Don’t Blow Your VC’s Money
“When you fail to plan, you plan to fail.”
Many businesses don’t have a plan for managing their corporate cash beyond putting their money in the bank and checking the balance once in a while. But all businesses, no matter how much money they have or what stage they are at, could benefit greatly from a solid and well-defined corporate cash management strategy.
Effective cash management means greater security, liquidity and returns on your cash, which will help your business succeed.
In this post, we’ll break down what cash management is and show you how to develop an effective cash management strategy for your business.
What is Cash Management?
Cash management, sometimes referred to as treasury management, is the process and structure of managing corporate cash flow. In the simplest possible terms, it’s getting your money where it needs to go.
An effective cash management strategy accomplishes 4 main goals:
- Make sure corporate cash is as safe as possible
- Make sure the cash is liquid and available when needed
- Invest excess cash to earn reasonable return without unnecessary risk
- Track and plan for the future
Cash Management Responsibilities
Cash management is a very broad and deep function that can be classified into three main silos.
Every company has a multitude of cash and credit transactions happening daily. The cash management team is tasked with monitoring these. Making sure transactions occur in a timely manner and correctly is vital. Without oversight, errors and delays can happen. Think of transaction management as a traffic guard at a crossroad intersection.
- Direct management of corporate accounts
- Track and manage payments of outgoing funds
- Track and manage collections of funds received
- Help establish forecasting of cash flow for planning
- Establish and maintain letters of credit
Balance Sheet and Liquidity
If a company does not have a grasp of how much and where their cash is, it can lead to problems. For example, not having proper cash available can delay supplier payment. This could slow down business and ultimately result in lost revenue. Proper balance sheet and liquidity management is the equivalent to the oil that keeps an engine moving.
- Track balance sheet and cash ratios
- Watch and manage operating and surplus cash
- Supervise and assess cost of capital
- Determine supply chain financing if needed
Risk management is vital for all corporations. If you do not plan and address for risk you can get blindsided. When implemented and followed properly, risk management will signal smoke before it becomes a fire. Think of risk management as the “check engine” light.
- Credit risk (counter-party risk)
- Market risk (interest rates, foreign exchange, commodity, competitive dynamics)
- Liquidity risk (use of credit line)
- Operations risk (late payments, technology, staff)
Cash & Treasury Management Infrastructure
All good systems need to have structure in place to be effective. Cash management is no different. While strategies may differ broadly, every good cash management strategy contains several key structural elements.
We like to take the KISS method (Keep It Simple Stupid) when creating a cash and treasury management policy. The policy should lean toward simple language and simplicity of directives. The requirement of management and board approval keeps everyone in line with the playbook.
Strategy and Objectives
Your treasury management practice needs to have defined objectives and strategies, including agreed-upon benchmarks and measurements to determine if the objectives are being attained.
Put in place processes to make sure tasks are smooth and efficient. Regular review of the processes increases company effectiveness. This reduces operating and financial costs.
It is important to require high standards of control for dealing with corporate cash. This helps prevent losses and operational errors. It also makes it easier to follow compliance and regulatory guidelines.
Whenever you are dealing with cash, cash movement and investments a stringent method of documentation is crucial. A documented operating process can help correct negative situations promptly and prevent recurrence.
It is important for the cash management and treasury team to be well connected to accounting. As the treasury oversees the balance sheet and capital, it is critical to understand how accounting will affect firm profits and financials.
An example would be if the treasury team needs to hedge investments. Properly accounting for those hedges can impact asset, liability, and cash flow values, but the accounting team can only do that if they are in the loop!
Using the appropriate systems helps with having visibility to cash flow, risk, and best uses of cash.
It is fairly common for companies to bring on outside service providers to help with treasury management due to the specialized nature of the work. It is the internal team’s responsibility to make sure the external providers are adding value.
Banks are integral to the flow of cash for a business. It is the treasury team’s job to determine which bank (or banks) to use and why. Implementing a consistent review process of partners is important as it determines if a change is beneficial.
We’ve discussed steps to determine which banking partner(s) is right for you in a previous blog post.
What is an Investment Policy (IP)?
An investment policy (IP) is the blueprint that the cash management and treasury team needs in order to do its job. It outlines how corporate cash concerns are to be handled and provides the controls to mitigate risk.
A good investment policy should be flexible, so that it can be updated as the company grows and objectives change. It’s important to keep the language simple, straightforward and specific to minimize confusion.
Components of an Investment Policy
A business needs to know when they are going to need capital and how much. Cash flow forecasting helps a business invest their excess funds and have cash available when needed.
Having a solid plan, in the form of an investment policy, will make this process less stressful. It also opens the door to earning returns on idle cash.
Statement of Purpose
The statement of purpose outlines the policies and procedures that are to be maintained.
Examples can include:
- Maintain adequate liquid cash to meet monthly obligations
- Earn reasonable return on cash
- Name specific parties to have access and control of assets
The investment objectives explain the purpose of the corporate portfolio. Some common examples include:
- Principal preservation
- Income generation
- Hedge currency risk
When individuals invest capital, it is of paramount importance that they understand their own risk tolerance. A corporation is no different. Risk tolerance can also change over time so it is important to review the guidelines regularly. There are several areas of risk tolerance, including:
- Time horizon - the longer the horizon the higher the potential risk tolerance
- Investment experience - a seasoned team my be open to more complex investments
- Leadership - one management team may be open to higher risk than others
This section outlines the types of investments that are approved for investment with corporate cash. How much money is allocated to each will be determined by risk tolerance and investment objectives.
Some typical types of investments for corporate cash are:
- Bank deposits
- U.S. Treasury bonds
- Certificates of Deposit
- Investment Grade Corporate bonds
The prohibited investment section lists specific investments and securities that the cash management team is not allowed to invest in. Even though the investment options section should be exhaustive, it is a good idea to include this section for an added layer of security. You can’t be too careful with your business’s money.
Custody of Assets
Custodians hold corporate assets for safekeeping. Custodians focus on safety of assets, securities settlement, and reporting of the portfolio.
A bank can be a custodian, but it’s common for corporations to use an independent and separate custodian for their corporate cash portfolio. This reduces the risk of counterparty default and the potential of fraudulent activity.
The reporting section outlines the specifics of what will be reported on along with the reporting interval. This can include:
- Portfolio Holdings
- Risk Metrics
Roles & Responsibilities
This section outlines and names the key responsibilities of the persons in charge, such as implementation, oversight, and review. The cash management and treasury team, senior management, or the board of directors are generally the persons in charge.
The compliance section outlines the information and frequency of review. It also specifies who will be conducting the reviews.
Most corporations use both internal and external parties for compliance. The use of external parties helps to ensure strong independent risk management measures.
When should you start implementing cash and treasury management with an investment policy?
No, really! Even if your company is only in the earliest stages of planning, you should be thinking about a cash management strategy. If you dedicate time in up front, you’ll be better prepared to handle adverse situations later on.
If your company has raised investor capital, you should stop right now and immediately look into these procedures!
Not only will it help the internal team manage investor capital, it will also show your investors you are thoughtful, prudent, and a strong steward of your funding.
As the great boxer Mike Tyson said, “Everyone has a plan until they get punched in the mouth”.
At InterPrime, we feel it is better to start off with a defensive mindset. It’s best to avoid trying to dodge punches in the heat of the business battle.
Reach out if you would like a no obligation review of your current cash management and investment plan. If you don't have one - we are happy to discuss how we can get you setup.