How to Implement Effective Treasury Management in Your Startup – Best Practices and Tools

This article will guide you through implementing effective treasury management practices in your startup, providing actionable insights and tools to optimize your financial operations.

Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. We are not a registered investment advisory firm, and the information provided should not be construed as professional financial guidance. Always consult with a qualified financial advisor or professional before making any investment or financial decisions for your startup.

What is Treasury Management for Startups?

Treasury management is the strategic oversight and optimization of a company’s financial resources, encompassing cash flow, investments, and funding. It involves managing financial risks, ensuring financial stability, and supporting strategic decision-making. For startups, effective treasury management is crucial as it enables them to manage their limited cash resources efficiently and achieve their financial targets. By implementing robust treasury management practices, startups can ensure they have the necessary liquidity to meet their obligations, maximize returns on unused cash, and mitigate financial risks. This strategic approach not only supports day-to-day operations but also lays a strong foundation for long-term growth and financial stability.

For startups, this typically involves:

1. 1. Cash management
   2. Investment strategies
   3. Risk management
   4. Banking relationships and partnerships with financial institutions
   5. Financial planning and forecasting

Effective treasury management ensures that your startup has sufficient liquidity to meet its obligations, maximizes returns on unused cash, and mitigates financial risks. Let’s dive into each of these areas and explore best practices and tools for implementation.

Cash Management Strategies

High-Interest Checking Accounts

One of the simplest yet effective ways to manage your startup’s treasury is by finding a bank checking account with an insured cash sweep. Diversifying your bank accounts can enhance cash management, reduce risk, and increase financial flexibility for your startup. This approach allows you to earn interest on your operational funds while maintaining easy access to your money.

Many founders mistakenly believe that relatively high-yield options are limited to savings accounts or money market funds. However, checking accounts can also offer competitive interest rates, often close to the federal funds rate. By choosing a bank that partners with an insured cash sweep provider, you can access both yield and diversification from a single account.

For example, some banks offer high-interest checking accounts that provide:

• • Interest rates competitive with money market funds
  • FDIC insurance up to $250,000 (US companies)
  • Additional insurance through partner banks for balances exceeding $250,000
  • Full checking account functionality for operational needs

This setup allows you to manage payroll, pay contractors, and handle other financial operations while earning interest on your balances. One such option is Mercury Treasury, which offers these features tailored for startups.

Banks that offer checking accounts with interest

Several major US banks offer checking accounts with interest for businesses:

1. 1. Chase Bank, one of the largest banks in the US, offers business checking accounts with potential to earn interest. Known for its extensive branch and ATM network, Chase provides robust online and mobile banking services.
   2. Bank of America, another banking giant, provides interest-bearing checking accounts for businesses. They offer a wide range of financial services and have a strong presence across the country.
   3. Wells Fargo, with its history dating back to the Gold Rush era, offers business checking accounts that can earn interest. They’re known for their focus on small businesses and startups.
   4. Mercury, a neobank tailored for startups and tech companies, offers high-yield Treasury accounts alongside their checking accounts. They’re known for their modern, user-friendly interface and API access.
   5. Brex, another fintech company, provides business accounts with competitive interest rates and integrates expense management tools. They offer a streamlined digital experience designed for startups.
   6. Novo, a digital bank for small businesses and freelancers, offers a business checking account with features like invoicing and budgeting tools built-in.
   7. Crescent, a fintech platform designed specifically for startups, offers high-yield cash management accounts. They provide automated treasury management, integrating with your existing bank accounts to optimize idle cash and maximize returns while maintaining liquidity.

When choosing between legacy banks and neobanks, consider your startup’s specific needs. Legacy banks often provide better conditions for loans, more comprehensive financial services, and the option of in-person banking. They may also offer higher deposit limits and more established fraud protection systems. 

However, neobanks typically excel in providing cutting-edge technology, user-friendly mobile apps, and innovative features tailored to startups. They often have lower fees, faster account opening processes, and more flexible integrations with other financial tools and services. Your choice will depend on factors such as your need for physical branches, the importance of cutting-edge digital tools, and your long-term banking relationship goals.

It’s important to note that interest rates can change frequently based on market conditions and bank policies. Always check the current rates on the bank’s website or speak directly with a bank representative to get the most up-to-date information before making a decision.

Implementing a Cash Flow Forecasting System

Accurate cash flow forecasting is crucial for effective treasury management. It helps you anticipate cash surpluses or shortfalls and make informed decisions about investments or financing needs.

