Mastering Treasury Management for Climate Businesses, Big and Small

In a company’s early days, when it’s all hands on deck, the founders generally oversee cash management - and getting it wrong can come at a high price. But how do you effectively forecast your cash needs?  What criteria should you use to evaluate potential banks? How much should you keep in what accounts? And how can you be sure your cash isn’t at risk?

The future of your business can depend on good treasury management, so we sat down with Charlie Bischoff, Treasury Director at Patagonia, to learn more about how founders can protect their cash.

Cash forecasting – short vs long term

In the short term (0-6 months-ish), it helps to have a solid understanding of your weekly expected inflow and outflows. In general, this should be somewhat predicable and include things like payroll, vendor bills, customer payments, and other near-term activity. Longer term cash forecasts (6-12mo+) can get into company strategy, growth projections, investments/M&A, and maybe even involves modeling various “what if” scenarios.

Once you have a firm grasp of your cash needs, both near-term and long-term, you can start to segment your cash into buckets based on liquidity need. At the very least, you could have a short-term cash bucket (perhaps cash that covers your obligations over the next 6 months) and long-term cash bucket (cash that will be used 6-18mo+ from now), maybe additional buckets if helpful.

Cash allocations to these buckets will look different from company to company and will probably evolve over time for any given company. For example, some might have a lot of revenue seasonality or occasional large inflows/outflows such as a funding round or a large investment, and so what is considered “short term” cash today might be much different than “short term” cash next year. So, it’s important that your strategy and cash buckets remain flexible to your company’s cash needs as they evolve over time.

Where to store your cash

Companies today have several options when it comes to cash management products. The most common ones are:

• Demand Deposit Account (DDA) – business checking accounts
• Money Market Savings Accounts (MM) – business savings accounts that pay interest
• Money Market Funds (MMF) – mutual funds with next day liquidity, invested in high quality short term fixed income instruments, some types will not lose principal value
• FDIC-insured Products – companies like IntraFi, StoneCastle, and CNote offer products to institutional depositors that break a company deposit up into increments of $250k and allocate across a participating network of banks on your behalf. This ensures 100% FDIC insurance on larger balances that would otherwise exceed the standard $250k insurance.
• Bonds – debt securities issued by companies, governments, etc

Key Priorities

How a company chooses to allocate funds across these products depends on whether that cash is considered short term or long term, or somewhere in between, and they should consider a few key priorities:

• Preservation of Capital – ensuring your funds do not lose principal value
• Liquidity – how quickly your funds can be converted into cash and used
• Yield – how much your funds can earn through interest income

Short term cash should probably prioritize liquidity and preservation, while longer term cash can start to give more priority to yield.

It’s important to note that today’s short term interest rates have increased rapidly over the last year, and as a result, short term products like MM’s and MMF’s can offer very attractive yields. This circumstance means that short-term cash and long-term cash can have a lot of overlap in terms of which products are used, and cash management strategies don’t need to be very complex.

An example of a viable short-term cash allocation might be to keep up to $250k in a DDA/MM (the FDIC insurance limit, which is top of mind for many CFOs today), while sweeping the rest into an MMF. This strategy would achieve same day or next day liquidity on all funds, offer very strong preservation of capital, and earn you a decent yield (via the MM and MMF portions). Meanwhile, that same company might opt to leave all long-term cash in an MMF, an easy pivot off the short-term strategy.

Additional Priorities

There are a couple additional priorities that a company should consider:

• Diversification – not keeping all your eggs in one basket

The last month has shown companies that counterparty risk is real when it comes to banking. It’s always a good idea to have backup options with additional banks. This is important to protect your cash balances (you have a safe place to move cash if needed) as well as your company’s operations (you have a place to pivot your payroll to if needed).

• Operational capabilities – technical abilities of the financial institution

Companies today are becoming increasingly reliant on financial technology and are integrating their companies with their banks more and more. It’s important that your bank can meet your company’s operational needs and can serve as a valuable partner that increases your operational efficiency, rather than impede it. For example, some banks might offer automated sweeps between DDA and MMF, which is a great setup that ensures full protection and liquidity while maximizing yield on your cash, all while removing the need to transfer money between accounts on a regular basis.

• Environmental and Social Values – ESG values of the financial institution

Treasury management can play a simple but very meaningful role here. This can take several shapes and forms, including who you chose to bank with. Your bank deposits don’t sit in a vault, your bank lends that money out to fund investments in other companies and projects ranging from mortgages and small businesses to large corporations. In other words, you are indirectly funding whatever your bank is lending to. If your company is focused on fighting climate change, you may want to understand if your bank is lending your cash to fund Arctic Oil & Gas, for example. One good way to check on this is to simply ask your bank what their lending policies are or whether they are setting targets for financed emission reductions (the emissions resulting from a bank’s lending activity). Or you can take a DIY approach to look at some publicly facings resources such as Bank for Good or Banking on Climate Chaos. Banks play a very important role in our transition to a more sustainable planet, and corporate clients are in a unique position to lean on them and hold them accountable.

Build for autopilot

At the end of the day, your startup is not likely in the business of managing cash and maximizing interest income. These things are an afterthought, and with some general housekeeping and best practices in place, it should mostly be on autopilot with a few tweaks along the way. If you are spending too much time worrying about an overdrawn account, whether your funds are fully FDIC insured, or why your bank is paying you 3.9% vs 4.0% on a money market account, you are probably doing it wrong. Put in place a straightforward cash management strategy, keep things simple, automate as much as possible, and make sure you are safeguarding your company’s valuable cash. No interest or investment income is worth putting the business in jeopardy.

Charlie Bischoff is the Treasury Director at Patagonia. He has been with the company for 5 years, overseeing global cash management, banking, and sustainable finance. His treasury management career spans 11 years, where he has also worked in the banking and CPG industries. In his spare time, he enjoys running, fishing, surfing, and spending time with family.