From Crisis to Opportunity: How to Strengthen Treasury Management in the Wake of the SVB Collapse

The unexpected collapse of Silicon Valley Bank (SVB)  was a turn of events that many feared would rival the financial crisis of 2008. The repercussions of this failure were quickly felt across the globe, with banking stocks plummeting, markets thrown into disarray, and many feeling concerned about the stability of other financial institutions. 

Entrepreneurs who had been drawn to SVB for its startup-friendly terms and interest rates were left anxious and uncertain about their ability to meet their financial obligations and ensure that their employees would receive their salaries. 

While having loyalty to a financial institution is understandable, it is crucial for startups to remember the importance of sound treasury management. Effective treasury management ensures the company’s financial stability and mitigates risks associated with relying on a single institution. 

Now, in the aftermath of this crisis, entrepreneurs and venture capitalists, whether directly affected by SVB’s collapse or not, are left wondering what measures can be taken to prevent similar impacts on their businesses. 

In this post, I’ll discuss the lessons that we can all take away from the crisis, tips for better cash management, how the right tools can help improve your overall treasury management, and more.

Lessons for Founders and the Startup Community

1. Focus on Increasing Revenue and Profits, the Lifeblood of Your BusinessA strong revenue stream that generates consistent profits enables companies to cover daily expenses, maintain liquidity, and reduce dependency on external funding. By focusing on revenue generation profitably, founders can alleviate financial stress and create a solid foundation for their business, even during challenging times.

2. Maintain a cash reserve Having an emergency fund can provide a safety net during times of financial uncertainty. Regularly set aside a portion of your revenue to build and maintain a cash reserve that can be tapped into when needed.

3. Understand the Importance of Treasury ManagementThe SVB collapse underscores the critical importance of treasury management for founders and startups. Effective treasury management helps companies maintain liquidity, manage cash flow, and mitigate risks associated with currency fluctuations and interest rate changes.

4. Link Financial Planning & Analysis (FP&A) to Treasury ManagementIntegrating FP&A with treasury management allows for better forecasting, risk assessment, and decision-making. By providing timely and accurate financial information, FP&A enables treasury teams to make informed decisions about cash management, investments, and risk management strategies.

5. Leverage Cash Flow Forecasts from FP&A to Ensure Liquidity and Optimize InvestmentsCash flow forecasts from FP&A provide valuable insights for treasury teams to monitor liquidity and allocate resources efficiently. Accurate cash flow forecasts enable treasury departments to identify potential shortfalls, adjust working capital requirements, and invest excess cash in profitable ventures. In situations like the recent bank failure, these forecasts can help companies avoid liquidity crises and maintain financial stability.

6. Join a Bank Sweep Network and Redundant Banking PartnersIn light of the recent banking crisis, it’s essential for companies to have a bank sweep network and a redundant system of leading banking partners in place. These measures safeguard against unexpected situations by diversifying funds across multiple financial institutions and ensuring access to liquidity when needed. A well-structured bank sweep network optimizes interest earnings and minimizes idle cash, while a redundant banking system protects against the failure of a single institution.The Benefits of Sweep Networks: 
   • Increased deposit insurance coverage: By spreading deposits across multiple FDIC-insured banks, sweep programs can increase the overall deposit insurance coverage for startups. This helps protect the business’s cash assets in the event of a bank failure.
   • Risk diversification: Participating in a sweep program helps startups diversify their cash holdings, reducing the impact of any single bank’s financial troubles on their cash assets.
   • Enhanced liquidity management: Sweep programs can help startups maintain liquidity by transferring excess funds to interest-bearing accounts across various banks. This enables businesses to earn interest on their cash while still maintaining access to the funds when needed.
   • Streamlined cash management: Sweep programs automate the process of distributing cash across multiple banks, saving startups time and effort in managing their cash holdings.

