Treasury Function: Best Practices for Early-Stage Companies.
In an Airbase Navigating Uncertainty panel session, we learned how two experienced finance pros have built treasury functions in their current and past companies. Brett Tighe, is SVP of FP&A & Treasury at Okta (previously Corporate Finance and Strategy at Salesforce), and David Tao is the Head of Risk, Treasury & Payments at Gusto (previously Head of Treasury and Payments Strategy at Uber).
Against the backdrop of the challenges and uncertainty of the current business environment, the picture that emerged from both panelists was one of level-headed stewardship of company funds and the preservation of capital. The role of Treasury, which primarily focuses on the planning for, and management of, cash needs of a business, includes the internal processes and external banking relationships that facilitate that cash management. The responsibility for these financial processes includes the management of the financial risks a company is exposed to, from counter party risk to market risk. In addition, Treasury is often charged with managing the stack of software tools that are used for accounting automation.
Although small companies don’t typically have a formal treasury department, VC-backed firms in particular require effective cash management for rapid paced growth. David pointed out that the functions still occur but are often taken on by accounting (especially accounts payable), payroll, and legal teams. Nevertheless, an advantage of viewing these functions through a “treasury lens” is the risk management ethos that the function brings.
Treasury function and organization.
As a general observation, David pointed out that the treasury function must focus its efforts to support the business model of the specific company and ensure that Treasury strengthens and protects the ability of that company to move forward. Every company has a different level of requirements, stemming from its business model.
Brett described the small team that forms the treasury function at Okta, and the key role that it plays in the rapid expansion at the company. The group's responsibility includes the forecasting of cash needs and taking the friction out of payments by managing the banking portal, ensuring reasonable yield from deposits, and facilitating international expansion.
David explained that at Gusto, where Treasury is responsible for both company cash and customer cash, the primary goal of the treasury function is risk management and the preservation of capital. An early mentor of David’s from Yahoo taught him that, as a treasurer, you don’t get promoted for increasing yield, but you do get fired if you lose capital. The advantage of having a more formal treasury function is the ability to assess best practices through the treasury lens, understanding what can be done to strengthen, preserve and protect a company’s capital.
Risk management and effective controls.
Brett explained that the treasury function can provide the opportunity to design and implement processes and controls that enable a growing company to move to the next level. For example, one of Treasury’s key responsibilities is ensuring that there are effective controls around the movement of money, including the administration of bank portals, dual approvals, and initiating payments with a layer of approvals for the admin function itself, i.e., who has authority to set authorities.
David agreed that for companies without a treasury function, providing controls on bank accounts is clearly the number one priority. Even without a formal Treasurer, managing user permissions is essential. While multiple people may need to use a banking portal, not everyone needs the permissions to do everything there. It’s important to set thresholds to limit fraud, while not restricting flow. Define who can do what, and how much they can do. Be thoughtful about what you can do in terms of thresholds – you don’t want to make it so cumbersome that it creates bottlenecks.
Brett emphasized that in order to reduce the opportunities for fraud, levels of authority need to be set thoughtfully. You may want to give someone authority to make payments, but require dual authority to set the rules, thus protecting the administrator. The controls that you set up to move money around and to pay people can ensure that risk is managed effectively, especially in an environment where cash is currently king.
Brett went on to explain how the treasury function differs in important ways at a public company. First, and foremost, are the SOC compliance and internal controls. He further explained that you need to have your house in order, because an auditor will test everything. If you’re doing things right, the audit process will be easier.
Second, as a public company, you’re probably going to have more money in the bank, and investing the money is important. The more access you have to capital, the more ways you have to grow the balance sheet and grow the company.
Third, if Treasury owns insurance (sometimes this resides in the legal team), there are a variety of responsibilities that include managing D&O insurance, property and casualty, and overall insurance risk planning. Cybersecurity also impacts all of these functions, and Treasury must play a role here.
Building a Treasury Function.
Building out your Treasury depends on what functions you take on. Does it pull everything together, or focus on specific areas? Brett offered a list of a few areas that may cause you to add staff:
- Software stack: How much financial software do you use internally, especially for managing cash flow? If you have one simple system then one person may be able to handle it, but if you have multiple systems in your finance stack, multiple banks, and multiple points of contact, you may need more staff.
- Insurance: if you have a good insurance broker who knows your business sector working closely with your company, they can handle a lot of your insurance work. But, if your insurance broker doesn’t provide that type of expert support you may need someone internally just to handle insurance needs. It’s a lot of paperwork.
