6 Principles of Effective Treasury Management for Uncertain Times

Effective treasury management is crucial for startups. It’s a key component of overall financial stability and growth, especially in the early stages when cash is often limited.

As fractional CFOs for many different businesses, the team at Forecastr understands the challenges that come with managing financial resources and cash flow. Take it from us, if you’re operating without proper treasury management, your startup may struggle to keep up with the competition and ultimately fail to achieve your business goals.

To effectively manage your limited cash resources and hit your financial targets, it’s important to follow best practices for optimizing your treasury management. The six recommendations we cover in this post are an excellent starting point for most founders.

Treasury Management Best Practices

• Forecast Your Cash Flow
• Proactively Manage Your Runway
• Diversify Your Bank Accounts
• Invest Wisely
• Negotiate Better Payment Terms
• Monitor Your Expenses

Forecast Your Cash Flow

Forecasting your cash flow is crucial for early-stage startups because it helps you anticipate any cash shortages and plan accordingly. Forecasting also allows you to make informed decisions about your spending and fundraising strategies.

Here are some key tips for effective cash flow forecasting:

1. Create a Detailed Cash Flow Model: Use financial modeling software to create a detailed cash flow model that tracks your cash inflows and outflows. Be sure to include all sources of cash inflows (such as sales revenue, loans, and investment returns) and all types of cash outflows (such as expenses, salaries, and taxes).
2. Be Realistic: Make sure your cash flow model is based on realistic assumptions. Be careful not to overestimate your sales revenue or underestimate your expenses, for example. Your forecasts should be informed by your historical data, market research, and industry benchmarks.
3. Consider Multiple Scenarios: Build alternate models to account for different scenarios you might face. As an example, what would happen if you suddenly had a spike in sales? Or if a major expense came up unexpectedly? Modeling different scenarios helps you identify factors that could cause potential cash shortages, and plan accordingly.
4. Update Your Forecast Regularly: Your cash flow model is only as good as the data it’s based on. So be sure to update it regularly with your most current data. Update it at least once a month, or more frequently if your business is experiencing significant changes.
5. Use Your Cash Flow Forecast to Make Informed Decisions: Your cash flow forecast is a valuable tool for making informed decisions about your spending and fundraising strategies. Use it to determine when you need to cut expenses, when you need to raise more money, and when you can afford to invest in new opportunities.

By following these tips, you can create an accurate and effective cash flow forecast that will help you understand your cash flow, plan ahead to hit your targets, and make better decisions along the way.

Remember that forecasting your cash flow is an ongoing process, not a one-time task. Review and update your cash flow model regularly as part of your treasury management process to ensure that it remains accurate and useful.

Proactively Manage Your Runway

As Troy Henikoff of MATH Venture Partners has said, “Cash is like oxygen. If you’re without it for 2 minutes, you’re dead.”

Taking ownership of your cash runway is essential for your startup to survive and thrive. Your runway is the length of time you’ll survive with the cash you currently have available. In other words, it’s the amount of time you have before you run out of money.

Her are some ways to effectively manage your runway:

1. Calculate Your Runway: Determine how long your startup can survive with the cash you have available by dividing your cash balance by your monthly burn rate. Your monthly burn rate is the amount of cash your startup is spending each month. For example, if you have $100,000 in cash and your monthly burn rate is $10,000, your runway is 10 months.
2. Monitor Your Burn Rate: Keep a close eye on your burn rate to ensure that you're not spending more than you can afford. Track your expenses and review them regularly to identify areas where you can cut costs or find more cost-effective solutions.
3. Adjust Your Spending and Fundraising Strategy: Adjust your spending and fundraising strategy based on how much cash you have available and your burn rate. If your runway is short, focus on reducing your expenses or finding ways to quickly generate more revenue. If your runway is long, you may be able to afford to invest in some longer-term growth opportunities.
4. Explore Fundraising Options: Consider traditional and non-traditional fundraising options to extend your runway. Traditional options include equity financing, debt financing, and grants. Non-traditional options include non-dilutive financing such as revenue-based financing, crowdfunding, or invoice factoring.
5. Negotiate a Line of Credit: A line of credit is a loan that allows you to borrow money up to a certain limit. Negotiating a line of credit with your bank(s) can help you extend your runway and provide you with a safety net in case of unexpected expenses or delays in revenue.