7. Develop robust financial contingency plansA robust financial contingency plan for treasury management is crucial in today’s unpredictable financial landscape. This plan should include procedures for notifying debtors not to deposit cash in impacted banks, maintaining liquidity through alternative channels, and safeguarding the company’s financial interests during crises. By being prepared, companies can minimize the impact of events like the recent bank failure.

8. Automate tasks when possibleAutomation plays a vital role in modern treasury management. Automated systems streamline processes, reduce manual errors, and provide real-time data for decision-making. By automating tasks such as cash flow forecasting, risk management, and investment analysis, treasury teams can focus on strategic initiatives and drive business growth.

9.  Incorporate Risk Management LessonsThis collapse highlights the critical need for startup founders to recognize that their businesses are not immune to macroeconomic factors. This event underscores the importance of incorporating risk management into the CEO’s responsibilities to ensure the financial stability and resilience of their startups.Risk Management Strategies for Startup Founders
   • Stay informed about macroeconomic factors: Startup founders should be aware of changes in interest rates, economic indicators, and regulatory environments. Understanding how these factors can impact their business’s financial health is crucial for making informed decisions.
   • Develop a comprehensive risk management framework: Implementing a robust risk management strategy that addresses various types of risks, including financial, operational, and strategic risks, can help startups anticipate and mitigate potential threats.
   • Monitor and assess risks regularly: Regularly evaluate your startup’s exposure to risks and review the effectiveness of your risk management policies and procedures. Update your risk management framework as needed to adapt to changing circumstances.

The Investment Tightrope: Walking the Line Vetween Yield and Liquidity

In an environment marked by economic uncertainty and rising interest rates, companies face the challenge of optimizing their cash investments to balance yield and liquidity. 

Ensuring financial stability and operational continuity requires a strategic approach to managing excess cash, maximizing returns without compromising liquidity. Companies must rethink their cash management strategies to ensure financial stability and adapt to changing conditions. 

By focusing on key components of effective cash management, embracing technology and automation, and proactively addressing financial risks, companies can safeguard their cash position and maintain the flexibility needed to thrive in an ever-evolving business landscape.

Key Components of Effective Cash Management

Regularly forecasting cash flow enables companies to anticipate future cash requirements and make informed decisions regarding investments, operational expenses, and funding needs.

Managing Cash Burn

Here are some tips for managing your cash burn over time: 

• Create a detailed budget: Develop a comprehensive budget that outlines all expenses, including fixed and variable costs. This budget will serve as a guide for monitoring cash burn and controlling spending.
• Track expenses regularly: Regularly review your startup’s financial statements and compare actual expenses to the budget. Identify areas where spending may be higher than expected and make necessary adjustments.
• Prioritize essential expenses: Focus on covering critical costs such as payroll, rent, and utilities. By prioritizing these expenses, startups can maintain operational stability during financial challenges.
• Implement cost-saving measures: Explore ways to reduce costs without sacrificing the quality of your product or service. This may include renegotiating vendor contracts, streamlining operations, or leveraging technology for increased efficiency.

Maintaining liquidity

Ensuring sufficient liquidity is crucial for managing day-to-day operations, covering unexpected expenses, and seizing growth opportunities. Companies should maintain a cash buffer and strike a balance between maximizing yield and preserving liquidity in their cash investments.

Optimizing working capital

Efficient management of working capital, including accounts receivable, accounts payable, and inventory, can help companies optimize cash flow and maintain financial stability.

Debt management

Prudent borrowing and effective debt management can help companies leverage external financing without overextending themselves and risking insolvency.

Risk mitigation

 Identifying and mitigating financial risks, such as currency fluctuations, interest rate changes, and counterparty risks, can help companies protect their cash position and maintain financial resilience.

How Forecast+ Can Help with Treasury Management and FP&A Automation

Forecast+ offers an integrated solution for automating FP&A and providing treasury teams with the information they need to make informed decisions. By connecting with Xero and QuickBooks, Forecast+  streamlines forecasting and scenario planning processes. The platform’s real-time data and analysis capabilities enable treasury teams to optimize cash management, mitigate risks, and drive business growth.