Chapter 8 – Your Secret Weapon – Your Banker

How should we invest the money we received from our investors? Will part of it be used to open offices in foreign countries? What are our expectations for replenishment?  Should we be hedging our financial risk?

Back office personnel rarely emerge from the ranks of the banking industry.  We are not predisposed to like bankers, especially those operators who sell dubious investment products.  Think of your typical start-up back office manager, someone who worries about “what can go wrong” for a living.  He or she agonizes over the consequences of their cash management choices.  They worry about catching hell from their founders, who want to emulate the returns their school’s endowment fund has achieved.  This does not mean that he is not competent.  Hopefully, he has the guts to say “I need help.”

The back office is a place where uncertainty rarely goes the right way.  Our business is one where the outcomes of unexpected or unusual events are likely to be negative.  What is surprising about this conclusion is that it allows you to focus on what can go wrong.  Additionally, it enables you to recognize others who understand your predicament, especially the person who can offer the best help in these matters – your commercial banker.

What is a commercial banker, and how do you tell a good one from a bad one?  A commercial banker simply accepts deposits and issues loans.  They are not part of the team that sells investment products, complex derivatives, or tax avoidance schemes.  A good commercial banker will help you collect and disburse cash without friction or fraud.  They know how to manage working capital.  Perhaps most important is their knowledge of how to process data.  This team earns their livelihood from processing gargantuan amounts of data and information for business needs.  Best of all, their incentives are aligned with yours in more ways than you know.

Like you, commercial bankers have a lot to lose and a limited upside in the form of repayment of their loans.  Their downside is that they may lose all of their money.  Borrowers can default.  Invested money can be lost.  Criminals can steal or commit fraud.  So banks spend huge sums studying these events.  They have developed significant technical competence when it comes to security and automation.  And they are very familiar with the many schemes criminals use to separate us from our money  as we process information and documents.

The right commercial banker can be one of your most trusted advisors.  If you admit the gaps in your money management knowledge and treat them as a partner rather than a vendor, they can add value to your operations.  Their costs decrease if you integrate your financial system into theirs, while you reduce time spent on mundane tasks such as accessing accounts, issuing cash advances, writing checks, reconciling accounts, or moving cash.

Keeping money in your operating accounts improves a bank’s capital operations ratio, one of the new regulatory health indicators.  In exchange for keeping it there the bank may offer other services at discounts, such as free collection lock boxes for cash deposits or reduced costs for a treasury workstation.  Such an arrangement lowers your costs by as much as the interest you may earn by investing your cash in certificates of deposit or money markets.  In a low interest market there is no downside.  You get credit for lowering costs without having to eliminate headcount or cut services.

Using the bank’s access security tools and protocols protects your cash and makes it harder for criminals to phish or commit identity fraud, something that every entity will confront as they do business over the internet, especially if your success is noted in the press.  For instance, both Xoom and the government of Bangladesh have had to disclose huge losses after they fell prey to employee impersonation and fraudulent requests in the past few years (see links below for more details).  The banking team will help you implement automated fraud detection tools called positive pay and reverse positive pay.  They will help you open checking accounts in which a balance is maintained by automatically transferring funds from your master account in an amount only large enough to cover checks presented.  They can also issue checks that reduce the risk of copy fraud.

If you are transparent about your processes, they can show you how to manage your foreign exchange exposure (banks in each country are linked to a hub in each region to a final destination account based on your tax strategy).  They will help you create a robust approval process for wire transfers.  Most important, they can offer off-the-record advice about the activities where errors or adverse events have large consequences.  For example, a banker has access to hundreds of collection tools; unlike your operations teams, they may know as much about the tools’ vulnerabilities to fraud as they do with its automated processing interface or cost structure.

A commercial banker will eventually want to introduce you to her investment banking partners.  When she does, just remember that no one gives the company credit for improving gains on investments.  Analysts disregard investment gains because they are not tied to your operating strategy, and bigger returns are usually accompanied by greater risk, which goes against your Board of Directors’ primary goal, capital preservation.

• What can go wrong – http://www.pymnts.com/news/2015/fraudsters-steal-millions-from-xoom/
• What can go wrong – https://www.wired.com/2016/05/insane-81m-bangladesh-bank-heist-heres-know/
• Index of technical terms – http://www.thewindowsclub.com/types-cybercrime