Cash flow management is the financial lifeline of any business. It is a fundamental practice that can help guide you when things are unclear. By mastering it, it provides you with peace of mind. Below we take a deeper look into what cash flow management is and how you can implement it in your business today.
Cash flow management is the process of monitoring, analyzing, and optimizing the inflow and outflow of cash within a business. Proper management ensures that a company has sufficient funds available to meet its obligations.
Effectively caring for these resources will both meet the needs of the company as well as review the risks that may be at play. It is likely as a startup that a full team is not available at your disposal for this task. This is where cash flow management services come into play. These services are often offered through banks or other financial institutions.
As a startup company it is important to take advantage of the large capital you hold and put it to work generating a positive yield return.
There are two terms that need to be understood to have a successful cash flow strategy: strategic cash and operating cash. Let’s take a deeper look into the differences between these two.
Strategic cash is money that the company will not need for a specific period of time. Knowing this information can allow you to invest, acquire new assets, work on new product development or other long term projects. Understanding your strategic cash balance is key for continuing to move your business forward. Investing money you do not have can lead to premature fall out for your startup, something no entrepreneur wants to see!
Operating cash is the total amount of money it will take to keep your business operating for the next 6 to 8 months. This total should include salaries, bills, marketing costs and anything else that keeps your business running. This is a specific amount that should always be on hand. Making this a consistent habit will provide your business with a better chance of succeeding.
Having a sense of what each of these amounts should be and what your actual amounts are is good practice. As this strategy becomes more developed it will become more clear where you should be leaving your money.
Overall your goal should always be to not lose money, this means preserving your capital. In order to do this you need to access your money when it is needed as well as have a consistent income, or yield to your account(s).
To do this successfully you should consider the following:
This will be your main account and the one you will be accessing the most often. It is recommended that you use a franchise that is knowledgeable in startup businesses as well as is FDIC insured. Working with an industry-knowledgeable banking partner reduces stress & streamlines early-stage needs.
This account should hold one to three months worth of operating expenses at all times. However it is important to be mindful of FDIC insurance limits.
Timing matters when managing the money within your startup. To establish this timeline, you must understand customer payment schedules (as well as invoicing), and key expense payouts (payroll, AP / bill runs, & contract payments). Knowing these amounts will help you know how much money you can lock away at a specific time, and whether that will be for a long or short term.
This same concept applies to investing within your startup. It has to be a positive time in your company in order to successfully invest in other areas to even expand your employee count. Each of these endeavors will cost you more money upfront but can be profitable in the future, if done correctly.
Treasury management is all about smart financial strategies. It’s like a financial superhero for businesses, aiming to boost profits while keeping risks at bay and safeguarding precious assets. It is a mastermind juggling act of carefully balancing investments to maximize earnings without risking everything. Done correctly you end up making your money work harder for you.
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!
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.
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.
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.
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.
Yes, any individual or company can invest directly in US Treasuries. The US Department of the Treasury provides an online platform called TreasuryDirect, which allows individuals to buy and manage Treasury securities like Treasury bills, notes, and bonds.
Yes, businesses can buy US Treasury bills or US Treasury bonds. Many businesses choose to invest in Treasuries as part of their financial strategy due to their low risk and reliable returns. At Finvisor, we offer assistance and management to make sure your company is getting the most out of your investments (Minimum assets of $5M required)
One disadvantage of investing in US Treasuries is that they typically offer lower returns compared to riskier investments like stocks or corporate bonds. While Treasuries are considered very safe, their yields may not keep pace with inflation, which means your real returns (adjusted for inflation) may be relatively modest.
The minimum investment amount for US Treasury bonds can vary depending on the specific bond type and current market conditions. Typically, the minimum purchase amount for Treasury bills is $100, but it’s essential to check the latest requirements. Keep in mind that some investors choose to buy bonds in larger denominations to minimize administrative costs.
