Automation helps founders avoid the basis point yield trap

Recent banking industry developments leading founders to look for places to diversify their cash reserves left markets wondering if the Fed would follow these events with another rate hike. As I wrote before, the Fed avoids surprises. Sure, rates are now 25 basis points higher, which raises a question for founders: How should this increase affect the way I manage my company’s money?

The wrong answer is to give in to the urge to spend hours emailing different banks looking for the highest yield payout and fretting about chasing an additional yield of five to ten basis points. As a founder with limited time, you are better able to manage other parts of the company. Cash management automation has reached a point where you and your finance team no longer have to spend hours trying to generate returns that reflect the current market rate. Here’s an exercise to illustrate why your time is better spent elsewhere.

Let’s say you have $25 million from your recent fundraiser.

Then suppose you spent four hours of your daily rate shopping and ended up squeezing five extra base points through a carrier amalgamation. We’re raising it to 10 to really emphasize the point. You discovered an extra $25,000 per year, but does it have a net negative impact on your organization when you consider how much time you and your finance team have spent generating this value?

Early on, when the Fed first started raising rates to fight inflation, it made sense to prioritize your time to implement a sophisticated treasury strategy that will take you from 1% to 4% APY brought – $750,000 in new value per year. However, now that you’ve achieved competitive rates of return that reflect the current interest rate of the Fed funds, it’s a mistake to spend your precious time trying to squeeze out additional value.

Harvard Business Review built a handy calculator that estimates resource costs of your finance team members looking for ways to increase the return on your business cash. The first half hour they spend evaluating cash management providers costs $35 per $100,000 salaried employee – and this calculation only includes the initial actions of talking to your current bank or sending an email inquiry to new providers . It doesn’t include the follow-up conversations, internal meetings to decide who to use, and subsequent steps to get things moving.

These opportunity costs can snowball as you hunt for those extra base points, diminishing the marginal benefit of that extra $25,000/year profit you discovered. This effort also comes with unnecessary risks: as we’ve seen over the past few months, market conditions can change dramatically, exposing your assets to a significant drop almost overnight, even with a provider you’ve scrupulously selected. vetted.

Once you reach competitive levels of return, adding additional returns may mean investing in higher risk assets. Your mental calculus then becomes a balance between generating additional marginal returns and increasing the risk of your money depreciating.

If you look back at some digital assets that delivered exceptional APY last year, some eventually collapsed and companies lost some or all of their operating cash. This negative outcome points to three critical cash management realities that can haunt your startup if you don’t acknowledge them.

Three factors that can kill your cash management efforts

Optimizing money stores is an essential practice in a non-zero interest environment. Every dollar can help offset costs and extend the life of your business, and the benefit only grows as you become more cash flow positive. However, three factors often prevent founders from experiencing these benefits: