Cash Management 101
What is Cash Management?
When managing significant amounts of capital, how you allocate that capital is crucial. Market volatility makes stability and liquidity important, but holding all your assets in stablecoins isn’t ideal either—inflation erodes purchasing power, and even small returns on large sums can create meaningful financial advantages. For example, earning 5% on $10 million generates $500,000, enough to extend a startup's runway by months, which could be the difference between success and failure in challenging funding environments.
Cash management involves intelligently balancing these trade-offs, ensuring financial resources are used effectively while managing risk. Despite its importance, many crypto-centric organizations and individuals lack a clear understanding of cash management. This article will explore what cash management is, why it’s essential, and how to implement it.
The Basic Process
Cash management can be broken down into three key steps:
Forecast your cash flow and needs
Manage your liquidity accordingly
Revise and update continuously
Let’s dive deeper into each step.
1. Forecast Your Cash Flow and Needs
The first step is to project your expected cash flows, including both income and expenses, to gain visibility into your financial situation over the next 18–24 months. This forecast becomes the foundation for your cash management strategy.
Key considerations:
Be conservative: Assume lower-than-expected income and higher-than-expected expenses. Build stress scenarios such as revenue cuts, loss of key customers, or unexpected expenses like equipment failures or legal fines.
Focus on cash: Use cash-based projections rather than accrual accounting to ensure your estimates reflect actual liquidity.
Use a single base currency: Convert everything into one currency for consistency and comparability.
Advanced Tip: For financial organizations or protocols, estimate potential intra-month cash drawdowns. For example, if a synthetic asset like sUSD has a redemption mechanism, you need sufficient liquid reserves to handle large-scale redemptions at any time.
2. Manage Your Liquidity Accordingly
Once you’ve forecasted your cash flow, the next step is to plan your liquidity. If your projections show potential cash shortages, consider strategies like reducing expenses, renegotiating vendor terms, or securing loans. If your forecast indicates excess cash, develop a strategy to invest it effectively.
Key priorities when investing excess cash:
Capital Preservation: The primary goal is to avoid losing money. This is not the place for speculative investments.
Liquidity: Ensure you can access your investments quickly when needed.
Yield: Optimize your returns, but only after addressing preservation and liquidity.
In practice, there’s always a trade-off between these priorities. For example:
Holding stablecoins preserves capital and provides liquidity but generates minimal yield.
Investing in short-term US Treasuries or corporate bonds offers higher yields but may involve slight delays in accessing funds and potential volatility.
Investment Buckets
A common approach is to divide cash into buckets based on when it will be needed. The closer the need, the more liquid and stable the investment should be. Here’s a breakdown:
How Soon You'll Need
TradFi Options
Onchain Options with Solana Synthetics
0–3 Months
Cash
Stablecoins like USDC or sUSD
3–12 Months
Money Market Funds, Short-Term Bonds
Solana Synthetic Treasury Bonds (sTreasury)
12+ Months
US Treasuries, Corporate Bonds
Long-term synthetic assets backed by stablecoins
Example: Solana Synthetics offers synthetic assets like sTreasury, backed by real-world assets, enabling onchain investors to earn yield while maintaining liquidity and transparency.
3. Revise and Update Continuously
Cash management isn’t a one-time process—it requires ongoing monitoring and adjustment. Regularly revisit your cash flow forecasts and adjust your allocations based on changes in your financial situation or market conditions.
Getting Started
A robust cash management program is invaluable, but implementing one requires planning and effort. In TradFi, this often involves partnerships with banks, custodians, and auditors, along with implementing internal controls. Onchain finance has similar needs but with additional considerations, such as secure custody of crypto assets and, for DAOs, governance approval for treasury management strategies.
For organizations managing treasuries, Solana Synthetics offers a suite of tools and products to simplify onchain cash management. Our synthetic assets provide high-quality exposure to real-world markets while maintaining liquidity and transparency, empowering organizations to manage their financial resources effectively in a blockchain-native environment.
Visit sol-synthetics.com to explore our offerings and start managing your treasury with confidence.
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