders should seriously consider bringing on someone at least part-time to focus on treasury management.
What are the key benefits of a treasury management program?
Treasury management comes with a number of benefits for startups, including enhanced decision-making, improved cash flow, reduced risk, increased efficiencies, and increased profitability.
- Enhanced decision-making: as they say, the more information you have, the better decisions that you can make. Treasury management provides accurate and up-to-date financial information which helps founders make better decisions on capital allocation.
- Improved cash flow: by ensuring short-term obligations are met, receivables are timely collected and excess funds are swept into interest-bearing accounts, startups can improve their cash flows.
- Reduced risk: as mentioned above, there are two primary financial risks that treasury management can alleviate: foreign exchange and interest rate risks.
- Increased efficiencies: by automating manual processes and payments, your team members can save time each week, while mitigating the risk of human errors.
- Increased profitability: by increasing the efficiency of an organization, cutting costs, improving cash flow, reducing risk, and maximizing idle cash, treasury management can help startups increase their profitability.
How does the role of treasury management evolve over the lifecycle of a startup?
- Early-stage startups: early-stage startups typically have very simple treasury management needs. They focus on maintaining an adequate level of liquidity for satisfying operational needs. This entails basic cash flow management practices, and a basic capital allocation strategy across primary operating accounts, and high-yield savings accounts. Depending on the amount of capital raised by early-stage startups, they may also start to explore money market funds.
- Growth-stage startups: growth-stage startups typically have significant capital reserves, and generate meaningful revenues—thus, they have more robust treasury management needs. They’re typically in need of programs that both protect and grow their capital while supporting additional customers and headcount. They generally have one or two team members dedicated to the treasury function, who leverage sophisticated forecasting and cash flow management tools to accurately predict capital needs, and leverage income-generating assets, such as T-bill ladders to maximize their idle funds.
- Late-stage, or “enterprise” companies: startups that reach this stage are no longer startups, they are full-fledged enterprises. They have entire teams of people who manage capital risk and growth. They leverage treasury management solutions to optimize their current capital structure and allocations across asset classes to position themselves for continued success 3, 5 and even 10 years in the future.
Compared: in-house vs outsourced treasury management
Generally speaking, startups don’t need to outsource their treasury management until they have raised meaningful capital (>$5M). Even then, it might not make sense to outsource if they do not have sophisticated treasury management needs. Most tools and platforms nowadays enable teams of just one or two to effectively manage the finances and capital of their organization. That said, depending on the size of the company and the complexity of its finances, outsourcing the function might be a better option.
In-House Treasury Management
- Less expensive than external treasury management services
- Greater control over data manipulation and more granular reporting
- More contextual knowledge of the history of the business
Outsourced Treasury Management
- Access to a broader set of financial tools and vertical experts
- More well-rounded, cross-category competencies
- Reduction in internal workload for employees
Compared: treasury management vs cash flow management
Cash flow management is just one of the aspects of a treasury management program. Whereas cash management focuses on short-term obligations and helps startups keep track of their cash inflows and outflows, treasury management focuses on the long-term goal of maxing startups’ profitability. Treasury management much more holistic and broader system of checks and balances for minimizing risks and maximizing returns.
Tips for optimizing cash flow
Optimizing a startup's cash flow is an important part of treasury management. Here are some tips for optimizing your startup’s cash flow.
- Forecast early and often: one of the easiest ways to optimize cash flow is by creating forecasts and making adjustments to your assumptions based on prevailing market conditions.
- Establish cash reserves: this involves setting aside a portion of your capital to cover unexpected expenses or emergencies.
- Invest in short-term securities: this involves investing surplus cash in short-term investments such as treasury bills, money market funds, and high-yield savings accounts.
- Leverage revenue-based financing: companies that generate revenue can smooth out their cash flows by advancing their future revenue through revenue based financing.
- Implement standardized payment terms: Net 15 and net 30 are the most commonly used payment terms for invoice-based contracts.
Final thoughts on treasury management
Proper treasury management is an essential part of every growing startup. Ensuring that you have the correct cash flow management practices in place, adequate cash reserves for short-term working capital needs and adequate interest-rate hedges can help minimize risk, while maximizing the upside on idle cash. If you are considering building out your first treasury management program or partnering with a treasury management provider, we’d love to help. We’d be happy to help you evaluate an internal program or the external program that providers put together for you, drop us a line!