The recent banking sector developments that sent founders scrambling for places to diversify their cash reserves left markets wondering if the Fed would follow these events with another rate hike. As I’ve previously written, the Fed avoids surprises. Sure enough, the interest rate is now 25 basis points higher, raising a question for founders: How should this hike impact the way I manage my company’s cash?
The wrong answer is to give in to the urge to spend hours emailing different banks in search of the highest yield payout and agonize over hunting for an extra five to 10 basis points of yield. As a founder with limited time, you are better off managing other parts of the business. Cash management automation has reached a point where you and your finance team no longer have to spend hours to achieve yields that reflect the current market rate. Here’s an exercise to illustrate why you are better off spending your time elsewhere.
Let’s say you have $25 million from your recent fundraising.
Next, assume you spent four hours of your day rate shopping and ended up squeezing out an extra five basis points through an amalgam of providers. We’ll increase it to 10 to really emphasize the point. You have uncovered an additional $25,000 per year, but does this provide a net-negative impact on your organization when you consider the time you and your finance team spent generating this value?
Early on, when the Fed first began raising rates to combat inflation, it made sense to prioritize your time to implement a sophisticated treasury strategy that moved you from 1% to 4% APY – $750,000 in new value per year. However, now that you have reached competitive yield rates that reflect the current Fed funds interest rate, spending your valuable time trying to squeeze out additional value is a mistake.
Harvard Business Review built a handy calculator that estimates the resource cost of your finance team members searching for ways to increase the yield on your company cash. The first half-hour they spend evaluating cash management providers will cost $35 per $100,000 salaried employee — and this calculation only covers the initial actions of talking to your current bank or sending an email inquiry to new providers. It does not include the follow-up conversations, internal meetings deciding whom to use and the subsequent steps involved to get things moving.
These opportunity costs can snowball the more you hunt for those extra basis points, reducing the marginal benefit of that additional $25,000/year gain you uncovered. This effort also carries unnecessary risks: As we have seen in recent months, market conditions could shift dramatically, exposing your asset holdings to significant downside almost overnight, even with a provider you have painstakingly vetted.
Once you hit competitive yield levels, adding additional return might require you to invest in higher-risk assets. Your mental calculus then becomes a balance between generating extra marginal yield and putting your funds at higher risk of depreciation.
If you look back at some digital assets that provided exceptional APY last year, some eventually collapsed and companies lost some or all of their operating cash. This negative outcome points to three crucial realities of cash management that can haunt your startup if you don’t acknowledge them.
Three factors that can quash your cash management efforts
Optimizing cash stores is an essential practice in a non-zero interest rate environment. Each dollar can help offset costs and extend your company’s life, and the benefit only grows as you become more cash-flow positive. However, three factors commonly keep founders from experiencing these benefits:
Automation helps founders avoid the basis point yield trap by Walter Thompson originally published on TechCrunch