Cash management is a very common question for startup companies. After raising capital, your startup might have a significant amount of cash. That capital will be spent over time to develop the business (your burn rate). In the meantime, though, how should those funds be effectively managed? 

Three criteria: Yield, risk, and access

These three criteria should be your main considerations when you’re considering a cash management plan. It’s important, however, to balance each factor against the other two, and consider your business model and requirements.

Yield. Ideally, you want to get the best interest rate or best return you possibly can without ignoring the other two criteria. Risk and return go hand in hand, and as return increases, so does risk. However, as a founder, your primary concern with startup funds is preserving your capital until you’re ready to use it for business expenses, like hiring top talent and developing a great product. Your job is to put your funds to work building the business, not generating investment returns. However, if you’ve raised significant capital, you should look for some yield while minimizing your risk. For a startup with $40 million in cash, earning 50 basis points generates $200,000, which could fund a hire. 

Risk. You don’t want to put your money as a startup into something risky, like the stock market or high yield bonds. At one time, people thought auction rate securities were not risky, but they turned out to be wrong and a lot of that money evaporated in the 2008 crash.The people who are investing in your company, the venture capitalists, the angel investors, even the people that work there, are not working with you because you’re a hedge fund. Taking investment risk is not acceptable to them.  

Access. Liquidity is the third criteria you need to consider. You will need to access the funds easily. A checking account, which typically pays no interest, keeps your funds available. Savings accounts are also easily accessible, and typically pay a modest interest rate, perhaps 10 basis points. So a smaller startup might maintain a checking account as an operating account and put other funds into a savings account, so they can be transferred conveniently to an operating account. That provides very easy access but fairly low yield. A step up from a standard savings account would be a money market account, which will pay a higher interest rate and are still very liquid, but typically have some restrictions on access, such as a 24-hour withdrawal window.

Cash management products for startups

Many banks that work with startups offer cash management solutions. Also called treasury management, these are suites of financial products that combine features that are similar to checking, savings, and money market accounts. At Kruze Consulting, the banks we typically work with, including SVB, Bridge Bank, Comerica, Mercury, and Rho, offer treasury management. These products are more sophisticated than a savings account and will get you a higher interest rate. They can also help you with other aspects of cash management, including accounts payable and accounts receivable. 

These products can help you manage your cash. They can help you balance yields, risk, and access. If you have a significant pool of capital, using a cash management program keeps your funds secure and frees you up to focus on building your business. Remember, if you’re asking where to put your startup’s cash, you’ve been doing a good job at raising capital and that’s great. If you have more questions, please contact us