Rules of Banking to Not Get Fired

Cash is King so treat it that way

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Two Rules of Banking

It has been about 1.5 years since Silicon Valley Bank (SVB) collapsed. While the banking crisis feels like a long time ago with everything else that has happened since that time, everyone in tech finance still has some scar tissue from the SVB collapse.

• Is our money safe?

• Is our money covered by FDIC insurance?

• When can we access our money?

• Will we be able to make payroll on time?

• What backup banks do we have?

• Is our backup bank also at risk?

The level of interest in a company’s banking setup has never been higher since the SVB collapse - and for good reason. Board members frequently ask about it now and smart CEOs (who want to keep their job) need to make sure they understand it.

There are two rules of banking that companies need to follow:

1. Minimize risk and exposure. What is the risk exposure of our cash?

2. Preservation of capital. What level of interest / yield are we getting and what is the related risk?

#1 is the most important - simply make sure your cash is safe!

Preservation of capital (rule #2) is related to #1. Companies should maximize their potential yield that balances risk that is appropriate for your company. For many companies, that means just getting the money market fund rate, which has very little risk.

All CEOs, CFOs, and Controllers MUST understand how they are following these two rules and where they fall short. If cash is king, then it is very surprising how little attention banking gets from so many companies.

Let’s walk through these two rules…

Rule #1: Minimize Risk & Exposure

A company’s cash can be exposed to risk in a few different ways:

• Have all cash in one bank account. Many folks found out how this can cause problems with the SVB collapse. It’s usually best practice to have some money to float expenses for at least a couple months in another bank account.

• Aggressive investment policies. Be careful in crafting and implementing investment policies. If you lockup too much money for too long you might create a cash flow problem. More on this in Rule #2 discussed below.

• Exposure above FDIC limits. A lot of people learned during the SVB collapse what money was safe and what money was potentially exposed.

  • Cash invested in securities or money market funds was generally safe

  • Cash sitting in most checking accounts had exposure because it was only covered up to the $250K FDIC limit

  The companies that were sitting on large balances in their checking account at SVB were freaking out….
  
  Many companies keep money in their checking account because they need it for general business operations, but there are ways to mitigate that risk (set up to increase total FDIC coverage, sweep accounts, etc)

• Lack of banking controls. I am continually shocked by the number of companies that don’t have appropriate banking controls in place. A VC wires them $25M and they just wing it…Make sure you have controls in place to prevent fraud.

  • ACH Filters/Blocks - Controls unauthorized outgoing payments with full blocks or filters that allow a list of authorized companies to pull funds from a company’s account.

  • Dual Administration - Enforces security controls by requiring setup and modifications to be approved by a second administrator. This mitigates the risk of internal fraud.

  • Wire Approvals - Set this up immediately. You should have all wires that are initiated by one person require approval by another person. You can also add a 2nd approver for wires over a certain limit (e.g. CEO approves everything over $100K).

  • Alerts: Banks offer a range of alerting options to help companies detect fraud.

  • Positive Pay - This is a control that provides detection of fraudulent, altered, or counterfeit checks through daily verification of checks presented for payment against a company’s check register.

  • 2FA (2 factor authentication): Please please set this up for both your company bank account and your personal account. It’s easy and adds a lot more protection.

  • Training: Make sure that the folks who initiate or approve wires have received training on best practices and how to prevent fraud. Any “urgent” wire request from the CEO is extremely suspect.

Rule #2: Preservation of Capital

CFOs don’t get fired for not generating some extra yield on excess cash. I have never been asked why I didn’t generate 0.15% more yield on our cash. But…CFOs might be fired if they find themselves in a liquidity crisis as a result of them chasing some extra yield.

It might make you feel good to get a few extra basis points but almost no one else cares. VCs aren’t giving you bags of money because they think you can invest it in conservative investments better than they can. Don’t play interest income hero.

Having said that, there is an expectation that you don’t just let the money sit idle. You should at least be generating the money market fund rate on the majority of your excess cash since that is short-term and extremely low risk.

Always ensure there is plenty of liquidity to meet operational needs. If there is an opportunity to invest some cash to generate extra yield based on a company’s financial plan and current cash balance, then great. But always make sure there is plenty of available liquidity - what that looks like is dependent on each company’s situation and risk profile. CFOs need to make sure they are communicating with their CEOs to understand changes in liquidity needs.

Concluding Thoughts

Remember the two rules of banking:

1. Minimize risk and exposure

2. Preservation of capital

Don’t put your company cash unnecessarily at risk. The list of things I mentioned above is not an exhaustive list of how you can reduce risk but it is a solid start.

Make sure your money isn’t just sitting idle. You can get some pretty meaningful yield with really low risk.

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Footnotes:

• Protect your cash and extend your runway with Brex banking (today’s sponsor)

• Get the Brex blueprint to follow the 2 rules of banking in the startup's guide to modern banking.

• Need a fractional CFO and/or bookkeeper that specializes in software and tech? Reply to this email (or email me at onlycfo@onlycfo.io) and I will help you.

• Check out OnlyExperts for to find offshore accounting resources. They have some amazing talent.

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