The basics of cash management for all company stages
The startup finance leader’s framework for managing liquidity, credit risk, yield, and more
When the news around SVB broke last year, I spoke to many of Anrok’s customers and connections from my time at Dropbox. A lot of them were asking similar questions about cash management, so I began pulling together some best practices from mine and others’ experiences across different stages of company growth.
A year later, I’m sharing the resource we put together for startups navigating cash management. I also discussed this framework and other banking strategies for finance teams with former Dropbox CFO Ajay Vashee here:
Cash management approach
Every business is going to be unique in its risk tolerance and liquidity needs but the below framework provides a starting point for the conversation.
Practical tips
Remember: Investors gave your company money because they thought your team could build great software, not because they thought you were great at generating interest income. The board won’t celebrate your extra 25 or 100 bps of yield or amazing investment tip, but they will definitely have some very difficult conversations with you if you lose any money
Investment policy
This is a pretty “plain vanilla” policy with all high quality credit rated investments
Have the board approve a policy to get alignment on risk tolerance and investment preferences
Solicit feedback directly from board members in advance
Remember diversification is your friend
Commercial banks
Pick one top tier (JPM, BofA, Citi, Wells)
Strong credit and building a relationship helps a lot with growing into future debt and equity transactions
They are tough to move quickly with unless you are large or about to have a debt or equity transaction
Pick one more aligned to your size
They are much easier to get things done quickly with
Some can have much better tech too
Have one bank support your daily operations (payables, receivables)
Have the second support your periodic transactions (payroll, rent, etc)
Money market funds
Recommend Goldman Sachs Mosaic portal because:
It gives you a third place to execute and move money should one the commercial banks go down or act slowly. Funds can be wired easily to/from to any account.
It’s free and they don’t bother you about your deposits, cash accounts, etc because they don’t offer those services as an investment bank
You can invest in any fund family (i.e. any money market fund out there) -> typically commercial banks significantly limit your investible options
You can access all share classes of funds with no minimums -> you can get a better yield on the same fund with access to the higher share class
Government funds are easier to deal with from an accounting perspective and also easier to get comfortable on credit risk questions than Prime funds
Short duration debt
Only get here when you have:
A really, really strong forecast
At or approaching free cash flow neutral to positive
AND a lot of extra cash
Use external managers called Separately Managed Accounts—they are experts on credit assessments, your internal team is likely not.
Pick 2 so you have an easy performance comparison
One from an existing bank relationship
One that is a pure investment advisor so they don’t have any bias towards their own Issuances or service lines
Disclosure: Anrok does not provide tax or legal advice. Please consult with a tax or finance professional regarding your specific circumstances. ⊞