by Victoria Duff

   This article was originally published in The Productivity Institute (PI) Newsletter

Start-ups through mid-size ventures are beginning to see increased interest by venture investors as signs of approaching improvements in the economy are beginning to appear in monthly economic reports. 

One thing that will improve your likelihood of receiving investment is being able to demonstrate that you are prepared to safeguard your investors’ money.  This involves appointing a Cash Manager and setting up a professional-quality Cash Management Policy.

One of the key components of Cash Management is the Prudent Man Rule.  This is a guideline that asks “What would a prudent man do in this situation?”  There is rarely an argument over how this rule is applied because the archetypal Prudent Man is always concerned with safety of principal.  This means that the Cash Manager should not be day-trading equities or options, should not be investing operational cash out 30-years, and should not be plunking the entire corporate fund into a single investment.  So if you are the Cash Manager, always remember that if anything happens in the economy or in your company that raises the concerns of your investors, your cash investments will come under scrutiny first and the more conservative they are the better.

Cash Managers become heroes when their investments are so conservative that they are unaffected by financial crises, not because they made a great trade that resulted in windfall profits.  Venture investors are not impressed by investment profits because a company should be making its profits through its business dealings, not through its cash management operations.

The following Cash Management Policy is representative of basic principles found in use in major corporations:

Purpose
The purpose of this policy is to set forth cash management procedures that
• Outline investment quality requirements adequate to ensure maximum safety of principal
• Provide adequate liquidity for operational needs

Bank Relationships
Corporate cash management banking relationships shall be limited to the highest rated Money Center and Super-Regional commercial banks, provided they are FDIC insured.

Investment Goal
The goal of cash management activities is to maintain cash positions in lowest risk investments that pay market rate interest.  Company cash and prudent reserve is not to be invested in risk securities or traded for profit.

Approved Investments
Investment instruments approved for use shall be
• Full faith and credit obligations of the U.S. Government
• AAA rated Municipal securities
• AAA rated Corporate securities
• Money market funds invested in the above listed securities
• Repurchase agreements with approved institutions, collateralized by full faith and credit obligations of the U.S. Government

Approved Maturities
• Cash shall be invested in the most liquid investments available
• Excess cash or money earmarked for specific future needs may be invested in longer maturities, according to the Prudent Man Rule and with the approval of __________

Operational Funds
Operational Cash shall be deposited in Corporate Checking Accounts that
• Daily sweep excess cash into appropriate Money Market Funds
• Otherwise, Cash Manager shall maintain no more than $20,000 overnight cash to meet unexpected cash needs
• In cases where Cash Manager anticipates a possible need for more than $20,000 cash available, permission shall be obtained from _______________________

Prudent Man Rule
Cash management operations shall be governed by the Prudent Man Rule.

Special Permissions
In the unlikely case when the above policies are inadequate or imprudent, Cash Manager shall obtain authority to alter these policies by special permission from ______________

Victoria Duff, founder of Southern California-based aBusinessPlan.com, is a widely acclaimed start-up facilitator, enterprise analyst, strategic advisor, venture finance catalyst, investor liaison, author, and speaker.  Her depth of experience lends itself well to efficiently providing solutions to over a decade of happy repeat clients.  Her advisory practice can be found at:  www.aBusinessPlan.com  Ms. Duff is available on a retainer or project basis vduff@abusinessplan.com .