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naraburns  nihil supernum  1yr ago (text post)   34389 thread views

Culture War Roundup for the week of March 13, 2023

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I'm going to use this text, posted in last week's thread, as a jumping off point to make a little effortpost on a boring area that's actually kind of important, and where I know a little bit: treasury management!

If the FDIC or other banking entity does not cover deposits, any business that depends on SVB and has a

$125K bimonthly payroll will have to do furloughs or layoffs. That's basically any business above ~15-20 people.

... From a survey of my VC and startup friends, it seems reasonable to assume that 25% of that are extremely dependent on SVB (e.g. payroll, no cash sitting elsewhere, and incoming customer payments aren't going to cover anything).

This will only happen if your CFO is incompetent and doesn't do treasury management.

Treasury management - the most basic practice of any corporate finance department - is the practice of managing corporate cash in order to earn interest on what isn't being used , ensure that whatever cash is needed by the business is available, and also minimize tail risks like your bank going belly up.

Step 1 is observing that you can get 4.5% on 4 week treasuries. These are, regardless of amount, backed by full faith and credit of US Gov.

Now suppose you are a business with $500k of biweekly expenses ($500k due on Mar 15, $500k due on Mar 31). You have $20M in venture capital remaining which gives you about 1 year 8 months of runway.

All of that - minus $500k or so needed for short term investments - goes into 4-8 week treasuries which you reinvest whenever they mature. This earns 4.5% or about $900k/year in essentially free money. Money sitting in government bonds with duration < 90 days is called cash equivalent by corporate finance people.

Your not incompetent CFO just extended your runway to 1 year 9 months.

Step 2: ensure that the maturity dates of these cash equivalents line up to your payroll dates. $500k cash is due on Mar 15 for payroll/etc. Fortunately, $500k worth of your 4 week treasuries got turned into cash on Mar 9 (typically the maturity date is thurs).

Another $500k cash is due on Mar 31. You have another $500k worth of 4 week treasuries maturing into your bank account on Mar 30 (a thurs) or maybe Mar 23 (also a thurs) if you really want to be safe.

Step 3: line up a short term credit facility.

Some expenses are less predictable. Part of the job of CFO is to project these expenses, come up with upper bounds, and inform the CEO what it will cost if these bounds are exceeded. Then the CFO goes to a few banks and lines up credit facilities - a $2-3M line of short term credit backed by cash equivalents from step 2.

Step 4: have a few bank accounts including one at a "too big to fail".

That's treasury management, obviously oversimplified.

Now suppose your CFO actually did his job. It's Mar 13 and SVB just imploded. You had $500k sitting in SVB for Mar 15 payroll and that's locked up. Here's what you do:

Mar 11: Quickly call up your credit facility and tell them to wire $500k to your payroll provider on Mon. Call your payroll provider and tell them to confirm with the bank that this is happening to avoid any snafus.

Mar 13-14: As soon as SVB allows it, wire the $250k FDIC insured money to your credit facility. Also redirect treasury maturity payments to said account, and take another $250-270k of cash equivalent and don't reinvest them.

Mar 16 or Mar 23 (a thursday when your maturity payment gets deposited): get $270k worth of 4 week treasury maturity payments from the US govt. Wire this money back to your credit facility.

Net result is that you make payroll with no interruption. You just lost $250k to SVB's errors and paid your credit facility $20k in interest. The end.

your CFO

My impression from reading Hacker News comments this past weekend is that even having a CFO is an unfair expectation to levy against a fledgling startup.

Tech world is really coming off as a bunch of little over paid children right now.

Because a massive bank lied to them and because incompetent federal regulators didn’t catch it?

Should they just have already assumed the government was made up mostly of completely useless rent seeking tyrants? Keep in mind a lot of them are pretty young and may not have figured that out yet.

The issue here isn't the government. It's running a business with $millions in cash but not having a person familiar with basic corporate finance to help them manage it, as well as not spending a bit of time on investopedia to learn it themselves.

Banks fail. The government has rules in place as to what happens when they do, they require banks to disclose these rules (e.g. FDIC insured up to $250k) and these rules are enforced. Is it your belief that SVB stopped disclosing FDIC insurance limits? SVB is only minimally a story of government being useless/corrupt - at least, it wasn't a story about govt corruption until Yellen/Biden decided to take money from workers and give it (indirectly) to wealthy venture capitalists.

I mean really, is a safe full of one pay-period worth of physical cash too much to ask? Is this how financially illiterate we have become?

These motherfuckers need to eat shit. CFOs won’t get it until they see Roku employees setting up GoFundMe’s for lunch money.

There was a woman at my grandmother’s retirement home who’d worked in a Saudi hospital in the 80s or 90s. She oversaw their payroll switch from carrying in a literal sack of money to the exotic technology of checks. People weren’t used to working with them, but they were a way more efficient solution than handing out cash.

In this scenario is HQ going to mail me an envelope stuffed with cash or do I have to fly to San Francisco and pick it up?

Money orders only, sorry.

George Bailey will be waiting for you in the Bay Area asking if you can hold out a bit

I mean really, is a safe full of one pay-period worth of physical cash too much to ask?

Yes.

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