Contributors: @Matthew_Graham @AcceleratedCapital @verto0912 @DarkForestCapital @MrMadila @dylan @ElliottWatts
Background
Continuing on the initial Treasury Management Goals and the subsequent TWG Treasury Diversification Proposal we seek to outline the Goal and Philosophy of the Operations Account. We expect this post will be the first of at least three forum posts that develop the creation of the Operations Account: 1. Goal and Philosophy (Why), 2. Composition (What), 3. Execution (How).
A recurring term with the Operations Account will be “working capital.” In simple terms, it represents our available capital for running the day-to-day operations of Index Coop. Working capital is generally defined as the difference between cash & short-term assets and short-term liabilities.
Goal
The goal of the Operations Account is to ensure the Index Coop has adequate working capital. The amount of working capital to hold in this account will be an iterative process, starting small and increasing with time as the DAO is comfortable with how the account is operating.
Sources of funds will be the inflation schedule (shared with the Investment Account) plus product revenue. Funds will be used for paying expenses or funding initiatives as detailed in the initial post. Surplus will be periodically deployed to the Investment Account where the focus is to generate long term returns. Product revenue or streaming fees may be sold to ETH or stablecoins if needed for the Operations Account, or transferred to the Investment Account if it fits the strategic asset allocation of that account (DPI, as a possible example).
Longer term as the Coop grows product revenue, the account will need to sustain from product revenue and depend less on the inflation schedule, which will provide fewer INDEX in 2022 and 2023 (though hopefully a higher market value). At that point the working capital target should increase to account for one year of expenses.
Our goal will be tracked through transparent forecasting that demonstrates balances in the Operations Account that exceed the forecasted outflows.
Philosophy
Working Capital management is a continuous process to maintain a cushion of available funding that exceeds forecasted obligations. We seek to proactively manage the treasury, reducing the INDEX concentration risk through rebalancing and a Smart Treasury program (January and June). Coordinated forecasting along with active management of risks and liquidity will support our goal of maintaining adequate working capital to sustain business operations.
We will continue to build on the day-to-day management of working capital and provide a proposed composition in upcoming posts linked to the budget, but tentatively the composition would primarily consist of INDEX, ETH and stablecoins to support forecasted expenses and initiatives not paid in INDEX.
A portion of stablecoin would be unproductive (1 to 3 months, to be determined within the Composition post), and the remainder productive in a trusted protocol such as Aave.
The key points of risk management consideration for the Operations Account are:
- Identify the primary sources and uses of funding
- Set and maintain target levels of stablecoin and high-quality liquid assets like ETH
- Provide for alternative responses or remediation plans to various scenarios
- Plan to deal with temporary, short-term, and long-term INDEX price disruptions
- Operate within working capital risk tolerance levels with oversight from the TWG
A critical first step for the Coop is identifying the primary sources and uses of funding, which hopefully carries a more positive connotation than “budget”, but we’ll use the terms interchangeably. The TWG, led by @Matthew_Graham, have worked to develop an initial budget to estimate expenses through 2022. This is a challenging task to forecast for an entity that is less than a year old in a rapidly changing environment, and will correspondingly be more flexible than the budgeting process of a large corporation that many of us are familiar with.
Rather than a hard rule on limiting what can be spent, consider the budget an organizational coordination tool. Individual working groups will propose budgets and the TWG will act as custodian to that data and facilitator to capital transfers, but decision making on expenses are DAO driven. The Coop’s resources are meant to be available for growth, and with multiple working groups vying for resources the budget can serve as the mechanism for keeping contributors informed on where resources are being allocated.
As the budget moves towards that state, we can iterate on the appropriate levels of working capital for this account, establish contingent funding plans to navigate through various scenarios, and provide a level of reporting that gives all stakeholders confidence in the long-term viability of the Index Coop.