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.
Three criteria for cash management: Yield, risk, and access
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.
