Treasury Insights

How Startups Can Optimize Cash in a Low-Rate Environment

Even in a recession, startups have multiple options for investing their cash. Here are three startup liquidity strategies to consider.


As part of our Disruption video series, I recently spoke with a few of my J.P. Morgan colleagues—Andrew Linton, Managing Director, Head of Corporate Sales, J.P. Morgan Asset Management and John Tobin, Head of Portfolio Management, Liquidity Strategies, J.P. Morgan Asset Management—about preserving capital. Read below for some of the highlights from our talk, and watch the full conversation for more insights.

If a business wants to protect itself from unknowns, liquidity is essential. Many startup leaders are valuing their cash on hand more than ever. Even in an unpredictable environment, you can adopt strategies to help maintain a strong cash position and optimize returns.

Your first instinct may be to take a cue from the 2008 recession, but fight the urge. “Today’s crisis is very different,” says Tobin. “There is no fundamental credit risk within these portfolios.”

As the COVID-19 crisis hit the United States in early 2020, many observers initially questioned whether the markets could provide liquidity to the market participants who needed it. But Tobin says that’s when the Fed stepped in to repair the problem.

As the market stabilizes, many are turning their focus to the future. Here are three ways to optimize your startup’s liquidity strategy:

 

1. If You Don’t Have a Cash Investment Policy, Create One Now

A cash investment policy can be incredibly beneficial to your business, helping you evaluate the types of risk that you can take while still maintaining liquidity and stability of principal. It will document your strategy for reaching your business’s short-term investment goals. In addition, it can help you think through various decisions around investing, such as concentration levels, durations of specific investments and credit quality of specific investments.

Plus, there’s an added benefit, says Linton. “A policy makes it clear to the entire management chain what types of investments your organization is going to be making and the risk involved, so that there are no surprises,” he says. “It gives you transparency, too.”

Once you have a policy in place, be sure to regularly update the document as the market and your company evolve.

 

2. Forecast When Possible, Segment Always

A cash forecast gives you the ability to segment your cash to preserve liquidity and the yield being offered in the marketplace. As rates trend down, knowing how much liquidity you have and your needs for both the short and long term can help you determine how to distribute it.

Not all startups can forecast with certainty, but Linton offers a starting point. He says the perfect scenario to take advantage of the right products is when you know the following:

  • How much you’ve raised
  • Your time horizons   
  • The amounts of money you’re going to need on hand    
  • Your cash burn       
  • And how far out that cash is going to be needed

 

3. Identify Off-Balance Sheet Options

While you’re likely familiar with products that go on a bank’s balance sheet, such as deposits and certificates of deposit, there are also off-balance sheet options to consider.

For example, money market mutual funds are sometimes seen as a cash or cash equivalent option, Tobin says. These funds come in a handful of types, typically aimed at maintaining liquidity while earning a competitive, market-driven yield.

When considering your options, you’ll want to develop your startup’s liquidity approach in partnership with your team and financial counselors, keeping in mind your specific business needs and objectives.

The bottom line? In a recession, your instincts around cash management might lean toward a “keep it under the mattress” mentality, but that could stunt your cash’s opportunity to deliver a return. By identifying an investment policy, developing a realistic forecast and thinking outside the balance sheet, you can help maximize the value of your cash, regardless of the changing environment. 

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