To implement a robust cash flow forecasting system:

1. 1. Implement software: Use specialized software like Float or Spotlight Reporting which integrate with your accounting system to provide real-time cash flow projections. These tools often offer features like automatic bank reconciliation and custom report generation to streamline your forecasting process.
   2. Update forecasts: Regularly update your forecasts with actual data and refine your assumptions. Set a consistent schedule, such as weekly or bi-weekly reviews, to ensure your projections remain accurate and relevant.
   3. Build different scenarios: Consider different scenarios (best-case, worst-case, and most likely) in your projections. This approach, known as sensitivity analysis, helps you prepare for various financial outcomes and develop contingency plans.
   4. Check metrics: Monitor key cash flow metrics such as runway, burn rate, and cash conversion cycle. Additionally, track your working capital ratio and accounts receivable turnover to get a comprehensive view of your financial health.
   5. Involve stakeholders: Involve key stakeholders from different departments in the forecasting process to capture a holistic view of future cash flows. This cross-functional approach can provide valuable insights and improve the accuracy of your projections.

Investment Strategies for Startups

Treasury Bills and Laddering

For startups looking to lock in rates for a defined period, purchasing Treasury Bills (T-Bills) directly can be an effective strategy. T-Bills are short-term securities backed by the U.S. government that mature within one year. They’re considered low-risk investments and, when held to maturity, pay your principal plus accrued interest.

A more sophisticated approach is to create a T-Bill ladder. This involves purchasing multiple T-Bills with staggered maturity dates, allowing you to take advantage of both short-term and long-term interest rates while maintaining a degree of liquidity.

Types of T-Bill ladders include:

1. 1. Traditional Ladder: T-Bills mature at regular intervals, with proceeds reinvested at the far end of the ladder.
   2. Bullet Ladder: All T-Bills mature simultaneously on a set date, ideal for meeting a specific financial target.
   3. Barbell Ladder: Invests in both short-term and long-term T-Bills, capitalizing on higher long-term rates while maintaining short-term liquidity.

To construct a T-Bill ladder:

1. 1. Determine the ladder’s length based on your liquidity needs, considering factors such as upcoming expenses, planned investments, and your cash flow projections.
   2. Purchase T-Bills maturing at regular intervals throughout that period, which could be weekly, monthly, or quarterly depending on your cash flow requirements and market conditions.
   3. Reinvest the proceeds from each matured T-Bill into a new one at the far end of your ladder, maintaining the structure and potentially taking advantage of any changes in interest rates.
   4. Regularly review and adjust your ladder strategy to ensure it continues to meet your startup’s evolving financial needs and market conditions.

Pros of T-Bill ladders:

• • Low risk, as they’re backed by the U.S. government
  • Steady income from regular maturities
  • Flexibility to tailor the ladder to your specific financial goals

Cons of T-Bill ladders:

• • Potentially lower returns compared to riskier investments
  • Liquidity risk if you need to sell before maturity (check if your platform supports early selling)
  • Interest rate risk, including price risk for longer-duration securities and reinvestment risk for short-term securities

Money Market Funds

Money market funds invest in short-term securities such as T-Bills and commercial paper. While they offer a hands-off approach, they come with trade-offs:

• • Higher risk due to lack of control over specific securities
  • Less flexibility in meeting your company’s specific liquidity needs
  • Potential credit risk, especially if the fund invests in commercial paper

When considering money market funds, carefully evaluate the fund’s holdings, expense ratio, and historical performance. Look for funds that primarily invest in government securities if you want to minimize credit risk.

Investment Grade Corporate Bonds

For startups with a slightly higher risk tolerance and longer investment horizons, Investment Grade (IG) corporate bonds can be an attractive option. These are debt securities issued by corporations with strong credit ratings, offering a balance between risk and return.

Key features of IG corporate bonds:

1. 1. Higher Yields: IG corporate bonds typically offer better returns than government securities like T-Bills.
   2. Moderate Risk: While riskier than government bonds, IG bonds are considered relatively safe due to the issuing companies’ financial stability.
   3. Diversification: Including IG bonds can help reduce overall investment risk.

Pros:

• • Higher potential returns than government securities
  • Regular interest payments
  • Potential for capital appreciation if interest rates decline

Cons:

• • Higher risk than government bonds, including potential default risk
  • Less liquidity compared to T-Bills or money market funds
  • More complex to analyze and manage

Bitcoin: A High-Risk, High-Reward Strategy

On the opposite end of the risk spectrum from T-Bills and IG corporate bonds lies Bitcoin, the world’s first and most well-known cryptocurrency. Some forward-thinking startups are considering Bitcoin as part of their treasury management strategy, albeit with extreme caution.