US Treasury Bills are short-term investment vehicles that generally have a life less than 6 months. Interest is paid once the Treasury bill matures and is repaid to the investor. US Treasury bonds are longer-term investments greater than 6 months, but interest is paid to the bond-holder every 6 months.
The limit is $10 million per type of security, per purchase. This means that most individuals and companies will likely not hit this limit.
Cryptocurrencies and alternative assets can be a bold choice in the investment world. Cryptos, such as Bitcoin and Ethereum, are digital currencies that exist only in the virtual realm, offering exciting opportunities for growth but also carrying higher risks due to their volatile nature. Alternative assets, on the other hand, include things like real estate, precious metals, and even art or collectibles. They can be an interesting way to diversify your investment portfolio, but they often require more effort to manage and may not be as liquid as traditional investments.
The stock market and Exchange-Traded Funds or ETFs are like the stability of the financial world. The stock market is where companies’ shares are bought and sold, and it can be a rollercoaster of excitement and risk. ETFs, on the other hand, are like baskets of different stocks, bonds, or assets rolled into one, offering diversification and lower risk. So, whether you’re a thrill-seeker in the stock market or a fan of the steadier, diversified ETFs, both can be great ways to grow your money and participate in the global economy.
Founders are not a hedge fund or investors. The value of the company is the product, sales & marketing, and R&D, not doubling cash. To minimize risk in treasury management, it’s crucial to focus on diversification and risk assessment. First, spread your investments across various assets, such as government bonds, corporate bonds, and cash equivalents, to reduce exposure to any single investment. Secondly, regularly assess and analyze the credit quality of the issuers and counterparties you deal with. Ensure compliance with risk management policies, and stay informed about economic conditions and market trends. Lastly, consider using financial derivatives, like interest rate swaps or options, to hedge against interest rate or currency fluctuations. By diversifying, staying vigilant, and employing risk mitigation tools, you can enhance the safety of your treasury operations.
Maximizing liquidity in treasury management is all about ensuring you have enough readily available cash to meet your financial needs while making the most of your assets. The highest yields often require you to put funds away, with no access, so planning is key. Firstly, create a cash flow forecast to understand when money comes in and goes out, helping you plan for cash requirements. Keep some cash reserves for emergencies and explore short-term investments to grow your money safely. Secondly, manage working capital efficiently by optimizing accounts receivable, accounts payable, and inventory levels. Negotiate favorable payment terms with suppliers, maintain a line of credit as a safety net, and regularly review your cash position to adapt to changing circumstances, and always avoid an overdraft. By following these steps, you can strike a balance between having enough cash on hand and making your money work for you, ensuring your business stays financially healthy.
Finvisor’s advisory team helps founders have a clear view of cash inflows, and outflows, and forecast, to use cash that’s set aside to generate the best income return.
It is important to have a clear understanding of how much money you have going out each month. Each cost needs to be calculated to give you an accurate total.
Just like it is important to know how much money you have going out each month, it is just as equally important to know how much money you have coming in.
As you are calculating these totals it is important to add a buffer to each total. This will provide you a bit of grace if the unexpected happens. Your goal should always be to avoid an overdraft fee.
Protecting your purchasing power and managing cash flow wisely go hand in hand. When considering an investment, it’s important to ask whether it’s insured. Insurance can offer a safety net in case things don’t go as planned. Also, think about the worst-case scenario for your investment – what happens if it doesn’t perform well? Are there safer options available that might provide more stability? Weigh the potential interest income or yield against the risks involved; sometimes, taking on more risk might not be worth it, especially if you’re running low on cash. Remember, only invest money that you can afford to lose without jeopardizing your financial stability.
Understanding these principles can help protect your purchasing power over time. By assessing risks, considering insurance, and being mindful of your financial situation, you can make informed investment decisions and effectively manage your cash flow.
To learn more about what we do, or to request a quote, contact us at email@example.com or 415-416-6682. We’re here to help you navigate deferred revenue journal entries so you can make the most of your assets!
*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*