Treasury management is the lifeblood for startups. After raising external capital, your startup would have a significant amount of surplus cash. The longer you can make it last, the better. This capital is used to its full potential over time.
How should these funds be used effectively?
If the company has too much cash lying idle in current account, the money is not working as hard as it could. Many companies fail by having treasury management departments as operational offshoots of teams like accounting or payroll which can result in less effectiveness of the surplus capital.
Early-stage startups don’t have a formal treasury department and require effective treasury management for expeditious growth. Having a treasury function will help you to assess best practices through the treasury lens, understanding what can be done to strengthen, preserve and protect company’s capital.
There are 3 pillars of treasury management in startup
Founders who have raised capital should look out for investing options that help them to generate yield while minimizing risk. For a startup, yield of few hundred thousand rupees might help them fund a few operational expenses. The task here is to put surplus funds to work building the business. Yield gained lowers the dead weight loss of undeployed capital. A step up from current account would be overnight funds or liquid funds which will potentially generate higher returns and are fairly liquid but have at least 18-24 hours withdrawal window.
Stock market or high yield bonds are the very risky choices for investors. It is necessary to ensure that the financial health of a company is robust. This means that the business owners should take minimum risk with the highest possible returns while investing surplus funds.
Liquidity is a very important aspect of treasury management. As businesses do not have the advantage of planning out their expenses beforehand, they might need the funds at any point. A current account typically pays no interest. It is critical to have enough liquidity to meet company’s commitment and is essential to the health of the organization.
Why debt mutual funds for investing treasury?
Few things to consider before investing your monies in mutual funds:
- If you are keeping your money in your current account, then you don’t earn any returns.
- If you put your money in fixed deposits which comes with a lock-in period and any pre-mature redemption carries a hefty penalty.
- In the rising interest rate scenario, it is not recommended to stay invested in a fixed deposit product with lock in, since you may be forced to stay invested at lower rates after interest rate hikes.
- Also, YTM (Yield to Maturity) has increased after the interest rate hike. For example: HDFC Bank 1-month FD rates – 3% in May 2022 v/s HDFC Liquid Fund YTM – 4.35% to 4.65%. One more rate hike is expected in June 2022, and even Liquid Funds may potentially give 5%+ v/s 3.25% in the last 1 year.
Fixed deposit v/s Elevo treasury manager
Let’s suppose you have 1 crore of treasuries lying idle in your current account. You have two options to park that in 1. FD 2. Elevo treasury manager. Let’s evaluate what option would be the best for your company-
A fixed deposit has a lock in the period before which if you withdraw funds, you will have to pay a penalty. This would further bring down your return. Unlike fixed deposits, debt mutual funds do not have a lock in period.
Elevo (www.elevo.money) is a platform built for startups and businesses to manage their treasuries in just a few clicks. The onboarding process is not time-consuming at all and is very convenient. Moreover, Elevo also offers innovative investment solutions such as 1-day investment and weekend investing solutions.
1 day investing module: It works in a way that companies can invest for as less as 1 day and earn around –4.5% annualized returns. This is useful for companies who have funds lying idle for one day and have to pay their vendors the next day.
Weekend investing solution: Elevo also offers a weekend investing solution where the company has to place an order on a Friday so that the company can earn annualized returns of 4-4.5% on Monday. This way the company earns the NAV appreciation of 3 days (assuming the company redemption day is Monday) v/s leaving funds idle in a current account.