You got the funding! Now learn how to manage your cash from the CFO of a $12.5B bank

STEVE SCHEPMANSeptember 28, 2020Cash ManagementTreasurySIPS

Looking at how banks manage their money and balance sheets as well as their investment policy statements provides insights on what to do with all that cash you just raised.

Before starting TSG and providing interim CFO services to early growth companies, I served as CFO of a $12.5 billion bank. The experience is valuable because one of the first issues I often address in advising early stage companies is what to do with the cash from the most recent funding round, considering the projected burn rate and liquidity needs.

Companies of all sizes need to have a treasury function to manage liquidity and risk, ensuring the firm can meet its obligations and achieve an optimal risk-adjusted return to efficiently utilize capital. Companies outsource this to a certain extent when they use banks to earn a return on their cash.

So, how do banks do it and what can non-banking businesses learn to utilize their capital more efficiently?

Banks have an Investment Policy Statement which is set by the board, managed by the Asset Liability Committee (ALCO) and executed by people working in the Treasury Department of the bank. Banks monitor liquidity and interest rate risk, the duration of their bond portfolio. They also look at the interest rate sensitivity of their loans and deposits which is often then hedged using Interest Rate Swaps (derivatives). Banks are more sophisticated than most, although all businesses should consider similar factors in managing their balance sheet. These include when the funds will be needed (liquidity) and how to optimize the return on the money with an acceptable level of risk.

Today’s low rates makes it even more challenging to generate a return on cash making it more work than ever. Additionally, factoring in the risk of securing the money beyond FDIC and SIPC limits requires know-how and significant work to mitigate risk while generating even a modest return of a few basis points.

Early stage companies having recently raised significant funding struggle with how best to manage all that cash.

The goal is to create an investment policy statement and a team to execute on it, as well as oversight to ensure that liquidity and risk falls within the established parameters. A sophisticated treasury function is typically not a core competency of early stage companies and banks do not provide an optimal risk adjusted return. If building out a treasury function is not a core competency tied to your business strategy, then outsource the treasury function.

Steve Schepman

Principal, The Synesthesia Group

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