CASH MANAGEMENT

Treasury is the management of a company’s cash and financial resources to meet the business’ financial needs - while also operating within the business’ risk levels. Unlike large corporations like Goldman Sachs, which have teams to actively manage the business’ financial resources, startups do not have the time or personnel to conduct sophisticated treasury operations.

However, unlike many traditional businesses, VC-backed startups DO often have large amounts of capital that can be put to work generating yield. Startup treasury management services are offered by banks and other financial institutions, and the types of products offered vary from high-yield savings accounts to money market accounts, government bonds, corporate bonds and crypto yield products. 

• Capital preservation
• Liquidity
• Risk management

When startup expenses need to be paid, you need liquidity – your funds can’t be tied up and need to be available to you. Certificates of deposit, for example, may provide a higher yield than money market funds, but they lock up cash for a set term. Cashing them early involves paying a penalty. CDs can have a place in a well-thought-out cash management strategy, but you’ll need to plan for different maturity dates as part of a CD “laddering” plan (see below), in which you stagger CD maturities so that funds are available each month.

Yield

In financial markets, reward is tied to risk. To get a greater yield, you have to accept more risk. That’s why this criteria falls below liquidity and safety. You can look at investment options to optimize your yield, but under no circumstances should you look at high-risk investment options. 

No exotic investments

This criteria is cautionary. Exotic investments fall outside the traditional investment categories of cash equivalents, bonds, or stocks, which are investment vehicles with increasing degrees of risk. Innovative financial investments will carry much higher risk than traditional investments. Cryptocurrencies, for example, can fluctuate significantly in value, and a large drop could seriously impact your startup’s cash position. As a fiduciary, you could be held legally responsible, and a large investment loss means you will certainly need to have an uncomfortable conversation with your board; investors; any lenders; and possibly vendors, contractors, and your employees. 

Sound cash management for startups

Low-risk investments include things like Treasury bills and bonds, certificates of deposit (CDs), and high-quality corporate bonds. These options offer more yield than a standard savings account, and you can use them to create a bond ladder, with a variety of low-risk securities with staggered maturity dates. While each of these options typically require you to invest for a specific term, if you need cash earlier you can normally access your funds by paying a small penalty. 

Poor cash management decisions can affect both your current startup, and potentially any future ventures. Bad investments could lead to a negative perception that could make other investors wary of working with you. For startup cash management, safety and liquidity should be your warchwords. For more information about cash management for your startup, please contact us.

This question is important for startups to consider, since a successful fundraising means you will probably have a significant amount of cash on hand. Your startup’s venture capital will be spent over time to develop your business, but in the meantime, you need to safeguard your funding. Many banks that work with startups offer cash management solutions, which are suites of financial products that combine features that are similar to checking, savings, and money market accounts, and will help you balance returns and risk, while providing access to the funds.

Your main considerations for a startup cash management plan should be these three criteria, yield, risk, and access. Each of these factors needs to be balanced against the others. 

• Yield. You will want to get the best return you can without ignoring the other two criteria. As return increases, however, so does risk. Founders need to primarily focus on capital preservation, making sure your funds are safe until you’re ready to use them for business expenses. Your responsibility as a founder is not generating investment returns, but you should look for some yield while minimizing risk. A startup with $40 million that can earn 50 basis points annually generate $200,000, which could fund a hire. 
• Risk. Risk increases among investment options with potentially higher risk, so founders should avoid investment vehicles like the stock market or high-yield bonds. Taking investment risk is not acceptable to your investors. Also, as a founder, you have a fiduciary responsibility to manage company assets prudently. A major investment loss could expose you to litigation, and it will almost certainly affect your relationships with current and potential investors. 
• Access. The third criteria is liquidity. For business expenses, you need to access your funds easily. That typically means putting your funds in savings accounts or cash-equivalent options. You might set up a checking account for immediate expenses, a savings account to hold funds that can be transferred easily when necessary, and potentially a money market account that might generate a higher interest rate.  

Cash management products for startups

Banks that work with startups usually offer cash management solutions, which are suites of financial products designed to help startups handle funds efficiently while balancing yield, risk, and access. In addition to earning higher interest, many of these products will help you manage cash flows, including accounts receivable and accounts payable. If you’ve done a good job of fundraising, the next step will be managing those funds, so you can build your business.

However, with rising interest rates, there’s opportunity to earn more with your capital than you may be earning in your checking or savings accounts.

One way that startups can use their available cash more productively is through a bond ladder. A properly structured bond ladder can help you achieve some return, while protecting your capital and maintaining liquidity. A bond ladder is a portfolio of bonds and securities with maturity dates that are staggered to mature at key dates so the cash is available when you need it. Generally you’ll want a mixture of Treasury bills (which have short maturities from 13 weeks to a year), certificates of deposit (CDs), or even zero-coupon bonds. CDs are insured by the Federal Deposit Insurance Corporation (FDIC), and Treasuries are backed by the US government, so your funds are very safe. And, if you run into unforeseen expenses, you can usually cash out any of these by paying a small penalty.

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. 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.

US Treasury securities (Treasury Bills, Notes, and Bonds) are debt obligations of the US government and are basically free of default risk. The government promises to pay a stated interest rate and return your principal at maturity. As long as you hold your Treasuries to maturity, you don’t have any risk of losing money. However, if you need your money earlier, and you have to sell before maturity, you could lose money. You’ll have to sell your security on the open market, and you’ll get market value. Changes in interest rates affect the security’s value. If rates go up after you bought it, buyers won’t be willing to pay full price for your security, since they can buy one with a higher rate from the government. So you’ll need to sell your security at a discounted price.