Founders with venture capital dollars in their bank account need to take into consideration several key points - capital preservation, liquidity and risk management. Yield is not a primary concern, although with the best founder cash management products, like short maturity treasuries, all it can be had alongside the other, more primary needs.
Founders handing their startup’s cash need to be considerate of several key risks, beyond the risks of the actual investments. First of all, as the SVB crisis makes very clear, the strength of the financial institution matters. Custodial accounts, FDIC insurance, etc. can help over come this risk. Additionally, rate risk matters for longer maturity investments. Liquidity is another risk, as emercency funds need to be accessible in an emergency.
Financial projections - a cornerstone of good treasure/cash management
Budgeting and forecasting are critical components of a comprehensive cash management strategy, as they help startups plan for the future, allocate resources effectively, and make informed decisions about investments and spending.
A robust budget and forecast can help founders gain visibility into their expected cash inflows and outflows - helping their startups not accidentally miss payroll, and also giving founders the confidence they need to invest their excess cash for a decent (and safe!!) yield. This level of foresight is particularly important for startups, as they often operate with limited cash reserves and may not have access to lines of credit and other financing tools that traditional, profitable businesses have.
Tips for Effective Budgeting and Forecasting
- Develop a detailed financial model: Create a comprehensive financial model that includes revenue projections, expense estimates, and cash flow forecasts. Use our free financial model templates as a starting point.
- Regularly update your budget and forecast: As your startup grows and evolves, it’s essential to update your budget and forecast regularly to reflect changes in your business and the broader market.
- Scenario plan and stress test: Use your financial model to scenario plan and stress test your assumptions. This will help you understand how changes in key variables (such as revenue growth rates or customer acquisition costs) could impact your cash position and enable you to develop contingency plans.
- Monitor cash flow closely: Implement systems and processes to closely monitor your startup’s cash flow, including accounts receivable and accounts payable. This will help you identify potential issues early and take corrective action as needed.
- Communicate with stakeholders: Share your budget and forecast with key stakeholders, including investors and board members. This transparency will help build trust and ensure everyone is aligned around your startup’s financial priorities and cash management strategy.
By prioritizing budgeting and forecasting as part of a comprehensive cash management strategy, startups can optimize their cash flow, make informed decisions about investments and spending, and position themselves for long-term success. If you need expert guidance on cash management or financial planning, the Kruze Consulting team is here to help.
