Your Complete Guide to Cash Management (Part 1): Bank Accounts
February's three part series on cash management for tech startups
As a startup CFO one of the most common questions I get from founders is:
“What type of bank account should I be keeping our money in?”
It all depends on where you are in your company’s lifecycle - a pre seed founder throwing their first $100K check in the bank should be more concerned with making payroll and avoiding mixing with their personal accounts, while a Series D CFO with $300M in cash should be more worried about yield and security.
This is our first of three posts on cash management.
Part I: Bank Accounts (THIS WEEK’S POST)
Investment Policy Template you can download
Part II: How Do Venture Debt Facilities Work? (NEXT WEEK’s POST)
Revolvers vs Term Loans
Typical Debt Covenants
Venture Debt Players and Sizing
Part III: 13 Week Rolling Cash Flow Forecast
How cash enters the building
How cash leaves the building
13 week forecast template you can download
What we’ll discuss this week is how to think about cash management, or as the experts call it “Treasury”, throughout your company’s lifecycle.
Subscribe now, or you’ll breach your onerous debt covenants.
Timeframe: Pre Seed, Seed, Series A
Company Size: <$10M in revenue and <75 employees
Who’s in Charge of Cash: Founders
Early on there’s not enough going on day to day to require a full time finance person
Therefore, day to day banking responsibilities fall on the founders.
# of Bank Accounts: 2
# of Banking Institutions: 1
Business Checking Account:
Start with a basic business checking account to manage day-to-day expenses, like making payroll, receiving payments, and paying bills.
Don’t keep 100% of your money here, though - just what you need for ~2 to 3 months of operating expenses
Even at an early stage, setting up a savings account helps to segregate funds for emergencies or future investments.
It also makes it less likely that you’ll get one account hacked and lose all your money.
This can be with the same institution as your checking account.
Keep all excess cash beyond ~2 to 3 months of operating expenses here
Two accounts is the most efficient setup. Have one checking account that will be your main operating account. Keep two-three months-worth of cash here and have your payroll, as well as other operating expenses run through this checking account.
Have one money market account (i.e., savings) which is where you should park any cash in excess of two-three months-worth. This money market account is interest-bearing (so you’ll get some yield) and is FDIC-insured up to $250k (a federal regulation that’s the same at all financial institutions).
All money market accounts are restricted to six transactions per month (a federal regulation that’s also the same at all financial institutions); however, this fits within the box of liquidity, as you can transfer funds to your checking account or withdraw anytime, so long as you stay within six transactions (e.g., transfers).
-Jason Mok - Former SVB, Current Brex
Liquidity: Access to your cash when you need it. Shit happens fast when you are young and scrappy. You don’t gotta get ready if you stay ready.
Cash Flow: Pay and get paid.
Receivables: Managing outstanding amounts owed to you from customers, and avoiding bad debt.
Payables: Paying vendors on time to get the best terms, and establishing a rhythm of who at the company cuts the checks, and when it gets done.
⛰️Mountains (Must Do's):
Liquidity Management: Don’t. Run. Out. Of. Money.
“Most businesses die because they run out of money”
-Marc Lore, founder of Jet.com
Monitor and manage cash flow on a WEEKLY basis to ensure you have enough runway. You can create a simple 13 week cash flow forecast (that’s the length of a quarter). Template to follow in week 3 of this series.
Simple Banking Structure: KISS (Keep it stupid simple)
At this stage you just need a checking account and a savings account, which can be with the same institution, as we discussed above.
Also, make sure it comes with a check book. Yes, the paper thing.
I know this is a silly thing to say, but many neo banks don’t give you one (they are 100% online), and there will be times when you need to write a paper check when doing business with legacy institutions or securing office space.
Seriously. Get a freakin’ check book.
Payroll: Ensure employees and contractors can get paid correctly and on time.
Comply with any state and federal tax withholdings. You can do this through a payroll provider (PEO or EOR)
Collections: Making sure people pay you on time
Keep a spreadsheet of all customer and supplier payment terms (net 30, net 45, etc.) and manage it all out of one system, like bill dot com or Quickbooks.
Also, Bill dot com, why you no sponsor my newsletter yet?
Credit Cards: Physical and virtual
Ideally you only cut credit cards to the founder(s) and whomever runs marketing, as that’s probably the highest non-payroll related expense at this stage. Brex is a great option that can scale into the maturity stage below.
Financial Controls: Don’t share the same bank login, and stuff like that
Try not to let the same person set up the wires and approve them for payment
But I’d be kidding myself if I didn’t say it happened at this stage.
🪨Pebbles (Keep in Mind, if you have time):
Relationship Building with Financial Partners: Think about where future business will go.
Begin nurturing relationships with banks for future funding rounds.
And if your company sells something that banks could buy, use the business you do with them as a chip for them to buy your stuff and become a customer
Interest: Anything is better than nothing.
Your job is to build a company, not to play Tommy Treasurer. If you can get away with collecting enough interest from your savings account to pay for half a developer each year, you’ve already won!