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)
Stages Covered:
Startup
Growth
Maturity
*Redflags*
Investment Policy Template you can download
Part II: How Do Venture Debt Facilities Work? (NEXT WEEK’s POST)
Revolvers vs Term Loans
Fees
Typical Debt Covenants
Negotiation Points
Venture Debt Players and Sizing
*Red Flags*
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.
Startup:
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
Bank Accounts:
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
Savings Account:
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
Key Themes:
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?
🧗🏽♀️Boulders (Important):
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
Wallet “share”
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!
Growth:
A quick reminder from our editor, Walter
Timeframe: Series B, Series C
Company Size: $10M to $75M in Revenue or ~75 to ~500 employees
Who’s in Charge of Accounts: First finance leader
By Series B there’s now enough going on for the company’s first finance leader
This can fall on varying levels of the spectrum - from a part time bookkeeper to a VP of Finance, or CFO (just depends on how complex the day to day flow of funds is… for example, a marketplace or fintech company has a lot of chaos to keep track of)
# of Bank Accounts: 3 to 5
# of Banking Institutions: 2 to 3
Bank Accounts:
High-Interest Savings or Money Market Accounts:
Consider moving surplus funds into higher-yield accounts to generate more returns. But you probably don’t want to mess around with CDs or anything that locks down your cash for more than 30 days at a time (yet).
Foreign Currency Accounts (if dealing with international transactions):
For startups engaging in global transactions, having accounts in different currencies can help minimize exchange rate risks.
You’ll need this if you have full time employees outside of the US. They’ll want to get paid in their local currency (for example, people in Bucharest don’t want to get paid in dollars, they want Romanian Leu… this requires you to have, at a minimum, a checking account in that country)
Doing so also requires you to have local directors to manage the accounts on the ground, so start to think through who in your local employee base will be you “GM” in lieu of a finance person; this usually needs to be a citizen of the country
Specialized Accounts (Escrow, Trust, or Investment Accounts):
Depending on the nature of the business, specialized accounts might become necessary to manage specific transactions or investments.
Examples may include escrow accounts for funding you’ve raised that’s contractually earmarked for a joint venture, or cash you’ve collected from employee early exercises
Key Themes:
Safety: You now have enough money to be a meaty target. Don’t put it all in one honeypot.
Controls: By Series C or D you have multiple banks and people involved in the process.
The same people shouldn’t be setting up wires and approving them. You got a pass when you were five guys in a garage. Now you big time.
Your first finance leader should sort this out when they come onboard.
Usually they’ll be the one to set up the wires, and the founder (if there isn’t a second finance person) will be the approver for blast off.
International Footprint: As mentioned above, you may be going international, which requires new banking partners on the ground in that region
For example, I worked with Bank Leumi in Israel, kind of like the Bank of America for the region. We used it for local payroll and day to day office expenses.
⛰️Mountains (Must Do's):
Payroll: Yup. Still #1.
Cash Conversion Cycle: Optimize working capital to drive efficiency in operations. Here’s a crash course:
FX Management: Forecasting how much you need in local currencies, and buying ahead (i.e., exchanging USD for local currency in batches)
I had a contact at SVB in London who I would call every month to make USD to GBP spot trades and he would tell me about soccer. Nice bloke.
🧗🏽♀️Boulders (Important):
Treasury Optimization: Explore better banking services, negotiate fees, and optimize treasury operations to manage larger cash volumes.
You don’t have to stick with the same bank you started with.
As you have more cash inflows and outflows (e.g., “action”) you are worth more as a customer to banks.
The same goes, obviously, for cash in the bank. Post fundraising you will be inundated with offers.
Financial System Enhancements: Invest in more advanced financial systems to scale with the company’s growth.
How will you manage all non-payroll expenses? Can you get it into one portal?
🪨Pebbles (Keep in Mind, if you have time):
Investment Strategy: OK, let’s try to pay for two developers this year with our interest!
You can start to think about messing around with CDs at this point. But you really don’t want to spend any time on this until you have more than 18 months of runway in the bank.
Before that point, speed and flexibility is a priority that outweighs a few extra BPs (BIPS as they say).
You can check out a managed investment account when you raise a much, much larger round and you know there’s a certain amount of cash you don’t need to touch for at least 12-18 months. Not now though.
Maturity:
Timeframe: Series D through Public Markets
Company Size: +$100M or +500 employees
Who’s in Charge of Cash: Treasurer
Beyond Series D you probably need a full time treasurer
Past $100M in ARR or with more than $300M in the bank, there’s too much at risk to not have someone’s full time focus on cash.