Managing your runway effectively is a key piece of fundamental treasury management. Always keep your finger on the pulse of your burn rate, and make adjustments to your spending and fundraising strategies so that you never find yourself scrambling for a last-minute solution. With careful planning and management, you can likely extend your runway and position your business for long-term success.

Diversify Your Bank Accounts

Diversifying your bank accounts can help your early-stage startup in several ways. 

Here's why it's important:

1. Improve Your Cash Management: Diversifying your bank accounts can help you manage your cash flow more effectively. You can separate your operating cash from your reserve cash, for example, which can make it easier to track your cash balance and ensure that you always have enough cash on hand to cover your expenses.
2. Reduce Your Risk: Having accounts with multiple banks can help you reduce your risk. If one bank experiences a security breach or a technical issue, you won't be completely cut off from your cash. Additionally, if one bank offers better rates or terms for a particular financial product, you can take advantage of those benefits without having to switch all of your accounts to that bank.
3. Increase Your Flexibility: Having accounts with multiple banks can increase your flexibility. For example, if you're traveling or moving to a new city, there’s a better chance that you can easily access your cash in that area when you have multiple banks to choose from. Additionally, keeping multiple credit cards with different banks can open up more purchasing power and better rewards options.

Here's how to diversify your bank accounts effectively:

1. Choose Banks That Meet Your Needs: Research commercial banks that offer the services and products you need. For example, some banks offer higher interest rates on savings accounts or lower fees on checking accounts. Consider your priorities and choose banks that align with your needs.
2. Open Multiple Accounts: Once you've chosen your banks, open multiple accounts with each bank. For example, you might have a checking account, a savings account, and a credit card with one bank, and another checking account and savings account with another bank.
3. Monitor Your Accounts: Keep track of your account balances and activity across all of your accounts. This will help you manage your cash flow effectively and avoid overdraft fees and other penalties.
4. Stay Organized: Establish an internal process to stay organized and keep track of your accounts. This could simply be a spreadsheet, a financial management app, or a document that lists all of your accounts and their balances. Keep it up to date.

When your bank accounts are diversified, you can improve your cash management processes, reduce your risk, and increase your flexibility. Choose banks that make sense for your business, open multiple accounts, and stay on top of their balances.

Invest Wisely

Investing your excess cash wisely can help your business earn interest while maintaining liquidity. 

Here are some tips for investing your cash effectively:

1. Consider Short-Term, Low-Risk Investments: Since your startup's cash is likely to be needed soon, it's important to choose investments that are low-risk and have a short-term maturity. Examples of such investments include money market funds, certificates of deposit, and Treasury Bills.
2. Understand the Risks: Before investing your cash, make sure you understand the risks involved. While short-term, low-risk investments are generally considered safe, they still carry some degree of risk. For example, the value of a money market fund can fluctuate, and there is always the risk of default with any investment.
3. Consider Your Opportunity Cost: Keep in mind that every dollar you invest is a dollar that you can't use for other purposes, such as paying salaries or covering expenses. Before investing your cash, make sure that the potential returns outweigh the opportunity cost of tying up your cash in an investment.
4. Seek Professional Advice: Speak to your fractional CFO or treasury specialist about the best investment options for your startup. They can help you evaluate your options and determine which investments are the best fit for your risk tolerance and financial goals.
5. Monitor Your Investments: Once you've invested your cash, monitor your investments regularly to ensure that they are performing as expected. Review your investment strategy periodically to ensure that it still aligns with your financial goals.

