Cash Management Best Practices

“Cash is king” as the saying goes. In 2023 we have witnessed rising interest rates and multiple banks under duress, so cash management is suddenly top-of-mind for startups.

In these uncertain times, a board-approved treasury and investment policy—including a banking strategy and a contingency plan for worst-case scenarios—can make all of the difference. In addition to managing risk, such policies enable companies to generate material ancillary income when interest rates are high.

We have developed this guide to help you operationalize an efficient and effective cash management strategy for your startup.

TREASURY & INVESTMENT POLICY: OBJECTIVES & BEST PRACTICES

An effective treasury process will:

• Preserve cash—first and foremost.
• Ensure cash is available to meet operational needs.
• Generate income on excess cash.

With a couple hours of planning and a few days of work, most startups can meet these objectives by implementing the best practices outlined below.

>> Best Practice: Diversify risk across banking institutions

• Maintain accounts with at least two banks:

• A primary bank for day-to-day expenses (vendors, payroll, etc.) and receipt of payments.

• A secondary bank to which you can transfer your primary banking activities at short notice and to diversify where you hold excess cash.

• Ensure all accounts at all banks are setup with ACH and wire to enable payroll/payments

• Later-stage companies that receive large volumes of checks to a primary bank lockbox may want to consider setting up a lockbox at their secondary bank as well.

>> Best Practice: Allocate funds based on amount of cash needed and when

• Maintain at least a few months of cashat each of two or more banks.

• Establish a board-approved investment policy that specifies the bank products and account types in which excess cash will be held -- with a focus on safe, liquid, investments.
• Safely invest excess cash with:

• Insured Cash Sweep (ICS) solutions, such as IntraFi, automatically and transparently allocate your account’s deposits to partner banks in $250,000 increments (the FDIC insurance limit)—so more of your deposits remain insured—while also paying interest. Talk to your bank to find out their ICS insurance limit and the amount of interest they pay on ICS deposits. ICS interest rates at some banks are negotiable, so don’t hesitate to ask for a higher rate.
• Sweep Accounts sit on top of operating accounts and automatically transfer funds into various higher interest-earning vehicles, such as a money market accounts or funds. Money market funds are generally not FDIC insured, but they are safely off-balance-sheet of the bank; it is incumbent on you to understand the risks specific to a particular fund. If you are a start-up with qualified small business stock (QSBS), which includes most VC-backed tech start-ups, consult your legal and tax advisors prior to shifting cash into any “fund” products (i.e., money market funds).

IMPLEMENTING A TREASURY & INVESTMENT POLICY

There are many effective ways for startups to implement a treasury policy. Here’s one example:

1. Primary Bank:
   • Several months of cash in operating account.
   • Excess cash insured through your bank’s IntraFi program with the percentage depending on your company’s stage and cash balance.
2. Secondary Bank:

• Several months of cash in operating account.
• A sweep account on top of operating account—automatically transferring an established percentage of excess cash to investment accounts/funds (money market accounts, money market funds, US Bonds, etc.)—per your board-approved investment policy. Be sure to consider any implications to QSBS.

As a best practice, a startup should have its board approve its treasury plan prior to implementing it.

FINANCIAL RISK MANAGEMENT PLAYBOOK

In times of uncertainty, drafting and testing a Risk Management Playbook can make a big difference in worst-case scenarios. For startups, managing financial risk starts by:

• Asking “What could go wrong?” within the company’s financial processes.
• Determining a plan for various potential “worst-case” scenarios.

Here are some recommendations for building a Risk Management Playbook:

• Maintain an up-to-date tracker of bank accounts and other assets:

• What financial institutions hold your bank accounts and other assets? What is the title (company name, entity name, etc.) of each account, and who has access to each account?
• What is each account used for? What are the deposits/payments in and out of each account?
• Maintain a list of vendors that auto debit each account, along with contact information and the steps to update the bank account being drafted.
• Maintain instructions for updating invoice templates to redirect customer deposits.

• For every scenario and account, determine how the company will:

• Access and transfer funds quickly.
• Pay employees, contractors, and vendors.
• Receive payments from customers, credit providers, and investors.

• Maintain and run a monthly cash projection to understand operating needs and cash flows:

• Check and update daily: keeping a close eye on cash flows.
• There are various software tools available to help track/monitor cash flows, including Pulse and PlanGuru . The desktop version of QuickBooks also offers simple cash flow management tools.

• Test your policies effectiveness once or twice a year:

• What will you do if your primary or secondary bank closes?

• Track distress of primary/secondary banks:

• Setup Google Alerts or other real-time notifications, so you are not late to act.

• Have clear procedures and approvals for verifying any new or updated payments instructions:

• With the increase in business email compromise, spoofing, and SMS fraud, it is important to always confirm new or updated payment instructions with the recipient via telephone -- especially for large payments or those via wire transfer.

BORROWING

Access to debt, such as a credit line that you can draw on, can be a lifeline during difficult times. But it can also impact how much you can diversify where your cash is held.

• Maintain a line of credit: If your company is eligible, consider opening a line of credit to draw on in an emergency. Lenders are more willing to lend when the borrower “doesn’t need the money,” so it is best to secure a line of credit well before you need it. While large companies often have lines of credit with multiple banks, if you are a startup, the bank will likely require that they are your sole lender.

• Impact of debt on cash diversification: Historically, when banks offered a startup line of credit, the lending bank would require that they are the company’s sole banking partner. Following the banking distress in early 2023, banks are now more open to allowing startups to hold a portion of their cash at a secondary financial institution. This is a term you should negotiate when opening a credit line. If you already have a credit line, before moving capital be sure to check with your bank to ensure you do not breach a covenant.

ADDITIONAL DETAILS: BANKING SOLUTIONS

>> IntraFi Cash Service Solution (ICS)

• Leverages a network of ~3,000 banks to allow companies access to multi-million-dollar FDIC protection through a single banking relationship.
• How it works:

• Submit funds for placement through an ICS network bank.
• That deposit is divided into amounts under the standard FDIC insurance maximum of $250,000 and placed in deposit accounts at other network banks.
• Choose whether to have funds placed in demand deposit accounts (using the demand option), money market deposit accounts (using the savings option), or CDs.

• Both principal and interest are eligible for FDIC insurance because funds placed in amounts below $250,000.

• Learn more here: https://www.intrafinetworkdeposits.com/

>> Sweep Account

• A type of bank/brokerage account that automatically transfers funds to/from a linked investment account when the balance is above/below a preset minimum.
• Typically used to “sweep” excess cash into a money market account or money market fund (or other low-risk vehicle), where it will earn more interest than an ordinary bank account.
• Provides a mechanism to keep liquidity off the bank’s balance sheet.

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