The right treasury management strategy can extend your startup’s runway

It doesn’t matter how much users love your product; every founder knows that if you run dry on funds, you’re done. In today’s tightened funding environment, this is happening more and more often.

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 be make or break for a startup during its most pivotal growth junctures.

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 objective: Safeguard cash, optimize liquidity, and scout for sound avenues to put idle cash to work.

It’s also about forecasting, about envisioning the cash needed to fuel the daily operations today and projecting into tomorrow.

Massive corporations have the luxury of dedicated treasury teams. For startups, driven by the mission of scaling, we often find ourselves in a tight spot. We can’t pour the same magnitude of time and resources into it, which can lead to a haphazard approach to treasury management.

This haphazardness can inadvertently expose hard-earned capital to a myriad of risks, one of them being the corrosive power of inflation, especially when cash sits stagnant and undiversified in barely breathing interest rate accounts.

How to calculate your cash position: The foundation for effective treasury management

Before diving into the options for managing your corporate cash, let’s first determine what actually counts as “liquid cash” to run your business. This is the cash that a company has on hand for immediate use, whether to run payroll, cover operating costs, make investments or tackle unexpected expenses.‍

Calculating how much cash you have might seem obvious, but it’s often not as simple as the amount you have in your bank accounts. For example, just because you’ve earned revenue doesn’t mean you actually have this cash on hand. Accounts receivable — the money that your customers owe you — isn’t liquid cash until it’s actually paid.

One common mistake that startups make is to count all earned revenue against expenses. But timing matters, and cash that you haven’t received is not liquid cash. It might be the case that some of your customers pay you late and others end up not paying at all. This needs to be taken into account when calculating your liquid cash.‍

A good treasury function is able to periodically observe both balances and cash flows across all of a company’s financial accounts with a high degree of precision. From there, it becomes possible to get an accurate insight into key financial metrics, such as burn rate and trend, runway/zero cash date, distribution of assets in various accounts, and key revenue and cost drivers. More context enables better decisions.

But understanding cash and liquidity is one thing. How can you begin to manage it? ‍

How should 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 can be seen as everything that your company needs to function for the next six to eight months. This includes salaries, rent, marketing costs, etc.

‍Strategic cash, on the other hand, is cash that your company won’t need for a longer period of time. This can be set aside for future investments, acquisitions, new product development and other longer term initiatives.‍

Having a sense of your forecasted cash needs can help you to determine where to leave it. Some operating cash can be kept in an account that you can draw from whenever you need it; this means that you’ll always have enough on hand for short-term payments. Strategic cash, on the other hand, can be strategically invested in fixed income instruments to earn a higher yield. ‍