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Startups often focus on rapid growth and market disruption. While startups need to do something different than the big players when it comes to product development, they should look to glean at least one valuable skill from established companies and governments: the art of treasury management.
Treasury management entails the handling of cash and investments to ensure not only financial stability but also sustained growth. This rings especially true when capital becomes scarce and customers tighten their purse strings.
My company, for instance, serves many hypergrowth scaleups, and it’s fascinating to witness their shift in focus. It’s no longer just about growth at all costs; they’re now strategizing for survival to conquer their respective markets in the long term.
This change in mindset aligns with the concept of treasury management. It’s not just about amassing wealth, but about intelligently deploying resources to weather storms and thrive in the long run. In this article, I will look at how three major players have handled treasury management in order to distill valuable lessons for startups.
Singapore
I recently watched a documentary chronicling the life of Lee Kuan Yew, Singapore’s founding father. This documentary shed light on Singapore’s extraordinary transformation from a struggling nation to a first-world powerhouse over one generation.
One key facet was Singapore’s shrewd treasury management. During its formative years, Singapore encountered numerous economic challenges. To secure its financial future, the government of Singapore laid substantial emphasis on accumulating reserves. These reserves not only served as a financial safety net but also facilitated investments in critical infrastructure and human capital.
For venture-backed start-ups, the typical industry rhythm encourages raising capital every 18 months. However, this cadence can often lead to unrealistic growth goals, especially when faced with challenges like a bear market. For my company, the painful but ultimately correct strategy involved shifting our focus toward optimizing profit margins and conserving cash. This approach not only strengthened our financial position but also provided us with flexibility and options when it came to exploring alternative sources of capital.
Taking a long-term perspective is key for startups. Unlike startups that prioritize immediate growth and short-term objectives, focusing on planning for the future can fortify against economic turbulence and position companies to seize emerging opportunities.
Startups should also consider the importance of diversified investments. While many startups concentrate on a single source of income or a solitary product, Singapore diversified its strategy to mitigate risk. While it meant stepping away from the allure of rapid scaling, my company found success by diversifying our client base from micro-companies to larger corporate and government contracts. This shift, while less immediately scalable, provided us with a more stable cash flow that bolstered our resilience.
Berkshire Hathaway
In the realm of corporate treasury management, Berkshire Hathaway, under the guidance of Warren Buffett, shines as an exemplary model. Revered as the “Oracle of Omaha,” Buffett’s treasury management practices have attained legendary status.
Berkshire Hathaway offers valuable insights for startups, notably in the realm of disciplined cash management. Although startups may not boast the colossal cash reserves of Berkshire Hathaway, they should consider what adequate liquidity is needed to meet operational needs.
While startups may not immediately reach the scale and diversity of Berkshire Hathaway’s investments, they should consider how a wide array of strategic partnerships, investments or acquisitions can align with their long-term vision. Having a variety of stakes can deliver strategic advantages, allowing startups to leverage a broader ecosystem to support their growth and objectives.
Adaptability has been the name of the game. For instance, in 2018, we focused on partnering with universities, which offered us stable capital in turbulent times. Most recently, our partnerships with larger companies allowed us to launch an education foundation that showcased how diverse alliances can be a cornerstone for building a resilient and dynamic organization.
Johnson & Johnson
Johnson & Johnson’s financial strategies also offer valuable lessons for startups, particularly in the realm of effective debt management. While each company’s debt needs are different, Johnson & Johnson provides a strong example of how to balance debt with cash reserves, earnings and other assets.
If your business is generating a healthy cash flow—ideally neutral or even cash flow positive—consider how to raise debt strategically. This approach can serve as a bridge during challenging times, ensuring you can meet payroll, continue operations and weather market uncertainties.
My company learned this the hard way during the pandemic when investor sentiment was uncertain, and clients were understandably cautious. This experience underscored the importance of applying financial acumen to steer our ship, ensuring we could continue our mission even in the face of adversity.
Startups must judiciously evaluate their borrowing needs, assess loan terms and consider interest rates. Formulating a well-considered debt strategy is essential, as it can grant access to capital while concurrently mitigating financial risk.
Applying Treasury Management to Startups
In the realm of treasury management, startups can draw valuable lessons from these titans:
1. Prioritizing liquidity is paramount. Startups should ensure they have sufficient reserves to cover operational expenses and address unforeseen challenges. A comprehensive understanding of cash-flow dynamics is essential to maintaining financial stability.
2. Diversifying revenue streams is a prudent strategy. Overreliance on a single product or customer segment can expose startups to significant risks. By expanding product offerings or targeting different customer segments, startups can safeguard against market volatility. Strategic investments and partnerships aligned with long-term visions are critical.
3. If debt forms part of the financing strategy, it should be approached strategically. Thoroughly understanding the terms, interest rates and repayment schedules is essential to ensure they align with the startup’s financial goals.
4. Adopting a long-term view is essential. While startups often prioritize immediate growth, building reserves and planning for the future can provide stability and enable them to capitalize on opportunities when they arise.
In short, effective treasury management encompasses risk assessment and mitigation. It involves identifying potential financial risks and developing corresponding strategies that focus on a resilient financial foundation.
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