by David Friedman, Chairman of Tech Coast Angels
These past several days have been extremely difficult for many executives as the uncertainty of what will happen in the aftermath of the failings of three banks, including Silicon Valley Bank which focused on support of the startup and tech community. The good news is that the Federal Reserve and the FDIC with support of the Treasury, stepped in to support the depositors. The Federal Reserve stated that depositor accounts will be preserved. “After receiving a recommendation from the boards of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, Treasury Secretary Yellen, after consultation with the President, approved actions to enable the FDIC to complete its resolution of Silicon Valley Bank in a manner that fully protects all depositors, both insured and uninsured.” See:
Notwithstanding this reprieve, we at Tech Coast Angels want to provide some suggestions for you as you go forward in these uncertain times. This is by no means meant as a mandate, financial, or legal advice but rather some pragmatic suggestions that you can discuss with your Board, management team and advisors to address cash management risks going forward.
- Safety and Liquidity first. Consider focusing on SAFETY, LIQUIDITY and only then YIELD. In these times, Safety and Liquidity should govern. Consider establishing alternative or backup bank accounts to which you can “safely” transfer money in case of banking issues.
- Choice of Bank. The FDIC and Federal Reserve website publishes statistics, such as AOCI/TEC-AOCI that function as potential trouble indicators. Check these statistics and others relating to financial stability of your bank. Where possible, bank accounts used for operations and working capital should be managed to minimize uninsured deposits. Idle cash should be invested productively and prudently rather than lying dormant and at-risk.
- Cash Management Policy. Define and document a cash management policy approved by your board so you can take decisive action as needed. The policy statement can be brief but should address key topics mentioned in this letter.
- Vendors/Supplier relationships. Pay attention to your suppliers, vendors and customers and where they have their banking relationships. If that company, supplier or customer has liquidity issues, your company’s products and services and cash flow might be affected. Consider contingency plans and second sources of supply.
- Excess Cash. Inform yourself of sweep accounts and the advantages and disadvantages. Cash should be invested in safe and secure money market instruments, which can include:
- SEC regulated (Reg 2a-7) money market mutual funds that invest in government securities and collateralized repos, with the fund portfolio assets held in a third-party custodian account for shareholder protection.
- Short term U.S. Treasury obligations (T-bills and notes/bonds with short maturities) with average maturities which do not exceed the expected cash flow needs of the entity, and generally less than180 days on average, unless approved by the board of directors or its audit/finance committee. All such investments should be held in customer segregated accounts at a regulated FDIC bank or SIPC broker.
- Repurchase agreements with banks or brokers using SIFMA master contracts, to be over-collateralized by government securities marked to market, or short-term bank CDs similarly collateralized.
- Emergency funds. Consider contingency plans for potential liquidity issues. Have a clear understanding of your immediate expenses, while planning to have a minimum of 3 months emergency funding to meet payroll and resource needs.
- Minimize debt. Debt can be a major drain on a company’s cash flow, so it is important to consider it vs. going to the equity market. Try to pay off high interest debt first and avoid taking on new debt whenever possible.
It would be foolish to assume that anyone has all the right answers. The past few days has been a wakeup call and we trust that some of these ideas will resonate with you and help you manage your growth initiatives going forward even in light of the current banking issues.