Treasury and cash management for startups
Congrats! You just closed a funding round and are staring at a big balance when you log into your bank account. Now what?
Raising money is hard, but it’s only the start of the journey. Once the money is in the bank, the race to the next round (or better yet, profitability) is on. And running out of cash means losing the race and saying goodbye to your business.
A founder's primary goal should be wisely investing money into product and distribution on the path to product market fit and growth. But building a great business without an efficient cash management strategy can be a real damper on long-term growth.
Enter Treasury Management.
An overview of treasury management
At its core, Treasury management means coming up with an appropriate financial strategy for a company’s cash that balances earnings, liquidity, and security.
Many investment options are available to companies, each with unique risks. Yet, since the purpose of a business is to sell products and services, the goal for many finance teams is to keep that risk as low as possible, even as startups seek to earn returns on their cash. As a result, they tend to invest in safer asset classes - generally government treasuries, FDIC-insured cash sweeps, and other related products.
Why is treasury management relevant today?
In the zero interest rate policy (“ZIRP”) era, yields on government treasuries were relatively low, and few CFOs or founders seemed to think about earnings on idle cash. Since 2022, the rapid and sustained rise in federal interest rates made these types of products more appealing. A 5% APY on $1M of cash can translate to meaningful runway for most companies.
Yet as of September 2024, analysts are widely projecting the start of several rate reductions in the year ahead (Reuters), threatening to dilute an increasingly common runway-extension strategy.
Liquidity shocks: The collapse of Silicon Valley Bank (“SVB”) in the spring of 2023 shook the banking system. Impacted startups temporarily lost access to their cash, and many scrambled to find other providers to make payroll. Since the crisis, diversifying cash across multiple banks while seeking to augment FDIC coverage has become commonplace. In the wake of the collapse, the accounting firm Kruze Consulting found the median number of bank accounts startups used grew from 1 to 2 (Kruze).
Image Source: Kruze Consulting, “Banking Market Share,” 2024.
Accessibility: Emerging fintech banking and treasury providers facilitated access to different investment products for businesses. Many Fintech cash management platforms act as a software layer built on top of banks and make accessing bank services easier. Startups could now more easily access assets like treasuries without needing larger sums of cash to justify the fees and without a finance team versed in treasury management.
According to Fintech Futures, a traditional bank earns most of its revenue from both the interest earned on client deposits and the loans issued to its customers (Fintech Futures). When bank customers use their bank cash to buy Treasury Bills, those banks can no longer earn deposit interest on that cash. Some banks seek to prevent this by offering varying degrees of yield or rewards in the hope of retaining deposits and can charge fees on other financial products.
Certain fintech cash management platforms like Arc offer multiple treasury options, such as a sweep account, different duration Treasury Bills, money market funds, and a mutual fund option. Other fintechs like Brex and Mercury offer access to preferred money market funds based on a given customer as their standard treasury offering with an FDIC sweep account. Companies like Rho advertise a portfolio of Treasury Bills.
How to evaluate treasury management options
As a founder, CEO, or finance head of a startup, one of your top priorities is to balance the cash you bring in from sales, your projected spend, and the capital you’ve raised. Understanding your burn rate can allow you to optimize the cash you need for business operations while allocating excess cash to yield-bearing strategies. Of course, expenses tend to be fluid, and finding an appropriate balance between optimized investments and sufficient liquid cash is unique to each startup’s burn profile.
Kruze Consulting suggests startups allocate 60 to 90 days of anticipated burn in operational accounts (Kruze). This can leave a significant amount of cash to allocate to investments matching their goals and objectives. A strategy like this could allow businesses to maintain a cushion between forecasted spend and unexpected expenses with sufficient time to access invested funds and their respective liquidity window.
There are a handful of criteria that you may want to consider when evaluating where to deploy your sidelined cash. First is the time horizon on needing investable cash and how liquid that investment may be. The time horizon and liquidity of the investment often come with a trade-off on potential return. Considering a company’s burn, cash flow, and unspent cash, striking a balance between liquidity and potential higher returns from less accessible investments can be important. Startups may seek to diversify their portfolio by investing in different asset types or maturity dates to manage both liquidity and risk.
