Understanding Cash Flow Management and How it can Help Your Startup

HIGH YIELD SAVINGS ACCOUNTS

High-yield savings accounts are like turbocharged piggy banks for business owners. They are special savings accounts offered by banks that pay you more interest than regular savings accounts. Placing your money in a high-yield savings account allows your total balance to grow faster. The catch is, you might need to keep a minimum balance or meet certain conditions, but the extra money you earn in interest can make it worth it. Plus, your money is safe and easy to access when you need it. Think of it as a smart way to make your savings grow without taking big risks!

Pros

• Easy to set up – typically the setup process is straightforward and easy to navigate.
• Safety: These accounts are typically offered by reputable banks and are FDIC insured which means your deposits are protected up to a certain limit, ensuring your money’s safety.
• Liquidity: Your money is easily accessible when you need it, usually through online banking, ATMs, or branch visits, making it a flexible option for emergency funds or short-term savings goals.
• Low Risk: Unlike riskier investments, high-yield savings accounts are low-risk options, making them suitable for those who prioritize the security of their funds.
• No Fees: Many high yield savings accounts have no monthly maintenance fees or account-opening fees, helping you keep more of your earnings.

Cons

• Higher Interest Rates Elsewhere – A high yield savings account may not offer the maximum interest rate that is possible.
• Limits on Withdrawing Your Money – High yield savings accounts limit withdrawals to 6 per month, per federal law. Lower returns compared to investments, while high-yield savings accounts offer higher interest rates than regular savings accounts, the returns are still lower than what you can potentially earn through investments in other areas such as stocks and bonds.
• Minimum Balance Requirements – Some high-yield savings accounts require a minimum balance to earn the advertised interest rate.
• Inflation Risk – Inflation can erode the real purchasing power of your money, and high-yield savings account interest rates may not always keep pace with inflation, meaning your money may not grow as much as you’d like over time.
• Interest Rate Fluctuations: The interest rates on high-yield savings accounts can change over time, so the rate you sign up for may not be guaranteed to remain high.
• Opportunity Cost: By keeping your money in a high-yield savings account, you might miss out on potentially higher returns in other investment opportunities that carry more risk.

CERTIFICATE OF DEPOSITS (CD’s)

A Certificate of Deposit or CD’s is like a savings account on overdrive. When you put money into a CD, you promise not to touch it for a set period of time. In return, the bank rewards you with a higher interest rate than a regular savings account. It is a safe option because your bank guarantees your money back with interest when the CD matures. The only catch is that if you need your money before it’s done growing, you might face penalties.

Pros

• Higher Yield – CD’s offer a higher yield than savings accounts.
• Safety – CDs are one of the safest investments because they are typically offered by banks and credit unions and are FDIC insured which means your principal is protected up to a certain limit.
• Predictable Returns – CDs offer fixed interest rates, providing a predictable and guaranteed return on your investment.
• Term Options –  CDs come in various term lengths, allowing you to choose the one that fits your financial goals, whether it’s a few months or several years.
• No Market Risk – Unlike stocks and other investments, CDs are not influenced by market fluctuations, so your investment is not at the mercy of market ups and downs.

Cons

• Lack of Liquidity – Your money cannot be withdrawn without penalty prior to maturity.
• Opportunity Cost – While CDs offer safety, their returns are generally lower than what you might earn through riskier investments like stocks or bonds, potentially causing your money to lose purchasing power to inflation.
• Interest Rate Risk: If you lock in your money with a long-term CD and interest rates rise significantly during that period, you might miss out on better investment opportunities.
• Tax Considerations: The interest earned on CDs is generally taxable income, which can reduce your overall returns.

MONEY MARKET ACCOUNTS (BREX CASH, MERCURY TREASURY) OR SWEEP ACCOUNTS

Money Market Accounts (MMAs), such as Brex Cash and Mercury Treasury, are like super bank accounts. They offer higher interest rates than regular savings accounts, so your money grows faster while staying safe and easily accessible. MMAs are perfect for keeping your cash while you’re not using it because they blend the best of both worlds: the safety of a savings account and the growth potential of investments. Plus, they often come with features like check-writing and debit cards, making your money super flexible for everyday expenses. However, MMAs have their limits, such as balance requirements and transaction limits.

Pros

• High Interest Rate with Options – MMAs typically offer the highest yield that still permits withdrawals frequently each month (similar to an operating account).
• Liquidity – Money in an MMA is easily accessible through checks, debit cards, or electronic transfers, making it a convenient option for everyday expenses or emergencies.
• Low Risk – MMAs are relatively low-risk investments.
• Limited Market Risk – Unlike investments in stocks or bonds, MMAs are not influenced by market fluctuations, providing stability to your savings.

Cons

• Insurance is Capped – Although your money may be insured, the FDIC is capped at $250k or may not be available at all; depends on the underlying fund being solvent.
• Lower Returns – While MMAs offer better interest rates than regular savings accounts, they typically provide lower returns compared to riskier investment options.
• Minimum Balance Requirements: Some MMAs require a minimum balance to open and maintain the account. 
• Transaction Limits: MMAs often have limits on the number of monthly transactions, such as checks or withdrawals, which can be a drawback if you need frequent access to your funds.
• Fees – Some MMAs may charge monthly maintenance fees or fees for falling below the minimum balance requirement, which can eat into your earnings.
• Inflation Risk – The interest rates on MMAs may not always keep pace with inflation, potentially reducing the real purchasing power of your money over time.

US TREASURY BILLS & NOTES

US Treasury Bills and Notes are like the government’s way of borrowing money from you, in a safe way for you. Treasury Bills are like short-term loans you give to the government for a few weeks to a year, and in return, they promise to pay you back with a little interest added. Treasury Notes, on the other hand, are like slightly longer loans, usually from 2 to 10 years. They’re great for people who want a safe place to park their money and earn a guaranteed return.  Both are a great option to have on hand.

Pros

• Maximum Interest Rate Offered – The maximum interest rate possible is offered at a rate that is considered ‘risk-free’ (Risk is if the US government cannot pay its debts); flexible maturities from 4 weeks to 8 weeks, etc.
• US Government Backing –  Both treasury bills and treasury notes are backed by the full faith and credit of the US government, making them among the safest investments in the world.
• Fixed Interest Payments –  Treasury bills and notes offer predictable, fixed interest payments, which can be attractive for investors seeking stability.
• Liquidity – They are highly liquid investments, meaning you can buy and sell them easily in the secondary market before they mature.
• Diversification – They can be part of a diversified investment portfolio to reduce overall risk.
• Tax Benefits – The interest income from these securities is exempt from state and local income taxes, although they are subject to federal taxes.

Cons

• No FDIC protection – However the FDIC protection will also not be worth anything if the government defaults.  Treasury auctions are more complex.  Money is held for up to 4 weeks at a time.
• Interest Rate Risk – The fixed interest rate means that if market interest rates rise after you purchase, the value of your existing holdings may decline in the secondary market.
• Inflation Risk – The interest rates on Treasury bills and notes may not always keep pace with inflation, potentially reducing your purchasing power over time.
• Lock-In Period – These investments have specific maturity dates, so your money is tied up for a fixed period.
• Taxation – While they offer tax benefits at the state and local levels, you’ll still need to pay federal income tax on the interest income, which can affect your overall return.

Another Option

Finvisor’s dedicated US Treasury team handles all auctions, and staggers purchases to maximize liquidity, and parallels this with overall budget to ensure no overdrafts.