- Investments: it’s helpful to consider how much your investment managers are doing for you, versus how much of your financial and investment management you choose to do yourself. The answer depends on how complex your investment strategy is.
- International growth: this has many different variables that aren’t encountered domestically. Some structures are simple, while others are extremely complex, often including a myriad of rules and large amounts of paperwork. Having this capability in house is important to support international growth strategies.
To outsource or not to outsource?
David suggested that companies look for efficiencies to outsource the things that do not require immediate responses. Something like managing cash positions, needs an immediate line of access for management and should be handled internally. However, there are things you have to do on a day-to-day basis that can be outsourced. Treasury does a lot of paperwork that could be done by others. For example, regular signatory updates need to be executed but it’s not as time critical and so this type of responsibility can be outsourced.
Cash Management and Banking Relationships.
Both panelists noted that when the economy becomes challenging, cash management becomes critical. David pointed out that this is especially important at small companies; you have to be sure you don’t dip to zero. Even at a large company, you can’t let half a billion dollars go out before a payment for half a billion comes in. You need to manage cash flow on a day-to-day basis, moving money around as needed. It’s not just a matter of today’s cash position but also the forecast for cash. Now may be the time to start using tools like real-time payment systems for accounting automation and payroll. There are several available like Bill.com, Gusto, Divvy, and Airbase for smaller companies and Coupa and SAP for large enterprise companies.
With respect to smaller companies that don’t have hundreds of millions of dollars in the bank, Brett pointed out that a good relationship with your bank is crucial. You should be able to pick up the phone and get the right person straight away, and then get the help you need when you need it. He suggested some things to look for in a bank: Who can provide technology expertise? Who can help us build relationships? Will they be there to support your needs in three to five years?
A good example is how well you were served by your bank with respect to PPP provisions. You want to layer in criteria for what your bank can do for you, not just the cheapest provider or the highest yield, but understanding what they can deliver in terms of additional products and services so that your company can grow.
In terms of maximizing yield on deposits, our panelists urged companies to negotiate rates on accounts. Banks are hungry for business, and their offer is not necessarily the final word. You can always respond to their rates by saying “That’s a great first offer.” Remind your bank that there are other banks who are interested in taking your money. Focus on getting the maximum yield on your sweep account. And don’t just have one partner.
At the same time, the panelists reiterated that a treasurer isn’t necessarily an economist. Brett pointed out that it’s important to not try to guess where the market is going to go. Eventually you’ll be wrong. He also cautioned to not over-rely on the experts, or keep all your assets in a single institution. Liquidity is king and you need to have access to capital when you’re running a business. Preserving capital ranks higher than increasing yield. His bottom line is that Treasury is there to support a software company, not to be an asset manager.
David suggested the threshold for pursuing yield might be to make it relative to the company’s size. For a large company, earning an extra few hundred thousand dollars might not be worth the extra work and potential risk, while for a smaller company, that amount could cover the salary of a critical resource. When asked about longer-term investments to secure higher yields, both suggested that such a decision should be driven by the cash needs of the company.
VC-backed companies in particular have an IPO focus and for the CFO and the Treasury function, that has implications for how to build systems for cash management. When getting ready to IPO, you need an operational IPO mindset and take action to; build reporting capabilities, think about where the next “gotchas” are, add software, features, or processes that will allow you to scale up quickly so that when the time comes, you’re prepared. In terms of growing the team to handle a growing Treasury, David said he had a preference to build from internal finance resources and suggested looking at the skillset you have in-house.
International Receipts, Payments and Transfers.
Both panelists pointed out that moving money around internationally is complicated. There are currency restrictions, central bank requirements on registering payments, and other processes that require a lot of attention. David pointed out that there are countries where it can take between six and twelve months to open an account. The U.S. has a complex set of restrictions on dealing with some countries. It might be easy to make a single transfer, but what if your business requires a million transfers a week to a particular country? Then it can get hard. It might even make business impossible.
Unless a big portion of your revenue is international, Brett suggested leaving the foreign exchange rate management to the FX traders. Instead of using forward contracts to lock in exchange rates, he suggested building in conservative forecasts for exchange rate movement, so that there may be some small upside to your actuals compared to your budget.
Having a formal treasury team in an organization is a luxury enjoyed by larger companies. Smaller companies must still perform many of the same functions of a treasury department using both internal and external resources who will have other competing responsibilities. Adopting a “treasury lens” can help a company think differently about the processes, risks, and opportunities associated with ensuring that a company’s cash needs are met and that investments fit a company’s overall objectives.
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