You may even mess around and become profitable at this point, which means there will be even more cash to put to work. Imagine that!
Messed around and got free cash flow positive
# of Bank Accounts: > 5
# of Banking Institutions: > 3
Bank Accounts:
Multiple Checking / Savings Accounts with Multiple Institutions:
With growth, segregating funds for different purposes (like payroll, taxes, operating expenses, etc.) becomes more crucial.
You also want to diversify where you keep your cash - if one bank goes under, you don’t want to be stuck.
It’s also a good idea to bank with at least one bank that you determine “too big to fail” like a JP Morgan.
Investment Accounts or Corporate Investment Portfolios:
The general rule of thumb is once you have a year and a half of cash runway in the bank, you can start to think about getting cuter with your investment strategy
Multiple FX Accounts
You will want a checking and a savings account in local currency for every country you do business in. It should be domiciled in that country for speed of transfers, as discussed above.
At this point you may partner with one bank for ALL international operating needs. There are a few, large multinational banks who have feet on the ground in +75 countries, which can help with the paperwork associated with adding new countries
Retirement Accounts for Employees (401(k), IRA, etc.):
Offering retirement benefits becomes essential to attract and retain talent as the company expands.
You may do this earlier through a managed 401k provider.
Pretty onerous (second time I’ve got to use that word!) to do on your own.
Escrow Accounts for Large Transactions:
Especially relevant for businesses dealing with larger contracts or transactions, an escrow account can ensure security and trust between parties.
Key Themes:
Visibility: You’ll want to get to a single dashboard point of view to get to your total cash position, converted to a single currency, on a daily basis.
This will probably require some sort of treasury software, like a Kyriba, if you aren’t able to use APIs through one of your larger bank providers, like a Citi.
Getting Fancier: Start to move around cash on a daily basis to make sure you get some yield.
You can set up some sweep accounts.
Strategic Capital Allocation: Saving up for an M&A “rainy day”.
You should start to think in “t-shirt sizes” in terms of the size of acquisitions you may do over the next five years (“one acquisition of more than $100M, two of between $50M and $100M, three of less than $20,” etc.)
⛰️Mountains (Must Do's):
Treasury Management Policy: A treasury management policy outlines the guidelines and procedures for managing the company's cash, what currencies it will hold, what types of investment vehicles it can enter into, and describe it’s overall risk tolerance.
🧗🏽♀️Boulders (Important):
Global Cash Management: You may start setting up multiple accounts in each international location, and even buying CDs in other currencies. Whew!
Debt Financing Strategies: We’ll be covering venture facilities in next week’s post. Stay tuned.
🪨Pebbles (Keep in Mind, if you have time):
M&A Readiness: Keep all of your records in good order in case you need to either wire someone else money to buy their company, or someone needs to buy you.
Bank accounts (especially international ones with directors) come with a ton of paperwork.
Compliance and Regulatory Considerations: Stuff can change.
Shower thoughts: I’ve always wondered why the $250K FDIC limit is the same for businesses and average Joe’s though - wouldn’t it make sense to have a higher limit for companies? I digress…
Redflags:
Co-Mingling
A lot of times the bank account set up process is really rushed when a company raises money for the first time
This can lead to a cardinal sin: Co-Mingling.
This is when you mix your personal funds with the business funds
When you want to receive a wire from an investor (EXCITING!), the last thing you want to do is show up to a bank with a passport and then wait three weeks for approval
I get it - you can get buried underneath compliance and KYC forms when you just want a safe place to run payroll out of
But it’s hard to unwind this sin (seems to always come up in M&A due diligence), and you’ll get yelled at by your auditors down the road.
Getting too cute with sweep accounts
Sweep accounts are a way to push excess cash at the end of each day sitting in your checking (operating) account to a higher yield investment account (usually a money market savings)
Companies set a minimum balance and anything over that amount is “swept” into an investment vehicle
Where this can go wrong is on two levels:
Getting too aggressive in how much you sweep: You try to maximize for interest, when that’s not your job as an early stage company, and lose flexibility for big payments that pop up
The fees for running the sweep account actually outweigh the added interest benefits - this can happen in low interest rate environments
I often counsel founders and first time finance leaders to really dig into the effective rate of the sweep account - the juice may not be worth the squeeze
I strongly believe banks are way too aggressive with pushing sweep accounts on early stage founders. They often chalk it up to something more beneficial than it really is to your day to day operations.
The second you have to wonder if you have enough money in your checking account to make a payment, you’ve out run your coverage
A quick history lesson: Sweep accounts were originally devised to get around a government regulation that limited banks from offering interest on commercial checking accounts… Sneaky sneaky!