Types of investments
There are many different investment options in the market. Below we will walk through four of those options. Each investment comes with its considerations when it comes to liquidity, protection, and potential for returns.
This content is for informational purposes only. For personalized recommendations, consult with a qualified financial professional who can help determine the most appropriate investment strategies for your business.
1. Treasury Bills
A Treasury Bill or “T-Bill” is a short-term debt instrument issued by the U.S. Department of Treasury that is sold at a discount, matures at face value, and provides returns over time. T-Bills can be thought of as an “IOU” from the U.S. Treasury. They are typically amongst the most considered asset classes by corporate treasury teams because they are directly correlated to federal interest rates and widely seen as lower risk than stocks or other traditional investments. In late 2023, after Berkshire Hathaway published record cash holdings that had significant growth in US treasuries (CNBC), Bill Ackman and Musk posted reactions of their own regarding T-Bills, with Ackman stating he invests in short-term treasuries as opposed to the 30-year T-bill, similar to Buffet’s move (Ackman on X) and Musk calling treasuries a “no-brainer” (Musk on X).
T-bills are a popular investment option because they are backed by the U.S. Department of Treasury and are typically considered low risk by investors. Of course, no investment is guaranteed and these assets still can present risks - albeit lower than many other investment options.
When held until maturity, a Treasury Bill is typically redeemed at its full face value. For example, if you purchase a 12-month Treasury Bill at $95.46, you would typically receive $100 for that Treasury Bill at maturity in 12 months, which would result in a net gain of $4.54 in that year. If you need to sell a T-Bill prior to the maturity date, they can be sold on secondary markets, however, this can potentially lead to a loss of principle depending on market movements.
Due to the range in maturities, perceived safety, and strong liquidity in the secondary market, T-Bills have been a commonly used investment option for startups and large enterprises.
2. Money Market Funds
Money Market Funds (“MMF”) are a type of fund generally composed of high-quality, short-term forms of debt instruments and cash equivalents. A MMF is like a bundle of assets assembled by an investment fund intended to offer strong liquidity while limiting risk. MMFs can hold Certificate of Deposits (“CD”), government debt, bank debt, corporate debt, and T-Bills. Different MMF types will hold a different basket of assets and are generally regarded as amongst the lowest-risk investments.
MMFs are scored a credit quality ranking by a Nationally Recognized Statistical Rating Organization (NRSRO). Grading scales go up to AAA and the higher-rated funds often hold highly liquid assets, including government obligations like Treasury Bills. As a result, MMFs may offer returns that track closely to T-Bill rates, but offer a higher liquidity profile.
MMFs are securities that are typically insured by the Securities Investors Protection Corporation, or SPIC, which provisions for up to $500k in coverage. They are not cash deposits and can be subject to losing the principal investment.
3. Certificate of Deposit
A Certificate of Deposit (“CD”) is a type of savings account that offers a fixed interest rate over a set period. CDs are insured by the FDIC, but because of their specific duration, are considered less liquid than other types of investments. If you need to access funds held in a CD before the maturity date, you’ll likely incur an early withdrawal penalty, which is specified in the account agreement.CDs, Bonds, and Treasury Bills that have maturity dates are commonly bought at different times or in different durations to build a ladder. Laddering involves purchasing these instruments with varying maturity dates, creating a schedule of staggered maturities over time, which can provide predictable liquidity at regular intervals.
4. Insured Cash Sweeps
An Insured Cash Sweep (“ICS”), commonly called an FDIC sweep, is a deposit account that syndicates funds across a network of banks. The FDIC insures deposit accounts up to $250k per entity per FDIC-insured bank. So, instead of opening accounts with multiple banks and partitioning $250k or less, an ICS can provide one account with higher combined FDIC insurance. The interest earned on ICS accounts is typically affected by the cost banks incur to offer the service, and is generally lower than the products mentioned above. Depending on the product, you may be subject to a monthly withdrawal limit. However, you may get greater security as a deposit account, and you can typically access these funds within a few days depending on the specifics of the sweep network and the size of the withdrawal.
