The Briefing: Don't think you need to create a treasury policy? Think again
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At the end of this article, you'll also find a link to a downloadable version of our very first treasury policy.
CFOs and Heads of Finance play an ever-evolving role at companies. Especially at the earliest stages of a company’s growth, we’re generally wearing multiple hats at the same time and tasked with a long list of responsibilities, ranging from financial forecasting, creating expense policies, managing payroll and employee benefits, curating the company balance sheet, and more.
In the end, it’s our job to make sure the company is set up for success across a myriad financial and organizational metrics. Oftentimes, the corporate treasury function is left by the wayside, and many early-stage companies and their CFOs pay little to no attention to it. After all, we’re super busy people, and interest rates are low, right? So what’s the difference?
Treasury policies take time and careful consideration to put together, but if done correctly, they can be extremely impactful. They can provide your company with the necessary operational liquidity, exposure to differentiated asset classes, like Ramp’s recent entry into the stablecoin market, and the flexibility to make the right investments.
When is the right time to draft a treasury policy?
As alluded to above, when a fellow CFO tells me that they don’t have plans to create a treasury policy, I’m not exactly surprised. There’s just not a lot of urgency to do this in the early stages of your company because you won’t have a ton of unallocated cash on hand to deploy. Most CFOs and Heads of Finance are concerned with conserving funds rather than having to handle unallocated cash. A typical pre-seed, seed, and even Series A financing will leave you with around one year of operating runway. But frankly, at this stage, you ought to be more occupied with just building the business.
This is an important distinction to make.
If you are still early in your growth or, if you don’t have a dedicated finance team or CFO, it’s best to wait until these hires are filled out. Early on, your value as a founder or early employee is navigating the proverbial ship, so drafting a treasury policy is not necessarily the most impactful project to take on at this stage. But if you check the right boxes and think that creating a treasury policy is right for you, going through this exercise can massively raise the bar for operational best practices, financial controls, and professionalism, and will also significantly enhance and deepen your relationship with your Board of Directors.
At Ramp, we started investing real time into thinking about putting together a treasury policy after our Series B fundraising round. After this round, we suddenly found ourselves with >$100M of cash and, thankfully, were not even close to burning through it anytime soon. With this context, we wanted to be careful about allocating this cash intelligently.
Rule of thumb? Start thinking about creating a treasury policy once you have more than 6-12 months of operating runway under very draconian assumptions, and likely more than $10-50M of cash on hand. Generally speaking, this tends to coincide with post-Series A/B capital raises. From an organizational standpoint, once the decision is made to create a treasury policy, it’s best to involve the executive team, and the board of directors. This effort requires many stakeholders (more on that below) so it’s important to get everyone involved early on.
Considerations that go into drafting a treasury policy
Now this is the fun part. You’re actually solving two problems at the same time when drafting a treasury policy: strategic asset allocation and tactical asset allocation. In other words, you’re not just drafting the policy itself, but you’re keeping an eye on making smart investments.
In order to maximize the efficiency of your policy, you need to be cognizant of both the structural framework as well as the tactical element of what you should be investing in. This means at least having some sense of what’s going on in the markets. Or not! It is totally OK to outsource some or all of this as well.
At Ramp, we simultaneously created our tactical asset allocation and portfolio while drafting our treasury policy. Doing so allowed us to invest in the assets we needed to, while also giving us enough flexibility so that we could change these allocations in the future.
My advice: tackle each of these two tasks in sequence: the high-level framework of your policy as well as the tactical choices you’re going to have to make along the way.
How to draft your treasury policy
When it comes to drafting your first treasury policy, you want to ensure that it’s as flexible and adaptable as possible. Don’t feel pressure to get it right the first time—you can amend it if necessary (and you definitely will!). When you’re starting out, you should have two goals in mind:
- The preservation of liquidity, match assets with liabilities: How much cash will you need in 3 months? 6 months? 12 months? Make sure you have that available.
- Principal protection: How much mark-to-market risk are you willing to take? The answer might be none. Are you reasonably confident that you won’t lose money?