Key considerations for Bitcoin investment:

1. 1. Extremely High Risk: Bitcoin is notorious for its volatility, with price swings that can be dramatic and unpredictable.
   2. Potential High Returns: Despite the risk, Bitcoin has shown remarkable long-term growth, with a Compound Annual Growth Rate (CAGR) of approximately 60% over the past decade.
   3. Long-Term Orientation: Advocates like MicroStrategy’s Michael Saylor have developed playbooks for corporate Bitcoin investment, focusing on long-term holding strategies.

Pros:

• • Potential for significant returns
  • Hedge against inflation and currency devaluation
  • Increasing institutional acceptance

Cons:

• • Extreme price volatility
  • Regulatory uncertainties
  • Cybersecurity risks

While the potential returns are enticing, startups should approach Bitcoin investment with extreme caution. It should only be considered for a small portion of treasury funds that the company can afford to lose entirely. Always consult with financial and legal advisors before venturing into cryptocurrency investments.

Risk Management in Treasury Operations

Effective risk management is crucial for protecting your startup’s financial health. Key areas to focus on include:

Interest Rate Risk

Interest rate fluctuations can impact both your investments and potential borrowing costs. To manage this risk:

• • Diversify your investments across different maturities (as with T-Bill ladders)
  • Consider interest rate swaps or options if you have significant floating-rate debt
  • Regularly review and stress-test your interest rate exposure

Liquidity Risk

Ensure you have sufficient cash or easily liquidated assets to meet your obligations. Strategies include:

• • Maintaining a cash buffer: Keep a predetermined amount of cash readily available, typically 3-6 months of operating expenses, to cover unexpected costs or revenue shortfalls without disrupting your operations or resorting to emergency measures.
  • Establishing lines of credit as a backup: Secure a pre-approved credit facility from your bank that you can draw upon if needed, providing an additional layer of financial flexibility without the need to keep excessive cash on hand.
  • Regularly updating your cash flow forecasts to anticipate potential shortfalls: Continuously refine your cash flow projections based on the most recent financial data and market conditions, allowing you to identify and address potential cash crunches well in advance.

Counterparty Risk

This refers to the risk that a party you’re doing business with might default on their obligations. The collapse of Silicon Valley Bank (SVB) in 2023 serves as a stark reminder of this risk, where many startups suddenly lost access to their funds when the bank failed. Mitigate this by:

• • Diversifying your banking relationships: Spread your financial activities across multiple banks to reduce dependency on a single institution, ensuring that if one bank faces issues, your startup’s operations won’t be severely impacted.
  • Monitoring the financial health of your key suppliers and customers: Regularly review financial reports, credit ratings, and market news about your important business partners to identify potential risks early and take proactive measures to protect your interests.
  • Using secure payment methods and considering credit insurance for large transactions: Implement robust payment systems with features like two-factor authentication and encryption, and for significant deals, explore credit insurance options to safeguard against potential losses from customer defaults or bankruptcies.

Banking Relationships and Cash Concentration

Developing strong banking relationships is crucial for startups. 

Here are some best practices:

1. 1. Choose banks with experience in serving startups in your industry.
   2. Negotiate favorable terms for services like wire transfers, foreign exchange, and credit facilities.
   3. Implement a cash concentration strategy to optimize your cash position across multiple accounts or subsidiaries.

Cash concentration techniques include:

• • Zero Balance Accounts (ZBA): Automatically transfer excess funds from subsidiary accounts to a master account. This approach optimizes cash utilization by ensuring that all excess funds are centralized, while subsidiary accounts maintain only the required minimum balance for operational needs.
  • Notional Pooling: Combine the balances of multiple accounts for interest calculation purposes without physically moving funds. This technique allows for more efficient interest management and can potentially reduce overall banking fees, as the combined balance may qualify for better rates or lower charges than individual accounts would receive separately.

Implementing these strategies can help reduce idle cash, minimize borrowing costs, and simplify cash management.

Advanced Treasury Management Techniques

As your startup grows, consider implementing more sophisticated treasury management techniques:

Foreign Exchange Management

If your startup operates internationally, managing foreign exchange (FX) risk becomes crucial. Strategies include:

• • Natural hedging by matching revenues and expenses in the same currency
  • Forward contracts to lock in exchange rates for future transactions
  • Currency options for more flexible hedging

Tools like Kantox or Currencycloud can help automate FX risk management and provide real-time market data.

Working Capital Optimization

Efficient working capital management can free up cash for growth initiatives. Focus on:

• • Optimizing inventory levels using just-in-time principles
  • Negotiating favorable payment terms with suppliers
  • Implementing effective accounts receivable management

Consider using supply chain finance platforms like Taulia or C2FO to optimize your working capital cycle.

