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The Treasury Management Playbook for Growth Stage Companies
Mitigating risk, diversifying banks, & scaling people, processes & policies
With rampant volatility in the banking system and capital markets, companies of all sizes are closely examining their treasury management strategy. Growth stage private companies may be particularly vulnerable, given the majority (77% according to a survey of CFOs in The Circle) do not have a dedicated team to manage the rapidly growing complexities of treasury management.
We recently invited three experienced public and private company finance leaders – Jeff Bogan (Co-Founder and CFO of Upgrade), Shiv Verma (VP, Finance & Strategy and Treasurer of Robinhood Markets, Inc.), and Stewart Ellis (CFO of Hippo Insurance) – to lead a discussion with executives in The Circle on ways to modernize and improve their treasury management strategy in the wake of the second largest bank crisis in U.S. history.
Note: This playbook offers guidelines for treasury management offered by and for CFOs in The Circle community. We encourage all companies to review their treasury practices in concert with their Board and Legal partners. Opinions expressed are solely the views of the individuals and do not express the views of their employers.
As the threat of more bank crises and market volatility looms, apply to join The Circle and exchange data, insights, and support with your personal “board of directors” of other growth and late stage leaders.
Three Business Risks to Keep Top of Mind
While CFOs are constantly focused on cash management, there may be vulnerabilities within their corporate treasury that a broader liquidity or financial crisis can exacerbate. Our experts highlighted three critical areas for CFOs to watch for:
- Operational Risk – When the rumors began to swirl around a potential bank run on SVB, countless CFOs suddenly found themselves at risk of not being able to fund their payroll or make outbound ACH payments to vendors. The ensuing panic and rush to move money out of SVB was a stark reminder that treasury management is as much about mitigating operational risk as managing operational cash. As a company grows, so do the interdependencies of its various cash inflows and outflows; therefore, CFOs need to be able to accurately forecast and plan for any operational issues that can arise during a sudden banking crisis. They also need to ensure there’s enough redundancy in their treasury management strategy so that if one or multiple banks fail, there’s a designated and fully-operational backup bank in place (more on that in the next section).
- Counterparty Risk – Treasury risk is rarely confined within the four walls of a business. The SVB saga reminded many CFOs that third-party risk with a company’s vendors, business partners, and investment managers should be a constant area of scrutiny. Even if a company’s cash deposits are safe during a bank run, CFOs need visibility into any third-party exposure that can potentially disrupt the business.
- Fraud Risk – Fraud represents an ever-present threat to treasury operations and cash movement, and is both a financial and reputational risk. CFOs should advise their teams to double-check wire details directly with the intended recipient before initiating a transfer, and also take the time to refresh the entire company on fraud and cybersecurity best practices.
As a former banker and investor turned CFO, Jeff offered two guiding principles for how CFOs should think about treasury management going forward:
“Your first goal from a treasury standpoint is to make sure you don’t lose your cash and you stay liquid. I think that’s absolutely critical. At the same time, treasury should never get operationally in the way of whatever the business needs are, whether that’s accounts receivable or dealing with partners.” – Jeff Bogan, Co-founder & CFO of Upgrade
The Importance of Diversifying Your Banking Relationships
The run on SVB highlighted a foundational principle of treasury management: be diligent about how much cash you have in one or even a handful of banking institutions. Establishing new banking relationships takes time, as banks can have a wide range of Know Your Customer (“KYC”) and deposit requirements (many CFOs scrambling to open a new bank account after SVB collapsed learned that the hard way).
Shiv Verma pointed out that challenge number one for CFOs is knowing how many different banking providers the business actually needs. He noted that larger companies often have cash in several different banks, money market funds, and asset managers. Robinhood primarily holds deposits in what is called GSIBs (“Global Systemically Important Banks”) which are, as the name suggests, generally less risky than smaller banks. His treasury management strategy also designates banks and backup banks for different functions of the business:
“For every function – payroll, accounts payable, etc. – we aim to have a backup bank where possible. The same goes for every operating entity. Sometimes if your entity has a bank account and that bank goes down, you can’t get a new bank account for that entity open right away, and that can cause trouble depending on your structural setup. It’s not just about having those relationships but regularly testing them to ensure they work properly.” -Shiv Verma, VP, Finance & Strategy and Treasurer of Robinhood Markets, Inc.