By investing your excess cash wisely, you can earn interest while maintaining liquidity. Consider short-term, low-risk investments, understand the risks, and monitor your investments regularly to make the most of your cash.

Negotiate Better Payment Terms

Negotiating better payment terms with your suppliers and customers can help improve your cash flow and strengthen your business relationships. 

Here are some tips for negotiating better payment terms:

1. Understand Your Current Terms: Before negotiating, make sure you understand your current payment terms with your suppliers and customers. Review your contracts and invoices to determine your current payment terms, such as the payment due date and any discounts or penalties for early or late payment.
2. Identify Areas for Improvement: Look for areas where you can improve your payment terms. For example, you might be able to negotiate a longer payment period with your suppliers or offer discounts for early payment to your customers.
3. Be Prepared to Negotiate: When negotiating, be prepared to make a compelling case for why the new payment terms would benefit both parties. Be ready to provide evidence of your financial position, such as your cash flow forecast, and highlight any positive trends in your business.
4. Build Strong Relationships: Strong business relationships are key to successful negotiations. Be respectful, professional, and collaborative in your negotiations, and focus on finding a win-win solution that benefits both parties.
5. Consider Alternative Financing Options: If negotiating better payment terms isn't feasible, consider alternative financing options such as invoice factoring or revenue-based financing. These options can provide short-term cash flow solutions while you work on improving your payment terms.
6. Review Your Payment Terms Regularly: Once you've negotiated better payment terms, make sure to review them regularly to ensure that they are still working for both parties. Monitor your payment patterns and communicate with your suppliers and customers to ensure that there are no issues.

By negotiating better payment terms with your suppliers and customers, you can improve your cash flow and strengthen your business relationships. Understand your current terms, identify areas for improvement, and review your payment terms regularly to make the most of your negotiations.

Monitor Your Expenses

Monitoring your expenses is crucial for managing your cash flow effectively and finding ways to reduce outflows. 

Here are some tips for monitoring your expenses:

1. Track Your Expenses: Keep track of all of your expenses, including fixed costs like rent and salaries, as well as variable costs like marketing and travel expenses. Use a tool like Forecastr to track your expenses and compare them to your budget.
2. Review Your Expenses Regularly: Review your expenses on a regular basis, at least once a month, to identify areas where you can reduce costs. Look for trends in your spending and compare your actual expenses to your budgeted expenses.
3. Look for Cost-Cutting Opportunities: Once you've identified areas where you can reduce costs, look for cost-cutting opportunities. Negotiate better rates with your suppliers, find more cost-effective solutions for your business needs, and renegotiate contracts as needed.
4. Involve Your Team: Try to get your team involved in monitoring expenses by encouraging them to track their expenses and identify areas where they can reduce costs. This can help create a culture of cost-consciousness in your startup.
5. Use Data to Make Informed Decisions: Use the data from your expense tracking and budgeting to make informed decisions about your spending. Consider the impact of your spending on your cash flow and prioritize spending based on your business goals.
6. Keep an Eye on Industry Trends: Keep up-to-date with industry trends and benchmarks to ensure that your expenses are in line with industry standards. Look for opportunities to adopt new technologies or practices that can help you reduce costs.

By monitoring your expenses effectively, you can identify potential savings and improve your cash flow. Track your expenses, review them regularly, and keep an eye on industry trends to make the most of your expense monitoring efforts.

Getting Started with Treasury Management

Implementing the best practices above will help you effectively manage your limited cash resources and achieve your financial goals. Remember, cash is king, especially for startups, so make sure you're using it wisely!

As an early-stage startup, treasury management is crucial for managing your cash flow and financial resources. By forecasting and managing your cash flow, you minimize the chances that you’ll find yourself in a last-minute fundraising scramble.

Some of these best practices, like diversifying your bank accounts, are quick and simple to implement. Others may require a heavier lift and possibly even some new software solutions.

Start with the smaller items and work your way up. If you follow all of these best practices, you’ll be well on your way to optimizing your treasury management and handling your cash as effectively as possible.