The Federal Reserve has been raising interest rates, and there’s no end in sight right now. And rising interest rates have the potential to affect startups in a big way.
At Kruze Consulting we are seeing a lot of our clients continue to earn very little on the cash balances in their bank accounts. Usually, that’s because their cash balances are in a checking account and not in a savings account, but we are also seeing funds in savings accounts earning very little, somewhere between 50 and 100 basis points. With interest rates on the rise, those funds should be earning more.
Startups need to take action to manage their cash better
The biggest barrier between your startup earning returns on your cash is actually you. You won’t change the situation and get better yields on your cash unless you pick up the phone or use your keyboard and ask your bank about it.
Banks can be very slow to raise the yield on bank accounts, savings accounts, and other interest-bearing accounts. That’s because interest expense is one of the biggest costs in their entire business, and they have had it really good for a really long time, since interest rates have essentially been at zero. We all know this because we were getting next to no yield in our checking and savings accounts.
But everything has changed starting in 2022 with interest rates going up. But you’ll still have to talk to your bank – they’re not going to move your funds into an account with a higher yield unless you ask them to. We’ve done this for a lot of our startups and we’ve even had to speak to our bank regarding the Kruze bank account. So just make the move.
Why should startups care about their rate of return?
Small increases in your rate can make big differences in your cash position. For example, if you have $10 million in cash and you go from 50 basis points to something like 2.5%, that is an additional $200,000 per year that your startup is generating in income. That’s more money to hire employees, or spend on marketing, or other initiatives that can help you hit your milestones.
All you have to do is pick up the phone and talk to the bank.
Don’t assume your bank will automatically give you a better rate
Some startups may be in more actively cash-managed securities or vehicles, such as money market funds, but don’t assume you’re automatically getting the best rates. We have noticed that some of the money market funds at a few of the banks are also very slow to get bumped up as well. So if you’re in one of those, you are also going to need to make a phone call, or write an email, and be proactive about this.
The advantages of automated cash management
If you are using an actively managed, automated cash management tool, then you’ve got a big advantage in a rising interest rate environment. Typically, they will auto-enroll you into other securities, such as publicly traded bonds, CDs, or other securities with short maturities, and you will automatically get reinvested at higher interest rates.
If you do opt for automated cash management, or even something more sophisticated, please make sure:
- It is aligned with your company's investment policy that has been verified/ratified by your board.
- You have a policy in writing with your cash management provider. This will keep them from investing in junk bonds or something high-risk. You definitely don’t want to wake up one day and find out that you’ve lost 25% of your cash that should have been invested in something safe.
We always recommend safety for our startup clients, and if you can get a little bit of yield on top of that safety, then that’s wonderful.
Make the call to get the return you need
So, given the rise in interest rates, you should check the yield on your accounts and if it’s stil low, pick up the phone and call your bank. Your bank may be able to provide you with better options. You can also check out some of the automated cash management services available now. And hopefully your startup can begin earning better returns on its cash!
If you have any questions on cash management, startup accounting, startup bookkeeping, taxes or venture capital please contact us. You can also follow our YouTube channel and our blog for information about accounting, finance, HR, and taxes for startups!