It is generally a best practice to maintain less than 10% of your net capital in a non-GSIB and to have less than 1-2% uninsured deposits. And even more important to try and quantify the level of acceptable risk you’re willing to take before entering into a new banking relationship.
When selecting specific banks, look for institutions that understand your particular business needs or that can strengthen your existing treasury operations, said Stewart Ellis:
“Fundamentally, it’s important to try and reduce cycle time and overfunding one account. It’s worth investing the time to make your treasury operations crisp, so you don’t have money parked in any one place for very long, and you can keep the bulk of your capital off-balance sheet in a ringfenced account or a series of investment managers owning underlying assets that you trust.” – Stewart Ellis, CFO of Hippo Insurance
While diversification of banks is essential, Jeff advised growth-stage companies with limited resources to avoid adding banks out of an abundance of caution or to appease the board. “There needs to be a real conversation around the cost of diversification both in terms of internal processes and a loss of leverage with your existing partners,” he said.
Scaling People, Processes, & Policies
In the early stages of growth, the CFO often runs treasury management. Still, growth- and later-stage companies will eventually need a dedicated owner or even a team, especially those that manage large cash balances or are implementing SOX compliance controls ahead of an IPO.
Depending on the amount of expertise already at your firm, you can start with a lean treasury team with a cross-functional charter. Shiv built his treasury team in the period before Robinhood went public to focus specifically on operational and business enablement, financial risk analytics, and capital markets functions. “When making your first treasury hire, find someone who can be a jack of all trades and work across finance, strategy, corp dev, or investor relationships – whatever you need,” said Shiv. “Then, as you get closer to IPO, you can narrow the silos slightly. Ideally, find someone that has worked internally at a corporate treasury. We also have folks who came from banking, and while it’s possible to make the switch, if you don’t have the operational experience, it’s a little bit harder making that transition.”
In addition to building out your team, our experts highlighted two essential elements of a modern treasury management strategy:
- Automation – As the complexity of your treasury management function and the number of different banking providers and business partners grow, automated treasury management platforms can create a singular view of the flow of funds inside and outside the business.
- A Board-Approved Investment policy – Companies may also want to consider prioritizing a board-approved investment policy that outlines ownership of treasury activities, parameters and limitations for the company’s investments, and mandates and reporting requirements for external investment managers.
When buying treasury investments and managing money market funds or insured cash sweep (ICS) accounts, CFOs have differing opinions on whether to manage in-house or outsource. Stewart noted that buying and managing treasury accounts directly can help avoid third-party management fees; however, it can be risky in a highly liquid or volatile market. “Having an asset manager that you trust and can spend all of their time thinking about the market doesn’t cost much,” explained Stewart. “For companies that don’t have the money or resources to manage highly-liquid money market accounts, outsourcing can be the most cost-effective approach.”
Another CFO on the call noted that investment managers should act in accordance with your company’s investment policy and the company’s target cash burn rate. “It’s important for CFOs to keep their investment managers apprised of any changes in either of those areas so that they can adjust the treasury account accordingly,” said the CFO.
Reiterating his point about not putting investors’ capital at risk and staying liquid, Jeff noted that investment managers should almost certainly be leveraged in a period of volatility. “We’re not hired to be investment portfolio managers,” said Jeff. “If you’re buying bonds that mature in 9-12 months while interest rates remain uncertain, you’re potentially taking on real market value risk for not that much incremental yield. And our first goal should be never to lose cash.”
Treasury management remains critical to the CFO’s role and a hedge against continued market volatility. Start by focusing more on diverse banking relationships and better visibility into counterparty and fraud risk, then build more robust systems and scale your treasury management team.