Treasury Management & T-Bill Ladders | Arc
This guide explores the benefits of treasury management and T-bill ladders for startups. It provides insights on how startups can effectively manage their cash reserves, mitigate risks, and maximize returns on investments through T-bill ladders.
Startup's Secret Weapon: Treasury Management & T-Bill Ladders April, 2023
Introduction What’s Covered : Chapter 1: Mastering the startup treasury management basic1 : Chapter 2: Treasury management throughout the lifecycle of a startu : Chapter 3: Tips on cash flow managemen3 : Chapter 4: The role of fixed income securitie1 : Chapter 5: The importance of T-Bills in startups’ treasury management strateg8 : Chapter 6: How to structure T-Bill ladders to balance returns & liquidit8 : Chapter 7: Hedging T-Bill ladder principal risk with credit default swaps
Chp 1: Mastering the startup treasury management basics The need for proper treasury management
Therole of treasury management in small teams The key benefits of treasury management programs
Compared: in-house vs outsourced treasury management Chp 2: Treasury management throughout the lifecycle of a startup
Early-stage startups Growth-stage startups
Late-stage startups and “enterprise” companies
Chp3:Tipsoncashflowmanagement Forecast early and often Establish cash reserves Automate your cash management
Leverage revenue-based financing Implement standardized payment terms & invest in short-term or fixed-income securities
Chp 4: The role of fixed income securities in startups’ treasury management strategy An overview of fixed-income securities Common types of fixed-income securities
Benefits, and drawbacks of fixed-income securities
The role of fixed-income securities in startups’ treasury management strategy Factors to consider when evaluating fixed-income investments
Tips for investing in fixed-income securities
Our take: the role of fixed-income securities in startups’ treasury management strategy Chp 5: The Importance of T-Bills in startups’ treasury management strategy
Treasury Bills: The Basics Why startups love T-Bills The interest generated from T-Bills & principal risks
Purchasing T-Bills directly vs investing indirectly in T-Bills via ETFs
T-Bills importance in treasury management As mentioned in chapter two, the goal of a treasury management strategy is to minimize risks and maximize returns. This is accomplished through a variety of actions, which include the allocation of capital. Prior to this year, most startups allocated their funds across primary accounts, which they used for day-day operations, and savings accounts, which they used to store excess cash. With interest rates on the rise, startups transferred their excess cash out of savings accounts with traditional banks to high-yield accounts with Fintechs, which generate infinitely more returns (100x+ in some cases). More recently, with the collapse of SVB, the importance of sweep accounts came to light. Sweep accounts enable startups to distribute their cash across a network of partner banks to maximize their FDIC insurance coverage. Sweep accounts are certainly better than traditional savings accounts, in terms of both coverage and returns, but leave startups wanting more. Enter Treasury bills. Treasury bills generate higher returns than both savings and operating accounts and are backed by the U.S. Department of the Treasury, an institution that has never defaulted on its debt. When structured properly, Treasury bills enable startups to capitalize on the upside of rising rate environments, while effectively covering 100% of their excess cash. The only downside is the limited liquidity (e.g. the date of maturity) and the principal losses that may ensue due to the sale of the T-Bills prior to maturity. Ultimately, startups should consider T-Bills one of the tools in their metaphoric treasury management tool belt. When structured properly, T-Bills can produce consistent predictable returns for startups. When structured improperly, they can be disastrous—causing not only principal losses but also complete cash lock-ups and inaccessibility of reserves. Check out the next chapter for structuring T-Bill ladders to balance returns & liquidity.
Chp 6: How to structure T-Bill ladders to balance returns & liquidity Housework to complete before structuring your first T-Bill ladder
T-Bill maturity: how the time horizon affects the returns, and liquidity The impact of rate hikes on T-Bill par values
Structuring your first T-Bill ladder 7 key tips for maximizing your first T-Bill ladder Frequently Re-Forecast - Revisit your forecasts every few weeks or whenever a major event occurs to ensure your assumptions are still correct.v Forecast w/ Buffer - Related to the above, when forecasting remember to add a buffer of at least 10% to avoid cash crunchesU Mark your Calendar - Now that some of your cash is parked in semi-illiquid assets it cannot be directly used to pay bills. Mark your calendar to pull the needed working capital each month prior to it being reinvested.v Return Variability - The return of the same-dated T-bill may vary from bank to bank or broker to broker, so it’s important to shop around to find the best rateU Allocation - For most startups, air on the side of caution: park <50% of your cash in T-Bills that mature in 6+ months, and 50%+ in T-Bills that mature in >6 monthsU Consider ETFs over T-bill Ladders - We’ve made the case once, and we’ll make it again— the time–savings, and peace of mind that T-Bill ETFs provide are well worth the opportunity cost of the minimal upsideU Consider Treasury Management Platform - Rather than managing the Tbill ladder on your own, consider leveraging a treasury management platform, that automates the cash sweeping and investment process. If you’re looking for a partner to help walk you through the entire process, check out Arc Gold. It helps startups put their treasury management on autopilot, comes with up to $2.75M FDIC insurance, $500k of SIPC coverage, and pays up to 5.00% APY.
Chp7:HedgingT-Bill ladder principal risk with credit default swaps An overview of T-Bill Ladders An overview of the US debt ceiling
The influence of rate hikes on the debt ceiling and debt payments The outcome of failing to raise the debt ceiling
An overview of credit default swaps Credit default swaps as an insurance policy As mentioned above, the US Government recently hit its debt ceiling of $31.4T— limiting the Treasury Department’s ability to issue new debt. While the government hasn’t ever defaulted on its debt and has enough cash reserves to continue operating until 4Q, 2023, there is an increased risk. As such, some of the startups who leverage Arc’s treasury management solution, Arc Gold, have asked about credit default swaps to hedge their principal risk. These startups aren’t alone, according to Axios, the demand for credit default swaps is on the rise with “U.S. CDS hitting an all-time high of 83 basis points”. In layman's terms: it now costs $83 to insure $10,000 of Treasury bonds against the risk of default, up from just $20 two months earlier. For context, the price today is higher than the previous record high of $82 set in July 2011, during that debt-ceiling crisis. Even though there is an increased risk of default today and demand for credit default swaps is on the rise, it’s important to note that U.S. Treasuries are considered one of the most risk-free assets in the financial world. Axios says “they're the bedrock on which almost everything else is constructed. The U.S. can always print the money it needs to repay its debts.” We tend to agree.
Conclusion Throughout this guide, we explored startups’ secret weapon: treasury management and T-Bill ladders. We covered the basics of startup treasury management, as well as more advanced strategies that can be employed throughout their lifecycle. We shared tips on cash flow management and the role of fixed-income securities in a startup’s treasury strategy, and we also shared tips for structuring T-Bill ladders to balance returns and liquidity. For those worried about the stability of US Government, we also provided an overview of credit default swaps, that enable startups to hedge their downside risk. If you’re looking for a partner that can help put your treasury management strategy on autopilot, check out Arc. You can onboard in <5mins, your funds are protected by up to $2.75M of FDIC insurance and $500k of SIPC coverage, you can earn up to 5.00% APY on your idle cash through money market funds and T-Bill ladders and you’ll receive dedicated, 24/7 support. Learn more at: arc.tech/gold
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