Treasury Management Systems (TMS)

As your treasury operations become more complex, a dedicated Treasury Management System can provide centralized control and visibility. Options include:

• • Kyriba: Offers a comprehensive cloud-based TMS solution
  • Holdings: A startup-focused treasury management platform that provides real-time visibility into cash positions, automates cash forecasting, and offers investment management tools tailored for high-growth companies.
  • Elevo Money: Designed specifically for startups and scale-ups, Elevo Money offers an all-in-one treasury management solution with features like multi-currency cash management, automated reconciliation, and integrated financial planning tools.

When evaluating a TMS, consider factors such as scalability, integration capabilities, and support for global operations.

Implementing Your Treasury Management Strategy

To effectively implement these treasury management practices in your startup:

1. 1. Assess your current financial situation and future needs. This involves a comprehensive analysis of your cash flow, liquidity requirements, investment opportunities, and anticipated expenses. Consider both short-term operational needs and long-term strategic goals to create a holistic financial picture.
   2. Develop a treasury policy that outlines your risk tolerance, investment criteria, and cash management goals. This policy should serve as a guiding document for all treasury-related decisions, clearly defining acceptable levels of risk, preferred investment vehicles, and specific objectives for cash management. It should also align with your overall business strategy and be approved by key stakeholders.
   3. Choose the right mix of tools and strategies based on your startup’s size, industry, and growth stage. Consider factors such as your company’s cash flow patterns, regulatory environment, and technological capabilities when selecting treasury management solutions. Be prepared to adjust your approach as your startup evolves and its financial needs become more complex.
   4. Train your finance team on the chosen tools and processes. Ensure that all relevant personnel understand the new treasury management systems, policies, and procedures. Consider ongoing training programs to keep your team updated on best practices and any changes in your treasury strategy.
   5. Regularly review and update your treasury management strategy as your startup grows and market conditions change. Set up a schedule for periodic assessments of your treasury operations, perhaps quarterly or semi-annually. Stay informed about economic trends, regulatory changes, and new treasury technologies that could impact your strategy.

Continuously monitor your performance, stay informed about market trends, and be prepared to adjust your strategies as needed.

QSBS Considerations for Startups

Qualified Small Business Stock (QSBS) is an important consideration for many startups. This provision of the Internal Revenue Code offers substantial tax incentives to investors in eligible small businesses, potentially allowing them to exclude up to 100% of their capital gains from federal taxes when they sell their shares. The tax benefits of QSBS can make a startup significantly more attractive to early-stage investors, potentially improving the company’s ability to raise capital.

However, maintaining QSBS eligibility requires careful management of the company’s finances and operations. Certain treasury management decisions, such as how the company invests its cash or the types of assets it holds, can inadvertently jeopardize QSBS status. For instance, holding too many investment assets or engaging in certain passive activities could disqualify the company from QSBS eligibility, potentially costing shareholders millions in tax benefits.

Key points to remember:

1. 1. Maintain eligible assets: QSBS rules require that at least 80% of the corporation’s assets be used in the active conduct of one or more qualified trades or businesses.
   2. Be cautious with investments: Certain types of investments, particularly those not directly related to the company’s core business, may jeopardize QSBS eligibility.
   3. Consult experts: Given the complexity of QSBS rules, always consult with tax and legal advisors before making significant changes to your treasury management strategy.

Financial Planning and Forecasting Tools

Robust financial planning and forecasting are essential for effective treasury management. Here are some tools to consider:

1. 1. Workday Adaptive Planning: Offers comprehensive financial planning and analysis capabilities.
   2. Anaplan: Provides connected planning across finance, sales, and operations.
   3. Jirav: AI-powered financial planning and analysis tool tailored for startups.
   4. Causal: Allows for dynamic financial modeling with scenario analysis.

When selecting a tool, consider factors such as:

• • Integration with your existing accounting and ERP systems
  • Scalability to accommodate your startup’s growth
  • Collaboration features for team input
  • Reporting and visualization capabilities

Conclusion

Implementing effective treasury management in your startup is an important step toward ensuring financial stability and supporting growth. By optimizing cash management, making informed investment decisions, managing risks effectively, and leveraging the right tools and technologies, you can create a robust financial foundation for your company.

From high-interest checking accounts and T-Bill ladders to sophisticated forecasting tools and treasury management systems, there’s a wide range of options available to startups at different stages of growth. The key is to choose strategies and tools that align with your specific needs and to remain flexible as those needs evolve.

While treasury management may seem complex, its fundamental goal is simple: to ensure your startup has the right amount of cash in the right place at the right time. By mastering this critical function, you’ll be better positioned to weather financial challenges and capitalize on opportunities as they arise.

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