Providers
Once you’ve established an appropriate treasury management strategy for your business, you will need the tools to execute it. Often, startups use the options available through their current banking service provider.
Several financial institutions and neo-banks embed a brokerage option into their platform and offer simplified access to investments, like MMFs and treasuries, with tools to manage those investments. For instance, Arc offers startups a menu of Treasury Bills, money market funds, and a mutual fund option from three different investment companies including Morgan Stanley, Vanguard, and Dreyfus (Arc). Many traditional banks will also offer similar products to qualified customers, and provide additional investment options, like CDs, as well. SVB offers startups options, like a Money Market Account and an overnight cash sweep into multiple different MMFs, from institutions, including Blackrock and Morgan Stanley (SVB).
Some financial institutions restrict these instruments by requiring a sufficient cash balance. As a result, they may not be available to some startups. For example, Mercury requires clients to have a total deposit balance of at least $500k to qualify for treasury services (Mercury).
Another strategy is to open a stand-alone brokerage account separate from a banking service provider to invest your startup’s cash. This option will often provide a larger range of investment options for a startup than a traditional bank. However, this can put more onus on the company and its finance team to self-direct investments.
Make sure that you choose a provider whose menu of investment options fits your investment goals. It can be helpful to speak to a qualified financial professional given the complexity and risks involved.
Understanding Treasury Management Fees
A key consideration to look out for when evaluating providers is high fees that can eat into your potential returns. Services from investment advisors, broker-dealers, and treasury services are subject to different fees and commissions. The access to assets and fee structures can vary based on the company and type of investment. As aforementioned, some providers do not offer treasury services or access to certain investment options unless you have a minimum amount of assets, and may charge fees if you fall below a certain threshold.
In your research of different providers, you may run into different terminology and marketing from cash management providers. For portfolios charged by AUM, the fee is typically calculated as a percentage of the total assets. Some investment advisors and brokers consolidate all of the costs associated with the service and call it a “wrap fee”. Investopedia notes that funds may display gross returns in marketing materials, but the net rate of return that removes expenses and fees may be significantly different (Investopedia). MMFs and other assets, like mutual funds and ETFs, often list a gross and net expense ratio that incorporates the cost of operating the fund. According to SmartAsset, the gross expense ratio includes all costs associated with operating the fund, whereas, including items such as discounts, the net expense ratio is more indicative of the actual cost to investors (SmartAsset). Depending on your provider, you may be charged a management fee of total assets, or certain investments may be subject to different expense ratios.
For example, Mercury’s pricing page mentions that fees range from .15% to .6% annually depending on the total amount of funds managed (Mercury). Arc offers treasury services to startups with different pricing models - a variable fee of up to .5% of funds invested in treasury products and a “Premium” offering starting at $199/month and .05% of treasury assets. Different investment advisory programs at JP Morgan Chase have a wrap fee capped at a maximum of 2%, but can be lower for certain clients with different access. Furthermore, the “wrap fee clients pay for investment advisory services will vary depending on the investment advisory program clients select” (JPM Wrap Fee Brochure pp. 14, pp.1). These different management fees can add up based on the amount you have invested, the assets chosen, and the performance of those assets.
Striving to optimize your treasury function is important. Founders can implement a treasury strategy aiming to generate interest on your idle cash that can be reflected in terms of extending runway, adding headcount, etc. However, from a first principles perspective, the money that has been fundraised or built up as investable cash is there to build and operate a sustainable business, not for you to try to beat the market as an investor. That is why at Arc we’ve built a product that offers clients the potential to earn competitive yield on MMFs and T-Bills with built-in automation that makes managing treasury simpler.
Be intentional. Fuel your long-term growth. Get back to building.