modern banking Sectoral developments that prompted the Founders to look for places to diversify their cash reserves left markets wondering if the Fed would follow these events by raising interest rates again. As I wrote earlier, the Fed avoids surprises. Sure enough, the interest rate is now 25 basis points higher, which raises a question for founders: How should this hike affect the way I manage my company’s money?
The wrong answer is to succumb to the need to spend hours emailing various banks looking for the highest yield and the agony of looking for that extra 5 to 10 basis points of yield. As a founder with limited time, you’d better manage other parts of the business. Cash management automation has reached a point where you and your finance team no longer have to spend hours generating returns that reflect the current market rate. Here’s an exercise to show you why you prefer to spend your time elsewhere.
Let’s say you had $25 million in fundraising recently.
Then, suppose you spent four hours shopping for your rate of the day and ended up squeezing an additional five basis points through a mix of providers. We’ll increase it to 10 to really emphasize the point. You figured out an extra $25,000 per year, but does that provide a negative impact on your organization when you consider the time you and your finance team spent generating that value?
Early on, when the Fed started raising interest rates to fight inflation, it made sense to prioritize your time to implement a complex Treasury strategy that moved you from 1% to 4% APY — $750,000 in new value annually. However, now that you’re at competitive rates of return that reflect the current federal funds rate, spending your precious time trying to squeeze in extra value is a mistake.
Harvard Business Review has built an easy-to-use resource costing calculator for members of your finance team looking for ways to increase your company’s return on cash. The first half hour spent evaluating cash management providers will cost $35 per $100,000 salaried employee – this calculation covers only the initial actions of speaking to your existing bank or sending an email inquiry to new providers. It does not include follow-up conversations and internal meetings that decide who to use and subsequent steps to get things moving.
Those opportunity costs can multiply as you search for those extra base points, reducing the marginal benefit of that extra $25,000 per year in earnings you’ve discovered. This effort also carries unnecessary risk: as we’ve seen in recent months, market conditions can change dramatically, putting your asset holdings on a huge downside overnight, even with a provider you’ve carefully vetted.
Once you reach competitive return levels, adding additional return may require you to invest in riskier assets. Your mental calculus becomes a balance between generating extra marginal return and putting your money at greater risk of depreciation.
If you look at some of the digital assets that delivered an exceptional APY last year, some of them eventually collapsed and companies lost some or all of their operating cash. This negative score points to three critical cash management truths that can haunt your startup if you don’t acknowledge them.
Three factors can kill your cash management efforts
Improving cash stores is an essential practice in a non-zero interest rate environment. Every dollar can help offset costs and extend the life of your company, and the benefit only grows as you become more cash flow positive. However, there are three factors that typically prevent founders from experiencing these benefits: