This is a question that’s frequently asked by startup founders and management. Most startups typically have two bank accounts. One is an operating account, that functions like a normal checking account, and that’s used to pay the normal operating expenses, like payroll, vendors, and credit cards.
The other type of account is usually a savings or money market account that provides some type of yield for the startup’s capital. A startup that’s just been through a fundraising event may have millions of dollars on hand. While you absolutely don’t want to put that money in high-yield, high-risk investment, you probably do want to earn some interest.
So how much should be in your operating account? The best way to think about this is in terms of your burn rate. That’s the amount of money your startup spends each month. You can use our startup burn rate calculator to estimate your burn. We recommend keeping two to three months of cash in the operating account. As an example, if your startup is spending $500,000 each month, you probably need $1-1.5 million in your operating account.
Your mileage may vary
This is based on your personal preference – a lot of companies want to keep as much as possible in the interest-bearing account to maximize earnings. Those companies might only keep one month’s expenses in their operating account. And they have to remember to transfer funds every month so they don’t miss payroll or can’t pay a bill.
Other companies prefer to be more conservative, and they’ll keep two or three months of expenses in the operating account, to make sure they don’t forget to make a transfer. They choose to sacrifice a bit of interest to avoid any cash flow problems.
Your startup’s cash management policy
This is something that you may want to tweak over time. Money market yields have been pretty low in the last few years, so companies that kept more money in their operating accounts weren’t losing much. But interest rates are rising, and that may affect your decision.
It’s a good idea to have a cash management policy that outlines these guidelines, and is approved by your board of directors - check our our templated startup investment management policy statement. But the most important thing is don’t forget to put money in your operating account. If you have questions about cash management, operating accounts, or startup banking, please let us know.
