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Practical Advice for Startup Treasury Management in 2023

June 16, 2023

By Ronan Kennedy

Cash management insights amid rising rates, foreign exchange swings and bank failures

High inflation, volatility in the banking sector and continued macroeconomic uncertainties are weighing heavily on the minds of startup founders and business leaders. As fiscal conditions tighten, developing or revamping cash management strategies have climbed to the top of priority lists for many founders.

While these market pressures are concerning, they’re not unprecedented—nor do they necessarily require novel approaches to cash management. Rather, the most effective strategies to mitigate the risks of today’s market are those that largely support the financial wellbeing of startups at any point in a cycle.

There are, however, certain characteristics of the current climate that should guide how founders and their finance teams can manage risk, control cash erosion and combat inflation. While there are plenty of headwinds, today’s economic environment is also marked by tailwinds that can work to companies’ advantage if they develop and execute a robust cash management strategy.

Where to Start

While plenty of uncertainty remains, today’s economic environment is also marked by rising yields and shifting foreign exchange (FX) rates that can work to businesses’ advantage. But before startups spend or allocate cash to investments, they must first understand their capital needs.

This requires assessing current operating cash needs for the next 12-18 months, runway which should consist of a few months of fully liquid cash, with remaining funds in semi-liquid investments (including money market funds and treasury/bond mutual funds) that can still pick up some yield.

Bifurcating operational cash from longer-duration strategic reserves is a great place to start when developing a cash management strategy. Capital beyond that 18 month-runway can then be used to combat inflation and bolster purchasing power.

Protecting Purchasing Power

Rising interest rates have remained a source of financial anxiety for many companies of all sizes. Yet startups can use the current rate environment and shifting FX markets to their advantage.

Globally we are in a period of fiscal tightening and many countries’ central banks are in a rate-hiking regime.  For every $1 million a company puts into a long-duration strategy like government bonds, a five percent rate yields $50,000 of additional income. With the global inflation rate at 7% for 2023, according to the International Monetary Fund, , that extra capital can be vital to preserving the purchasing power of the capital startups have already raised.

Changes in FX rates can also benefit startups doing business across borders, including those with U.S. operations. As of mid-March 2023, the U.S. Dollar Index, which tracks the value of the U.S. dollar against a basket of six foreign currencies, was up 6.6 percent year-over-year. U.S.-based startups with international operations are at a particular advantage: a business selling in USD and paying in Indian rupees, for example, further strengthens their purchasing power. Globally, developed market currencies appear to be strengthening against many emerging markets’ currencies, too, creating tailwinds across many currency pairs.

At B Capital, we’re also working with our portfolio companies on their forwards contracts to help them lock in this benefit today for business deals done tomorrow.

Negotiating Debt Covenants

Rising interest rates should be a major consideration in another important area for startups: loan agreements.

Many startups that secured loans over the past several years did so during a time of macroeconomic tailwinds, using the financing to extend runway or add financial protection in case of a downturn.  Lenders typically underwrote these facilities with a focus on startups’ continued growth: so long as businesses continued to grow at a specified rate, borrowers remained in compliance with the loan provisions.

Yet the current economic climate has forced startups to modify their business plans. Profitability targets are replacing revenue targets, the pursuit of efficiency is replacing expansion, and a focus on the bottom-line is replacing a focus on growth.

As a result, startups with loan facilities should amend their agreements to reflect current operating conditions or consider refinancing. Companies that fail to do so are at risk of missing revenue and growth covenants—and therefore, falling into default.

Further, rising interest rates are impacting floating-rate debt payments, and any future rate hikes will have an even greater impact on credit payments. Startups will want to ensure the financial plans they develop today can accommodate any future fiscal tightening as a result.

Triple Diversification

Recent volatility in the banking sector has renewed startups’ focus on cash diversification. Keeping cash at various locations could look like holding operating capital in one institution and strategic capital at another. It’s a critical strategy to mitigate risk, but it’s only one component of a conservative and holistic cash diversification strategy.

At B Capital, we encourage a strategy we call Triple Diversification. In addition to diversifying cash location, this entails diversifying the structures in which startups keep their cash (money markets, treasuries, etc.) as well as diversifying the tenure of those instruments.

It’s important to note that there is no one-size-fits-all approach to cash diversification. Startup founders and business leaders should consult with their boards about which strategies best suit their company’s needs.

Stewards of Capital

Beyond mitigating risk and improving purchasing power, a holistic approach to cash management also requires startups to acknowledge their fiduciary duty to shareholders.

We recommend startups implement a treasury practice, as well as develop an investment policy statement (IPS). Developed in collaboration with the board, this document establishes risk appetite and cash deployment strategy, stating the parameters within which CFOs and finance teams can put company capital to work.

Altogether, these tactics empower startup leaders to demonstrate an ability to execute on the goals of the business, mitigate risk, and preserve purchasing power of capital, whether that cash is being deployed or sitting in reserves. And when it comes time to raise future capital, startups with a holistic cash management strategy can do so with the promise to investors of being a prudent and savvy steward of capital.

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