Defining asset allocation and risk tolerance
Given the above considerations, where most folks will shake out is that your asset allocation will probably consist of:
- Mostly fixed income products
- Will be investment grade rated
- Mostly short duration in nature
- Will have some sort of distribution and diversification of maturities, issuers, and sectors
You should also ask yourself if you want the flexibility to invest in other assets. If yes, is there strategic value in doing so? You may want to write that into your policy draft as well.
Defining roles and responsibilities
The above is like solving a fun math problem. This next part is like chess. Treasury policies aren’t created in a silo. Assigning stakeholders is as important as drafting the functional policy. You should be clear about who is involved and what their responsibilities are. Usually this means talking about a possible formation of a treasury and investments committee (in addition to an audit committee) to support the finance team, if there is appetite among the Board of Directors.
Furthermore, it should be made clear who has the ability to manage investments (and who can delegate to representatives, and what can be delegated), who has to review the investments and performance regularly, who and how often to review the treasury policy itself, and the cadence of updates to key stakeholders. Nothing needs to be set in stone, but there should be some light guidance on this in your draft policy.
How to approach tactical asset allocation
While I can’t provide any investment advice, here are some strategies you should consider when thinking about how to allocate and manage your assets:
Do you want to manage in-house or outsource? How much time do you want to spend on this?
Here at Ramp, a portion of our portfolio is self-managed, whereas another portion of it is happily outsourced to our partners and corporate bankers at First Republic Bank. I spent a number of years early in my career as a bond trader, so I feel somewhat well-equipped to manage our fixed income investments. Even so, I don’t necessarily think it’s the best use of my day-to-day bandwidth. However, everyone will have a slightly different view on this.
Do you want to, or are equipped to take a specific view on interest rates, macroeconomic risk, or corporate bond spreads?
Most of the time, the answer is no. Depending on your level of comfort here, you may think about taking various levels of duration risk, maturity risk, credit-rating bucket weightings, sector or geographic weightings, or fixed vs floating rate instruments. Here at Ramp, we have a view on only a small subset of these risk factors
What about the weighting of government treasuries vs corporate bonds?
Most of the time, you will definitely be invested in both. How you allocate between the two will depend on your risk tolerance and yield target. Government bonds will be safer in general but have much lower yields, whereas corporate bonds are exposed to significant idiosyncratic corporate risk (earnings, competition, etc) but may offer more attractive returns.
What about ETFs, Closed End Funds, and Mutual Funds?
This is where it gets tricky. Most traditional corporate treasury and investment policies don’t hold a very favorable view toward equity securities because:
- There is significant mark to market risk
- There is no maturity date, so how do you even manage duration risk?
Generally speaking, as long as you create very specific guardrails around your equity investments (no single name equities, for example), and are OK with actively tracking ETF performance, it should be OK to allocate to buy ETFs, as long as the underlying holdings are what you want. One example of a Ramp ETF holding is MINT, which we picked due to its high constituency ratings and short duration.
How much should I actually buy?
This is a very nuanced question. The two biggest things to keep in mind are:
- Diversification is a nice risk hedge
- You do NOT want to be the biggest trader of a particular security on any given day and soak up all the trading liquidity, so keep an eye on that as your position sizing grows
If you need to liquidate a position for whatever reason over some period of time, make sure you don’t blow through the order book and the market can bear your trade execution!
This is very much a multiplayer game. Make sure you have regular dialogue with your counterparts. This could mean your accounting team (for financial reporting), your executive team and board of directors (for policy review and adjustments), and your investment manager (for tactical asset allocation decisions). Developing a good support network will be very helpful as you’re thinking about leveling up the corporate treasury function and increasing the sophistication of the finance team.
I will also leave you with two resources:
- Here's an article detailing some of the investments in our portfolio and what our portfolio metrics generally look like.
- Here's a copy of our very first treasury policy for reference.
The information contained in this article is not and should not be construed as investment advice. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any investment discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.
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