Put simply, your startup’s cash position refers to the amount of cash you have on your company’s balance sheet or in your bank accounts. Here at Kruze, we like to also include any marketable securities your business may have that, with interest rates going up, are highly liquid and can be turned into cash quickly. Your cash position shows your startup’s financial strength and liquidity.
Your cash position and cash management solutions
While a lot of startups keep large sums of money in their bank accounts, that can be pretty risky if we have another banking crisis like we saw with the collapse of Silicon Valley Bank and First Republic. With that in mind, there are a lot of pretty sophisticated cash management solutions that can also be smart investments.
When utilizing one of these solutions, startups will typically be putting money into treasuries, or other types of government bonds, mainly because they have higher yields. Frankly, they are actually safer than just having money in your bank account, since they’re backed by the US government.
Typically, with these securities, you can retrieve your cash in one to three days, or sometimes even faster if you need to (in fact, these securities are often referred to as “cash equivalents.” Since these types of securities are highly liquid, it’s important to remember to include them in your cash position.
How often should you calculate your cash position?
Finding and knowing your cash position is important because it’s a number you’ll want to send to your investors on a regular basis. Your cash position is important when you’re calculating your burn rate and your zero cash date. For example, if your cash position is $10 million and yourburn rate is $500,000 a month, that means you have 20 months’ worth of cash before you reach your zero cash date. We recommend doing this calculation and having a conversation about it with your investors every month.
By including this figure in your board deck/monthly communication with your investors, it means they can easily determine how much longer they have before they need to write a check.
Don’t include unsecured cash
One important thing to remember is not to rely on a promised amount of cash from a VC or a lender. It can be really detrimental to include that promised loan or investment in your cash position if you don’t already have the money in your bank account.
Fundamentally, if you haven’t closed on the deal or accepted the money, do not include it. We see a lot of founders who come to us and say “don’t worry, my VC promised to bridge us” or “my VC said they would write another check.” Obviously, it’s a great thing that they are promising this money, since it shows they believe in you, but please don’t count on it until:
● The money is in your account.
● Your accounting team (like the team at Kruze Consulting) have signed off on it.
● The cash is available and can be spent however you need to.
What’s the difference between cash position and cash flow?
Your startup’s cash position is the total cash you have available at a specific point in time. Your cash flow is the total change in your cash position during a certain period, including all cash inflows and outflows. Cash flow includes all types of cash payments, debts, investments from stakeholders, etc. Your investors will look at both your cash position and your cash flow when they’re evaluating your startup’s progress.
A strong cash position is important for startups
A solid cash position means you’re startup is stable and you’re able to finance your growth. To summarize, here are the keys things you need to know about cash position:
- Cash position is the total amount of cash on your balance sheet/in your accounts.
- You must remember to include marketable securities in your cash position.
- Calculate and share your cash position with your investors on a monthly basis.
- Don’t include any cash/loan that is not in your bank account.
If you have any other questions on cash positions, valuations, startup investing, or startup accounting, please contact us. You can also follow our YouTube channel and our blog for information about accounting, finance, HR, and taxes for startups!
