SVB Demise & New Cash Management Rules
March 12, 2023 | 5 min read
Don’t leave the management of your excess cash to chance.
Written by Jeanette Tan | Photo by Upspash
The quick and sudden demise of Silicon Valley Bank has naturally made everyone worried about the stability of the banking system. The analysts will be discussing for years to come exactly what happened, to determine if someone shouted “fire” or if there was an actual fire. We all hope that Rob McMillan and the Wine Team will find a new home.
In the meantime, please remain calm and focus on what you can control: your cash management procedures.
Here are some articles I found interesting:
At this point in time (Monday, March 13, 6 pm) we now know that all the depositors will be made whole. If you did not bank at SVB, a service you use such as Bill.com, Rippling payroll processors, and others have shifted to other banks and are back operating smoothly. So, most of the problems from Friday have now been resolved. (Except for the SVB shareholders who lost everything)
Let’s do a quick recap: Silicon Valley Bank was the 16th largest bank, and the the leading bank among VCs and tech startups. We are more familiar with their leadership in the wine industry and for the invaluable State of the Wine Industry report that they produced every year. None the less, SVB had a bank run and was shut down less than 48 hours later. Their customers’ funds were guaranteed by the FDIC up to their insurance limits (generally $250,000, but your mileage may vary). Initially when SVB was shut down on Friday, all deposits were frozen. Deposits below the FDIC insurance levels were guaranteed, but those above were, possibly, lost.
On Sunday the Federal Reserve announced that all the SVB customers’ funds will be made whole. Naturally, many folks had a very anxious weekend.
Many of you who regularly read our newsletter don’t need to worry about exceeding that limit under normal circumstances, however if your Club Runs exceed $250,000 you could have had this scenario last week:
Wednesday: You had a club run and charged the cards $250,000
Wednesay/Thursday: You were busy handling phone calls from club members
Thursday: The funds were deposited into your account in the morning. If you had $50,000 in the account to begin with, the balance became $300,000
Friday: You mailed a check to a grower for $200,000
If you banked at SVB, you would have been SOL, because all of your funds were frozen on Friday, and $50,000 would have been frozen indefinitely. For some SVB customers billions of dollars were frozen and that is painful. But how painful would it be for you to lose $50,000?
The lesson is that we need new Cash Management Rules.
I regularly preach that you need to do a cash flow forecast so you can determine when you will have a cash dip and how large it will be. Those dips are normal in the wine industry, and I recommend that you get a line of credit to smooth these out. If you plan in advance, a bank will likely approve your request, but if you don’t plan you will be guaranteed a hard “no”.
I will admit that once a winery gets beyond the start up phase, the club runs became more significant, and the production costs more predictable, the cash flow becomes more regular, so we stop focusing on this.
The new rules are that cash flow management is about both managing excess cash and cash shortages.
These are the new rules:
Know the insured limit of every account - Contact your bank and ask them to explain the limit for each account. Get this in writing and do not settle for a link to their terms and micro-print disclaimers. Frankly, there are a lot of rules, a lot of bank products and a lot of arcane terminology. You should expect personal service from your bank. If you don’t get this, move to another bank.
Diversify your banks. Consider using both a large national bank and a local regional bank. Keep some funds liquid in both banks. If you banked with SVB, and your accounts were under the $250k insured limit, those funds were safe. However they were frozen on Friday. And if you were unlucky enough to have had a pay run on that day, your crew would not have been paid. Several payroll processing companies banked with SVB, and their their funds were frozen on Friday. Thus the payroll processing company was not able to process their customers’ pay runs.
Establish a relationship with each bank. You need to have a contact at each bank, or at least know to reach a human. Sorry, Call Centers do not pass this test. This is old school good customer service, and regional banks and credit unions do not have a monopoly on this. I have had excellent service at the local branch of my Big Bank, and I left a regional bank because the service was terrible. Remember the PPP scramble? Folks who had a relationship with a bank were served first, and everyone else spent anxious days calling around to find a bank that would even take a phone call.
Set up a sweep account so that no account ever exceeds the insured limits. The bank will require a minimum balance in your consolidation account to set up automatic sweeps. This will give you peace of mind. If you don’t have the cash reserves to meet that minimum, make sure your bank’s online portal allows you to easily transfer between accounts because you can still do “manual” sweeps.
Plan the cash management of the club runs in advance. Add this task to your Club Run Preparation List. As soon as you charge the cards, your phones are going to be busy. Know how and where you will move the excess funds as soon as the deposit shows up, then enjoy your phone calls with your club members.
Consider parking funds in several short-term CDs. You might need to use your LOC to smooth out cash shortfalls until a CD is mature.
Plan for large payments. Use a program like Bill.com that automatically deducts the funds from you bank account, or set up a sweep account, or space out large payments. The goal is to prevent your checking account from having a balance more than the insured amount while waiting for a grower to mosey over to their bank to deposit a check. With the new rules, you have to keep an eye on “the float”. Just a reminder: “the float” is the difference between the bank balance showing in your QuickBooks bank register and the actual balance at the bank. If you are still confused about this distinction, please get someone on your team who understands this.
Some of the articles discussing the SVB situation have suggested that other banks might be vulnerable. Their situations are not the same, however anything can trigger a bank run. Let’s hope for the best, but plan for the worst (and please, stay calm … don’t be that guy who shouts “fire” in a theater)
… anything can trigger a bank run. Stay calm, hope for the best, but plan for the worst …
Here at QB Winery Solutions, we have SOPs, courses, and other information to help you manage your cash. The first step to good cash management is reconciling your bank account and we have a mini-course on this topic. Click here for details
At the next Office Hours for Silver Club Members, I will discuss other tips and steps to forecasting your cash flow.
Hit reply and let us know how we can help you.
