Understanding Cash Flow Management and How it can Help Your Startup

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.

What is Cash Flow Management?

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.

Developing a Successful Cash Flow Strategy

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 Flow

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

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.

What Accounts are Best for Holding my 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:

Open a Primary Bank Account

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.

WHAT IS THE FDIC INSURANCE LIMIT?

  • The FDIC or Federal Deposit Insurance Corporation is an independent agency of the United States government that protects bank depositors against the loss of their insured deposits in the event that an FDIC-insured bank or savings association fails. It is backed by the full faith and credit of the United States government.
  • The standard deposit insurance amount is $250,000 per depositor, per FDIC-insured bank, per ownership category.
  • However, it is important to understand that FDIC deposit insurance only covers certain deposit products, such as checking and savings accounts, money market deposit accounts (MMDAs), and certificates of deposit (CDs).
  • The FDIC insures deposits according to the ownership category in which the funds are insured and how the accounts are titled. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank. For example, a revocable trust account (including living trusts and informal revocable trusts commonly referred to as payable on death (POD) accounts) with one owner naming three unique beneficiaries can be insured up to $750,000. 

Timing and Maturity Matter

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: Maximizing Yield while Minimizing Risk (& Protecting Assets)

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.

Maximizing Yield

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.

Common Questions

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.

CRYPTO OR ALTERNATIVE ASSETS

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.

Pros

  • High yield, and inflation hedge
  • High Growth Potential – Cryptocurrencies have shown the potential for significant price appreciation, offering opportunities for substantial returns on investment.
  • Diversification – Alternative assets, can diversify your investment portfolio and reduce overall risk.
  • Decentralization – Cryptocurrencies are often decentralized and not controlled by a central authority or government, which can be appealing to those seeking financial autonomy.
  • Tangible Value – Some alternative assets have intrinsic value, which can provide a sense of security.
  • Accessibility – Cryptocurrencies are accessible 24/7, allowing for easy buying, selling, and trading through online platforms.
  • Inflation Hedge – Certain alternative assets, like gold, have historically served as hedges against inflation, helping protect your purchasing power.
  • Long-Term Appreciation – Some alternative assets tend to appreciate over time, potentially leading to capital gains.

Cons

  • High volatility – Generally, investors will be far more upset by founders who lose cash, than making some cash on the side.  Your primary responsibility is not as a hedge fund, but to build their product.
  • High Costs – Investing in alternative assets often involves substantial upfront costs.
  • Lack of Regulation -The lack of regulatory oversight can expose investors to risks such as fraud, scams, and market manipulation.
  • Limited Use Cases – While cryptocurrencies have gained popularity, they still have limited practical applications compared to traditional currencies and assets.
  • Complexity – Understanding how cryptocurrencies work and how to secure them can be complex.
  • Market Cycles – Certain alternative assets can be sensitive to economic cycles, impacting their value and income potential.
  • Lack of Consumer Protections – Unlike traditional banking, cryptocurrencies do not offer the same level of consumer protections, making it crucial to secure your investments properly.

 

STOCK MARKET / ETF’S

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.

Pros

  • Potential for High Returns: Investing in individual stocks can offer significant potential for high returns, especially if you pick the right companies with strong growth prospects.
  • Diversification Control: Investors have full control over the selection of individual stocks, allowing them to build a customized and potentially diversified portfolio based on their preferences and risk tolerance. ETFs pool together a basket of assets (stocks, bonds, commodities, etc.), providing immediate diversification. This helps spread risk and reduces the impact of poor-performing individual assets.
  • Dividend Income: Some stocks pay dividends, providing a source of regular income for investors. This can be particularly appealing for income-oriented investors.
  • Ownership and Voting Rights: When you buy individual stocks, you become a partial owner of the company, which may grant you voting rights and a say in corporate decisions.
  • Liquidity: ETFs trade on stock exchanges throughout the trading day, allowing for easy buying and selling at market prices.
  • Lower Costs: ETFs typically have lower expense ratios compared to actively managed mutual funds, which can translate into cost savings over time.
  • Transparency: ETFs disclose their holdings daily, allowing investors to see exactly what assets are held within the fund.

Cons

  • Limited Control: Investors have less control over the specific assets held in an ETF, as the fund’s composition is determined by the issuer.
  • Tracking Error: Some ETFs may not perfectly track their underlying index due to factors like fees and trading costs, resulting in a tracking error.
  • No Voting Rights: Unlike individual stocks, owning ETF shares generally does not grant you voting rights in the underlying companies.
  • Lack of Flexibility: ETFs are designed to track specific indexes or asset classes, limiting the ability to customize a portfolio to individual preferences.
  • Higher Risk: Investing in individual stocks can be riskier than ETFs due to the lack of diversification. If a single company performs poorly, it can have a significant impact on your portfolio.
  • Market Volatility: Stock prices can be highly volatile, leading to emotional stress for investors during market turndowns.

Minimizing risk

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.

Insurance

  • FDIC – FDIC stands for the Federal Deposit Insurance Corporation, which is an independent agency of the United States government. It’s a program provided to protect depositors in case a bank or savings association fails or becomes insolvent. The primary purpose is to provide confidence and stability in the banking system by guaranteeing the safety of deposits.
  • SIPC – SIPC stands for the Securities Investor Protection Corporation, which is a nonprofit corporation established by Congress to protect the customers of brokerage firms in the United States. It is a form of protection for investors who hold assets in brokerage accounts in the event that the brokerage firm becomes insolvent or fails. It is important to note that SIPC insurance is not the same as FDIC insurance, which covers bank deposits. 
  • Full Faith & Credit of the US Government – Although this is not an insurance, you can look at it as a guarantee or commitment made by the U.S. government to meet its financial obligations. It is a statement that the government will honor its debts and repayment commitments, and it serves as a foundation of trust in the stability and creditworthiness of the U.S. government in financial markets.

Maximizing Liquidity

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.

Calculating your Cash Flow

Calculating Cash Outflows

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.

  • Payroll
    • What days are your employees paid?
    • What is the total cost for paying your employees?
    • Who are you hiring going forward?
  • Vendors / AP
    • What recurring vendors do you have?
    • What are your new vendors?
    • What are your normal payment terms?

Calculating Cash Inflows

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. 

  • Customers
    • What are your forecasted sales? How often are they occurring? Weekly, biweekly?
    • How do you receive payment? Is it immediately (e.g,. CC payment); or net terms (how many days after invoice do customers usually pay)?
  • Loans or lines of credit
    • What are the terms of drawing on your loans?
    • Also calculate any repayments and interest that needs to be paid back.

Buffer

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 purchase power and understanding your risk

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.

How to Implement This

Opening an account

  • Most products are available through business bank accounts such as Brex, MercuryChase, and others.
  • After opening a normal checking account, inquire about higher yield options.  These are generally a second account with the same institution.

US Treasuries

  • Create an account for the auction website
    • This requires business verification and owner verification.
  • Choose which bill or note to purchase.  Longer-term bills have higher yields, but you won’t have access to your cash for longer
  • Review most recent interest rates 
    • This information can be found here.
  • Create a plan for maximizing cash flow, so that the least amount of your cash is tied up at once, but you are maximizing interest rates.
  • Ensure you don’t overdraft your individual bank accounts as auction dates are set dates
    • It is important to know that you cannot transfer in or out cash on your own.
  • Need help?  Finvisor has a dedicated team to support you!

To learn more about what we do, or to request a quote, contact us at hello@finvisor.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.*

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