Treasury management refers to the governance of a corporation’s holdings, with the primary goal being to manage its money while mitigating reputational, operational, and financial risks. Using this system effectively equips a business with the necessary funds so it can fulfill all of its financial obligations. Treasury management strategies vary from company to company, but the goal of every Treasury Management strategy in every case is to manage their cash flow to meet all of their short and long term needs effectively as possible.
For any company to strive financially, managing their money effectively is crucial. Even very profitable enterprises need effective Treasury Management systems to ensure that they’re able to optimize cash flow and minimize any potential risks to their financial health and growth. With Treasury Management, organizations gain the necessary resources to monitor cash flow amounts and track the timing of them as they move to their final destination. Treasury Management also help companies determine how much money they need to retain so they can pay their expenses and bills and still maintain their level of growth.
Benefits of Treasury Management
There are many benefits to adopting an effective Treasury Management Strategy, such as:
Create an Additional Revenue Stream. Effective Treasury Management can create an additional revenue stream that is uncorrelated to both market conditions and the performance of the company.
Reduces potential risks: All companies have potential financial risks, but effective Treasury Management helps to identify those risks and then protect them. This means that an organization is less likely to experience extreme financial or asset losses.
Improves financial health: The better a company can manage its money effectively, the more likely it can achieve greater financial health. Good financial health indicates financial stability or growth, which is an appealing quality to corporate stakeholders and investors.
Encourages financial growth: Effective Treasury Management is an effective tool for helping a company generate more wealth and increase its profit margins by creating additional uncorrelated revenue streams. Greater financial growth means that organizations have more money to pay their employees and make structural improvements.
Helps with cost savings: By creating additional uncorrelated revenue streams effective Treasury Management provide businesses with access to a wide variety of resources and tools. Being able to use these resources helps to save organizations a lot of money since it’s unnecessary for them to rely on numerous outside sources to fulfill one specific operation.
Provides financial forecasting: The ability of effective Treasury Management to create additional uncorrelated revenue streams also means that Treasury Management can often provide financial forecasting tools, allowing a business to make estimates about its future financial outcomes. These estimates help the company determine where to allocate funds, reduce cost borrowing decisions and pay off more debts.
Bach Capital Management Treasury Management Investment Strategy
Bach Capital Management UPPLIFT Treasury Management Investment Strategy (“BCM UPPLIFT TMIS”) employs an Index Option only methodology in order to insure an above market tax advantaged return along with complete portfolio integrity. Although there are both equity options and index options, only index options allow you to set the required rate of return in as risk free an environment as possible.
Although similar in concept, equity options and index options have significant differences. An equity option is a contract between two (2) parties that gives the owner the right to buy (in the case of calls) or sell (in the case of puts) the underlying asset at a specific price until the expiration date. The “asset” in regard to an equity option is an actual stock or ETF that is exchanged between the two (2) parties after the option is exercised. When a standard call is exercised the owner receives one hundred (100) shares of the underlying security at the contract’s strike price. Equity options are the most common type of option and are listed on most of the actively traded stocks or ETFs in the market today. Equity options contracts can be weekly, monthly or quarterly.
Similar to equity options, index options have strike prices, expiration dates and can be calls or puts. However, since the underlying asset is an index rather than a stock or ETF the “asset” that gets delivered at expiration is cash. An index is just a number designed to measure the value of a portion of the stock market and therefore cannot be delivered. At expiration, the difference between the value of the index and the strike price (assuming it is in the money at expiration) determines how much cash is delivered. Options are listed on many of the popular indices such as the S&P 500, NASDAQ 100 and Russell 2000. Unlike equity options, index options expire on the last business day of each calendar quarter.
Additionally, Index Options unlike equities, ETFs and equity options allow companies to take advantage of the 60/40 rule, lowering the tax bite for short-term holdings. According to Section 1256 of the Internal Revenue Code, certain financial contracts, including Index Options are classified as “Section 1256 Contracts” and are treated differently than other products when the holding period is less than one year. Specifically, these products are subject to the “60/40 rule,” under which 60 percent of the gain (or loss) on a trade is treated as a long-term gain (or loss), regardless of how long the contract is held in a portfolio. The remaining 40 percent is treated as a short-term gain (or loss).
Given the wide discrepancy between short and long-term capital gains tax rates, the impact of this 60/40 rule can be very significant. Long-term capital gains are taxed at either zero (0%) percent, fifteen (15%) percent or twenty (20%) percent depending upon an individual’s taxable income. Short-term capital gains are taxed as regular income, subject to marginal tax rates reaching up to thirty-seven (37%) percent in 2021. This can lead to a significant tax advantage for income generated by Index Options versus
income generated by equity trading and/or equity options as illustrated by the following example.
Suppose that a successful index option trade netted $100,000 and the investor is in the highest marginal tax rate of thirty-seven (37%) percent and the highest long-term capital tax rate of twenty (20%) percent. With the 60/40 rule, $60,000 of that profit would be taxed at the twenty (20%) percent long-term tax rate, requiring a payment of $12,000, the remaining $40,000 would be taxed at thirty-seven (37%) percent marginal tax rate requiring a payment of $14,800. The total tax paid would be $26,800 or 26.8%. A similarly successful trade made with equity trading and/or equity options not qualifying for IRS 1256 Tax Status would be taxed fully at the marginal tax rate of thirty-seven (37%) for a tax payment of $37,000, a difference of $10,200 representing 10.2% of the total trade.
The Value Add of the BCM UPPLIFT TMIS
The BCM UPPLIFT TMIS is an incredibly powerful tool for the following types of entities:
1. Start-Up or Early-Stage Companies – The BCM UPPLIFT TMIS when added to the financial projections of these types of companies in any sector produces a significant amount of investor confidence that they will achieve an above market return on investment and principal protection regardless of market conditions and/or the performance of the company itself thereby facilitating the capital raise for these companies Bat considerably lower costs.
2. Revenue Producing Companies – The ability of the BCM UPPLIFT TMIS to produce an above market tax advantaged additional revenue stream regardless of market conditions and the performance of the company itself gives revenue producing companies the ability to expand quicker, pay down any existing debt faster and lower future borrowing needs and costs substantially.
3. Investors – The use of the BCM UPPLIFT TMIS to Investors interested in project financing will dramatically reduce the risks inherent in startup financing thereby turning “high risk – high reward” opportunities into “low risk – high reward opportunities”. Additionally, Investors who already have a portfolio of investment opportunities can add the BCM UPPLIFT TMIS to create additional uncorrelated tax advantaged revenue streams.
4. Individuals – Individuals interested in growing their own capital in an above market tax advantaged uncorrelated manner for future investment opportunities and/or financial independence (“Build Your Bank”) can use the
BCM UPPLIFT TMIS to meet those goals.
Please feel free to reach out to us at [email protected] for more information.
Michael Bach
CEO & Founder
Bach Capital Management