Tuesday, June 3, 2008

Investment Policy for Local Motors

A note for today on a small but important facet of managing the Business of Local Motors. Have you ever wondered what happens to the cash in a business when it is sitting on the balance sheet during a time of growth. Liquidity is paramount so that capital can be quickly deployed to grow the business. This is especially true for a start up business such as ours.

So is the Local Motors' mattress the best place to hide the cash?

Some might think that a bank is the best. Up to $100K is safe in a single Federally insured bank account and bank money market accounts carry a better rate than nothing, at least with them there is almost certain liquidity. But liquidity is not the only concern. Safety is another, and rate of return is a third. Each of these concerns carrying a significant weight that must be managed.

For this reason, well managed start-ups must create an Investment Policy which guides the officers and directors in managing the cash for availability and growth commensurate with risk. Typically this policy defines investment in a well-diversified portfolio of fixed income securities while managing for return and relatively short weighted average maturities. This is exactly the type of policy that Local Motors has worked to institute.

I know that many of our community think precious little about the financial mechanics of running our business and are primarily focused on the vehicles we produce. Bravo for that focus; I am consumed by building great American cars. But as part of being so consumed it is important to share small details such as this aspect of cash management to show the inner workings of what makes an automotive team function fluidly and effectively.

Go Local!