Banking Treasury Recommendations

Written by Johnnie Walker
Business Planning

Treasury management refers to the process of managing an organization’s cash flow, financial assets, and liabilities to ensure liquidity, mitigate risk, and optimize returns.

It’s a crucial aspect of financial management for businesses of all sizes, as it helps ensure that they have enough cash on hand to meet their financial obligations while minimizing financial risk.

Effective treasury management is essential for businesses to manage their cash flow and ensure the financial stability of their operations. The primary objective of treasury management in startup companies is principal preservation. This means that the focus is on maintaining the value of the financial assets and cash flow over time, rather than on generating high returns. While generating returns on investment is an important aspect of financial management, the primary goal of treasury management is to safeguard the startup company’s financial resources and ensure their availability when needed.

To achieve this objective, businesses need to avoid single points of failure in their cash management strategies. Single points of failure refer to situations where the loss of one component can disrupt the entire system, leading to significant financial risk. In the context of treasury management, this means having all funds concentrated in one bank or account, which can lead to a lack of liquidity and an increased risk of loss. Therefore, diversification of bank accounts is crucial for businesses to avoid single points of failure and protect their financial assets.

Diversifying Bank Accounts

Maintaining accounts at more than one bank is crucial for businesses to ensure that they do not have a single point of failure, which can arise from various reasons such as operational issues, technical failures, or financial instability of a bank. Having accounts at multiple banks reduces the risk of losing access to funds or encountering any other financial difficulties.

Systemically Important Banks (SIBs) are financial institutions that are considered critical to the overall health and stability of the financial system. These banks are usually large in size and have significant cross-border activities, making their failure potentially devastating to the global financial system. As a result, they are subject to increased regulatory oversight and capital requirements.

For businesses, having an account at an SIB can provide an additional layer of security and peace of mind in the event of a financial crisis or economic downturn. This is because SIBs are typically seen as safer and more stable than smaller banks, and are therefore less likely to fail or experience financial difficulties. Additionally, having an account at an SIB can provide access to a wider range of financial services and products that may not be available at smaller banks.

Using both Money Market Fund accounts and Checking accounts can offer several benefits to businesses. A Money Market Fund account is a low-risk investment vehicle that typically offers higher yields than traditional savings accounts. It allows businesses to earn a competitive return on their idle cash while maintaining easy access to their funds. On the other hand, a Checking account offers more flexibility and accessibility for businesses to manage their day-to-day operations. 

Sweep structures can be used to optimize cash management by automatically transferring funds between accounts, ensuring that cash is always put to its best use. For example, excess funds in a checking account can be swept into a Money Market Fund account to earn a higher interest rate, while still allowing businesses to access the funds when needed. Similarly, sweep structures can be used to transfer funds from a Money Market Fund account back into a checking account when more liquidity is needed.

Structuring Accounts According to Operational Needs

Structuring accounts according to operational needs is crucial because it ensures that a business has the necessary funds available to meet its day-to-day operational requirements. If a company’s cash is not structured according to its operational needs, it could lead to cash flow issues, resulting in delayed payments to suppliers, missed investment opportunities, and even bankruptcy. By matching the availability of funds with the company’s operational needs, businesses can avoid such scenarios.

Businesses can structure their accounts based on their specific needs by separating operational and investment funds. For example, a company may choose to maintain a checking account for its operational expenses, such as payroll and supplier payments, and a separate investment account for excess funds. The investment account may be a money market fund, which offers higher returns than traditional checking accounts but still allows for quick access to cash. By separating the two types of funds, the business can easily track its operational expenses and ensure that investment funds are not being used for operational needs, which could lead to cash flow problems.

Ensuring Proper Access Policies and Controls

Proper access policies and controls are crucial in treasury management because they help to prevent unauthorized access to funds, which can result in significant financial losses for the business. Treasury management involves handling large amounts of cash and other financial assets, which makes it an attractive target for fraudsters and cybercriminals. Having proper access policies and controls in place helps to reduce this risk and ensure that only authorized individuals can access and manage the company’s cash and financial assets. Some examples of access policies and controls that businesses should have in place include assigning different levels of access to different employees based on their roles and responsibilities, requiring multi-factor authentication for access to sensitive accounts or information, regularly monitoring and reviewing access logs to identify and address any suspicious activity, and limiting the number of individuals who have access to sensitive information or accounts.

