Cash Management For Raised Capital

“Great-we closed the round! But…where do I put all the cash?” An alternate cash management strategy for growth companies

If you’re the CFO of a growth company, it’s very likely you’ve raised multiple rounds of capital. And it’s also very likely that you’ve struggled to find an appropriate investment for the raised funds. CFOs are often placed in the difficult position of needing to balance the needs for liquidity and safety with the desire to have the money working as hard as practically possible until it’s needed.

Typically the choices which are presented are either a federally insured money market fund or one of many non-insured funds with higher rates. The challenge has been managing the trade-off between yield and safety, with insured funds offering safety but low yields and non-insured funds providing a more compelling yield but without a government guarantee of payment. An additional factor may be company bylaws or board direction that funds be held in cash or insured instruments, effectively eliminating any non-insured option.

There is a third alternative, however, which in some cases may be able to offer the credit safety of a government backed instrument with a yield comparable, and in some instances superior to, a non-insured fund. In some cases the difference in yield is significant enough that it can cover one or more additional hires who might have otherwise not been in the budget.

Laddered CDs for yield optimization with a federal guarantee

CDs are bank deposits maturing at a specific date which are insured up to $250,000 per owner, per bank. Amounts in excess of $250,000 can still be held, but do not benefit from the insurance.

Because raises for seed, series A and B rounds tend to range from $500k to $15 million, $250,000 of coverage is far below what would be needed to cover all but the smallest seed round. And the prospect of maintaining separate accounts at up to 60 different banks (enough to cover a $15 million raise) is enough to make any CFO shudder!

In our work with the leadership teams of growth companies, my team has employed a strategy which can allow a company to enjoy the higher yield of CDs with virtually no credit risk. This is accomplished by depositing funds with a financial services company whose fixed income department can purchase CDs from different banks on behalf of their clients. Providing the $250,000 maximum per bank is observed, the company will be able to maintain the simplicity of a single account while obtaining a more attractive yield with the entire amount protected by FDIC insurance.

Laddering is a strategy in which CDs of varying maturities can be purchased to meet expected cash flow needs. In most interest rate environments longer maturing CDs will have higher interest rates than shorter term CDs, allowing a portion of the invested capital to provide a better yield than the funds which will be needed sooner.

CDs have similar characteristics to other debt instruments, in that they have a principal amount which will be paid at maturity, and an interest rate which will be paid as long as the CD is held. Because they have a maturity date, it’s important to plot your cash flow needs so that sufficient funds will always be available for capital expenditures. CDs can also be liquidated prior to maturity, but because doing so may have a detrimental effect on the total return of the CD it’s best to plot a conservative cash flow chart and have CDs maturing before they would be needed, even if greater than expected expenditures are required.

Practically speaking, in most cases the longest maturity CDs in a growth company’s portfolio will be in the 12-18 month range, with the shortest maturities being in the 30 day range. Funds which are needed in less than 30 days should generally be kept in insured cash funds which, while having a lower yield, have the advantage of immediate liquidity.

Another thing to consider when evaluating this strategy is the financial services company you’ll be purchasing the CDs through. It’s important that their fixed income department is robust enough to have traders who focus exclusively on the CD market and that they’ll be able to provide a sufficient inventory of competitive CDs to meet your needs.

*Any opinions are those of SKA Wealth Strategies and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected

Brokered Certificates of Deposit (CDs) purchased through a securities broker and held in a brokerage account are considered deposits with the issuing institution and are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the US, Government. FDIC deposits are insured up to $250,000 per issuer (including principal and interest) for deposits held in different ownership categories including single accounts, joint accounts, trust accounts; IRAs, and certain other retirement accounts. The deposit insurance coverage limits refer to the total of all deposits that an account holder has in the same ownership categories, at each FDIC-insured institution. For more information, please visit About Liquidity: Funds may not be withdrawn until the maturity date Or redemption date, However, the brokered CD, are negotiable, which mean, that although not obligated to do so, Raymond James and other broker/dealers presently maintain an active secondary market at current interest rates, Market value will fluctuate and, if the CD is cashed out prior to maturity, the proceeds may be more or less than the original purchase price, Holding CDs until term assures the holder of par value redemption. CDs are redeemable at par upon death of beneficial holder. FDIC insurance does not protect against market losses due to selling CDs in the secondary market prior to maturity.

Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds. The prospectus contains this and other information about mutual funds. The prospectus is available from our office [or from the fund company] and should be read carefully.