It doesn’t matter how many users love your product; every founder knows that when you run out of funds, you’re done. In today’s tight funding environment, this is often the case.
Operating in unpredictable markets is what first taught me the art of treasury management. It can be a lifeline and a safety net, which can sometimes make or break a startup during its most important growth stages.
Simply put, treasury management is the task of managing a startup’s capital and orchestrating cash flows. At the core of my strategy for my startup is a trifold goal: Saving money, optimizing liquidity, and looking for good ways to use idle money.
It’s also about forecasting, about envisioning the money needed to fuel today’s day-to-day operations and planning for tomorrow.
Large corporations have the luxury of dedicated treasury teams. For startups, driven by the mission to scale, we often find ourselves in a tight spot. We don’t pour the same amount of time and resources into it, which can lead to a poor treasury management approach.
This failure may unwittingly expose hard-earned capital to many risks, one of which is the destructive power of inflation, especially when money sits stagnant and irreplaceable in accounts with barely breathing interest rates. .
How to calculate your cash position: The foundation for effective treasury management
Before diving into options for managing your corporate cash, let’s first find out what actually counts as “liquid cash” to run your business. This is the money a company has for immediate use, whether to run payroll, cover operating costs, make investments or deal with unexpected expenses.
At the core of my strategy for my startup is a trifold goal: Saving money, optimizing liquidity, and looking for good ways to use idle money.
Calculating how much money you have may seem obvious, but it’s often not as simple as the amount you have in your bank accounts. For example, just because you made money doesn’t mean you have this money. Accounts receivable — money owed to your customers — isn’t liquid cash until it’s paid.
A common mistake that startups make is counting all revenue generated against expenses. But timing is important, and cash you don’t receive isn’t liquid cash. It may happen that some of your customers pay you late and some don’t. This should be taken into account when calculating your liquid cash
A good treasury function can periodically observe the balances and cash flows of all financial accounts of a company with a high degree of accuracy. From there, it will be possible to get an accurate view of important financial metrics, such as burn rate and trend, runway/zero date of cash, distribution of assets in different accounts, and key revenue and cost drivers. More context makes better decisions.
But understanding cash and liquidity is one thing. How do you begin to manage it? .
How do startups manage idle cash?
The key to developing a successful treasury management strategy is understanding the difference between strategic cash and operating cash, and developing a definition that works well in the context of your business.
Operating cash may appear to be all your company needs to operate for the next six to eight months. This includes salary, rent, marketing expenses, etc.
Strategic cash, on the other hand, is cash that your company will not need for a longer period of time. This can be set aside for future investments, acquisitions, new product development and other longer term initiatives.
Knowing your forecasted cash needs will help you determine where to put it. Some operating cash can be kept in an account that you can withdraw from whenever you need it; this means you always have enough on hand for short-term payments. Strategic money, on the other hand, can be strategically invested in fixed income instruments to earn higher yields. .
