Significance of Treasury Management for Growth-stage Companies

To ensure that the company has enough capital to cover both short-term and long-term obligations, reduce financing costs and increase return on investment are the goals of treasury management.

FREMONT, CA

Companies of all sizes are closely examining their treasury management strategy with the vehement volatility in the banking system and capital markets. Given that the majority of global growth-stage private companies lack a dedicated team to manage the rapidly increasing complexities of treasury management, these businesses may be particularly vulnerable.

While the focus is on cash management there can be shortcomings in a company's treasury that could be made worse by a larger liquidity or financial crisis.

Counterparty Risk

Within the four walls of a business, treasury risk is rarely confined. A company's vendors, business partners, and investment managers should all be closely examined for third-party risk. Even if a bank run doesn't compromise a firm's cash deposits, CFOs need to be aware of any third-party vulnerability that can jeopardise the operation of the company.

Fraud Risk

Fraud poses a constant threat to treasury operations and cash flow and is a risk to both money and reputation, which is both a reputational and financial risk. CFOs should urge their staff to confirm the wire's specifics immediately with the intended recipient. They should also take the time to review fraud and cybersecurity best practices with the entire company.

Operational Risk

Numerous CFOs suddenly found themselves in danger of not being able to fund their payroll or make outbound ACH payments to vendors as the rumours of a bank started to circulate. The subsequent panic and rush to remove funds from SVB served as a strong reminder that managing operational cash and limiting operational risk are both important aspects of treasury management. The interdependencies between a company's several cash inputs and outflows change as it expands, thus CFOs must be able to predict and prepare for any operational problems that can occur during an unexpected banking crisis.

The Importance of Diversifying the Banking Relationships

Individuals should be cautious of how much money they have in one or even a few different banks. Since banks might have a wide variety of Know Your Customer (KYC) and deposit requirements, establishing new banking ties can take some time.

Knowing how many different financial providers the company needs is the CFO's biggest challenge. Bigger businesses frequently keep cash in a variety of banks, money market funds, and asset managers. The majority of holdings are as GSIBs (Global Systemically Important Banks), which are, as their name implies, often less hazardous than smaller banks.

It is generally recommended to keep less than 10 per cent of the net capital in a non-GSIB and less than one to two per cent of the deposits uninsured. Even more crucially, individuals should make an effort to quantify the amount of acceptable risk they are prepared to tolerate before beginning a new banking connection. When choosing individual banks, seek for organisations that are knowledgeable regarding particular business requirements or that can improve the current treasury operations.

Even though bank diversification is crucial, growth-stage businesses with limited resources to avoid joining banks out of an excess of caution or to appease the board should be encouraged. There needs to be a sincere discussion about the cost of diversification, including the impact on internal procedures and a reduction in bargaining power with existing partners.

Furthermore, automated treasury management platforms can produce a unified image of the movement of money inside and outside the company as the complexity of a treasury management function and the variety of banking providers and business partners increase.  Investment guidelines authorised by the board is a board-approved investment policy that specifies ownership of treasury activities, criteria and restrictions for the company's investments, and mandates and reporting requirements for external investment managers may also be prioritised by companies.

Whether to handle in-house or outsource when purchasing treasury assets, money market funds, or insured cash sweep (ICS) accounts, CFOs have conflicting viewpoints. In a highly liquid or volatile market, owning and maintaining treasury accounts directly can assist reduce third-party management fees, but it can also be dangerous. It doesn't cost much to hire an asset manager who can be trusted to focus exclusively on the market. Outsourcing may be the most economical strategy for businesses that lack the funds or resources to operate highly liquid money market accounts.

Moreover, the investment theology of an organisation and the intended cash burn rate should guide investment managers' decisions. Any changes in either of those categories should be reported to investment managers by CFOs so that they can update the treasury account.

Maintaining liquidity and not putting investors' money at risk, investment managers should certainly be leveraged during a volatile time. While interest rates are still unpredictable, buying bonds with maturities between 9 and 12 months out could result in taking on considerable market value risk for a negligible increase in income. To be precise, treasury management is a key component of the CFO's job and a safeguard against future market instability. Building more reliable systems and expanding a treasury management staff after putting more emphasis on a variety of banking connections and improved visibility into counterparty and fraud risk is essential.