Three Cash Management Questions for Venture-Startup CFOs

CFOs of emerging growth companies have always faced unique challenges in managing their corporate cash accounts as they juggle multiple rounds of financing, unpredictable burn rates and uncertainty about when products in development will turn into revenue. But in 2016, rising interest rates combined with recent regulatory reforms will make the cash management equation even more complex.

Therefore, financial executives in venture-funded enterprises need to ask themselves three urgent questions this year:

1.Will bank deposits suffice?

Government guarantees on deposits greater than $250,000 have expired, and regulatory reforms have tightened banks’ capital requirements. These changes have made traditional demand deposits more expensive, leading some large banks to reduce their percentages of uninsured deposits of corporate cash. The concentration risk of “putting all your eggs in one basket” may also be a concern.

2. Will reconstituted money market funds provide appropriate safety and liquidity?

SEC-mandated money market fund reforms, taking effect in October 2016 will impose floating net asset values at institutional money funds—meaning you may no longer be able to depend on a fixed $1/share price for a prime fund’s shares. There will also be possible redemption fees and liquidity gates that might limit access to cash in times of stress. These changes may increase potential shareholder risk and lessen potential liquidity in prime money funds.

3. Would it make sense to allocate more cash to separately managed accounts?

Separately managed accounts (SMAs) with portfolios of highly liquid short-term securities can be attractive supplemental alternatives to bank deposits and money funds. In a rising interest rate environment, separate accounts managed by a registered investment advisor provide the opportunity to select portfolio assets offering potentially higher yield than deposits or Treasuries. Asset class diversification in SMA portfolios may mitigate the possible commingled-shareholder risk associated with prime money funds and the potential concentration risk of bank deposits. And, securities in a separate account are directly purchased and owned, enabling more direct control over risk management and liquidity.

What’s the best cash management strategy to pursue in 2016? If you answered “Yes” (or even “Maybe”) to Question #3, it may be a good time to explore your options. If you’d like more information on why such a move may make sense, please take a look at three helpful white papers our research team has produced: How to Weather a Rising Interest Rate Environment clarifies some of the decisions that will be front-of-mind for corporate cash investors in 2016; Demystifying Separately Managed Accounts provides a deeper explanation of why and how SMAs can be helpful in a new interest rate cycle; and An Alternative to “Floating NAV” Money Market Funds introduces our new Capital Advisors Group Liquidity Accounts^SM, which provide an easy way to get started with separate accounts.

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