Basics of Treasury Management and Risk

Based on the Responsible Innovation Labs Webinar: Risk and Governance: Lessons from SVB and Beyond

Recent banking crises have highlighted the need for good, risk-aware treasury management practices. In a Responsible Innovation Labs webinar, we spoke with to inform this treasury management and risk guide, with best practices and tips for company-builders.

Five Practical Tips

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1. Build up a risk mindset

Make time on a recurring basis to identify your company’s biggest risks (not just treasury), both directly from your operations (e.g., building, hiring, banking, etc.) and factors outside of your control (e.g., regulation, markets, etc.). At scale, this will likely be part of your business continuity planning (BCP) process. But to begin, just get the basics down–what are the biggest things that could have a serious negative impact on your business. Once you have a sense of your biggest risks, start by developing basic response protocols and assign ownership. This starts building your team’s muscle on risk identification, accountability, and effective communication in emergencies.

As you grow, hire a strong finance leader to help run risk-sensitive cash forecasts and develop strategies to mitigate your biggest risks. This could include risk modeling, treasury planning, business insurance, collaborating with legal counsel, and more.

2. Diversify your banking partners to reduce institutional risk.

Maintain accounts with one primary banking partner and at least one or two secondary partners, including at one of the four largest in the US (Bank of America, Citi, JP Morgan, Wells Fargo). Track the use for each account (e.g., payroll, rent payments, etc.) so you can move quickly and update payment instructions to the right people ASAP. Narrow your search based on key factors and research how to extend your deposit insurance. For example: 

Invest in a tier-one banking relationship as you get additional traction and investment. As you grow, ask some of your key investors or board members to help and introduce you at the right level and vertical (e.g., Technology or Technology, Media, Telecommunications teams).

3. Develop a forecast and plan cash reserves.

Know how much cash is needed to keep the lights on (e.g., payroll, invoices). Ramp up your horizon on forecasts from months to years. By the time you have raised venture funding, you should be aiming for a 1-2 year forecast for cash projections and a 2-3 year forecast on operating expenses.

Create cash reserves around your forecast. Start with a minimum of 1 month of liquid cash, then build up 2-6 months of liquid cash across. Regularly update forecasts with better inputs and data.

4. Leverage your board and keep them informed.

Treasury risk and governance are core responsibilities of board directors. Regular communication is key to uphold your shared fiduciary duty to the company. Board directors can add critical perspectives and may connect you with advisors and banking partners as needed. Get feedback from your board early and often when making significant changes to your cash management plan or banking relationships. Make decisions based on data (e.g., frameworks, market data, etc.). Ask your board how often they want to be updated on treasury management and develop a standard board slide that you can use to normalize presentation of this information.

5. Prioritize the return of capital over yield.

You are building a technology business and–if you succeed–that’s where most of your value is going to come. So your goal with your cash is to preserve capital, not generate huge returns. To deploy excess cash beyond a savings account, be conservative and generally keep the duration below 6 months.

Federal deposit insurance (offered by the FDIC for banks and NCUA for credit unions), covers certain deposits up to their $250,000 limit per depositor, per insured bank or credit union. If you’re above that limit, research how to extend your deposit insurance (e.g., sweep accounts, CDs). See below for account types and deposit insurance. Discuss the specifics with each bank you’re considering.

A “sweep account” is “a bank or brokerage account that automatically transfers amounts that exceed a certain level into a higher interest-earning investment option at the close of each business day.”

Basics of Sweep Accounts and CDs

* Risk varies based on multiple factors, including fund composition. For example, US Treasury Bills are first-tier securities with no default history; at the same time, short-term risks like delays in US budget approval and long-tail risks are part of robust risk modeling.

national rating agencies

Additional Resources and Tools

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Playbooks and Content

Forecast Tools

Many thanks to Stephanie Peng from Transcarent, Stacie Faggioli from Swoop Search, and Kyle Doherty from General Catalyst for insight and guidance in the Risk and Governance: Lessons from SVB and Beyond webinar in March 2023. 

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