In addition to having proper access policies and controls in place, it is also important to store access details securely and with guaranteed retrieval, in case of emergencies. This includes storing passwords, authentication tokens, and other access details in an encrypted and password-protected file or database and ensuring that multiple individuals within the organization have access to this information in case the primary individual responsible for it is unavailable. It may also be necessary to establish backup authentication methods or emergency contact procedures to ensure that access can be regained quickly in the event of an emergency or unexpected disruption to normal business operations.

Maintaining Knowledge of Covenants and Restrictions

Staying up-to-date on any covenants or restrictions related to cash management is essential for businesses. Covenants are typically part of debt agreements and can restrict the way businesses manage their cash. It is important for businesses to stay up-to-date on any covenants or restrictions related to their cash management because failing to comply with these requirements can result in penalties or other negative consequences. 

For example, if a business has a debt agreement that requires it to maintain a certain level of liquidity or restricts certain types of investments, not adhering to these covenants could result in default or higher borrowing costs. Similarly, if a business operates in a regulated industry, such as banking or insurance, there may be specific requirements related to the management of cash reserves or investments that must be followed to remain in compliance with regulatory requirements. By staying informed of any covenants or restrictions related to their cash management, businesses can proactively adjust their strategies to avoid penalties or other negative outcomes.

There are several examples of covenants or restrictions that could impact a business’s cash management strategy. For instance, a debt agreement may impose limitations on the amount of cash that can be distributed to shareholders or invested in certain assets. Regulatory requirements may also limit the types of investments that businesses can make with their cash. Another example is the use of cash for working capital requirements, which may be subject to restrictions imposed by lenders. Businesses can stay informed of any changes or updates to these covenants or restrictions by regularly reviewing their debt agreements and regulatory requirements, and seeking the advice of legal or financial experts if necessary.

Account Structure Recommendation

Based on the various factors discussed above, Rooled recommends that businesses adopt a structure that includes a checking account as the main operational account, a money market fund/sweep account for the sweep of excess funds, and an SIB checking account as the backup banking solution.

The checking account serves as the central operational account, providing businesses with easy access to their funds for their day-to-day operational needs. It is important to have this account fully functional and readily available for transactions to keep the business running smoothly.

The money market fund/sweep account provides businesses with a safe and flexible option for managing excess funds. The funds can be automatically swept into the account from the checking account, or a manual sweep can be initiated by the business as needed. The money market fund/sweep account can help businesses earn a higher return on their excess cash, as compared to leaving the funds idle in a checking account.

Finally, the SIB checking account serves as the backup banking solution. By maintaining an account at an SIB, businesses can ensure that they have access to a banking solution that is stable and reliable. This is especially important in times of crisis, such as during economic downturns, when banking systems can become unstable. By having a backup banking solution in place, businesses can minimize the impact of any disruptions to their primary banking relationships.

By adopting a structure that includes a checking account as the main operational account, a money market fund or sweep account for the manual or automatic sweep of excess funds, and an SIB checking account as the backup banking solution, businesses can optimize their cash management practices, while ensuring access to their funds at all times.

Effective treasury management is essential for businesses to maintain financial stability and optimize their cash management strategies. Throughout this article, we have emphasized the importance of diversifying bank accounts, structuring accounts according to operational needs, and ensuring proper access policies and controls. By maintaining accounts at multiple banks, businesses can mitigate risk and ensure access to funds in case of emergencies. Structuring accounts according to operational needs helps businesses to optimize their cash management by separating operational and investment funds. Proper access policies and controls prevent unauthorized access to funds, reducing the risk of fraud and theft.

We strongly encourage readers to implement these best practices in their own cash management strategies. By doing so, businesses can maintain financial stability and avoid potential financial disruptions. At Rooled, we offer a range of services and resources to help businesses optimize their treasury management, including cash management solutions and risk management strategies. Our team of experts can provide customized advice and support to help businesses achieve their financial goals. Contact us today to learn more about how we can help you improve your cash management strategies and achieve financial success.

About the Author

Johnnie Walker

Co-Founder of Rooled, Johnnie is also an Adjunct Associate Professor in impact investing at Columbia Business School. Educated in business and engineering, he's held senior roles in the defense electronics, venture capital, and nonprofit sectors.