What to Know About Managing Cash at Startups

“A crisis is a moment to learn a lot …  If you make the right decisions now and you put yourself in a position to be aggressive as things get better, that's where winners are built.” —Michael Linford, CFO at Affirm*

Cash management has always been critical for startups to get right. But with several banks we depend on under pressure, the rules are being rewritten in real time. As we all adapt to a new normal, what should founders, CEOs, and other leaders know about managing their startup’s cash and other financial assets?

To hear the latest best practices, we turned to finance leaders at both public and private companies in the GGV community including:

• Michael Linford, CFO at Affirm*
• Celeste Ackert, CFO at Fairmarkit*

As shared in a recent virtual roundtable for GGV’s portfolio companies, check out these strategies for effective cash management:

Start by managing the risks within your control

To diversify institutional risk, this may include establishing best practices like:

• Reexamining your startup’s banking relationships: If you haven’t already, consider setting up accounts at both money center banks (such as Bank of America, Citi, J.P. Morgan, and Wells Fargo) and regional banks. “It’s important that we’re not reliant on any one partner for any reason,” Michael says. “Have at least one backup for any mission-critical operational component.”

• Understanding debt covenants: For companies with debt facilities, lines of credit, etc. with a certain bank, remember to check your debt agreement and consult with your legal counsel to make sure your company won’t be breaching a debt covenant. For example, there may be a covenant that requires your company to maintain certain accounts and/or X% /$X of deposits with [The Bank that’s the Debt Lender] or something similar. 
• Being prepared to staff up: As Celeste points out, treasury management may be a subfunction that needs to be covered by startups with lean finance teams. Hire accordingly as your startup scales.
• Uncovering downstream risks for payroll providers and other third-party vendors: Given that early-stage companies often support other startups, you may need a contingency plan for any vulnerable vendors you rely on for day-to-day operations. “If we're buying something, we assess whether or not it's a single point of failure,” Michael says. “And if so, we do extra work to make sure we're underwriting that vendor and have some sense of the risk if they fail, what we do and what they do … The only real solution is to have a fallback.”

Prioritize preserving cash over maximizing yield

When it comes to managing excess cash, my experience as a VC and active board member of startups has shown me that maximizing yield is not as important as cash preservation and flexibility. After all, “liquidity is a security blanket that lets you sleep soundly at night,” Michael says. 

Consider best practices like: 

• Staying short on duration: Depending on your startup’s runway, a good rule of thumb is to follow the guardrails of your investment policy. For example, if your policy has a two-year maximum duration, you may choose to operate in a way where “nothing is tied up for longer than a year,” Celeste says.  
• Anticipating overnight liquidity needs: “Look at what the cost would be to break up anything that you have that's more illiquid,” Michael says. “Do that math, do it regularly, and make sure that you've always got enough runway … Why would you add additional risk to that? Why would you make that timeline shorter?”

Increase cybersecurity training to help prevent fraud

Given the rise in phishing attacks, take the time to examine your internal workflows for everything from wire transfers to inquiries from merchants and suppliers.

Consider processes like having one person initiate a transfer and another approve it. As with Fairmarkit, a certain threshold should require approval from two people, and anything above a set limit should require a green light from both the CFO and CEO.

Seek support, and look after your team

Whether it’s relying on a private peer group or getting advice from other forums like GGV’s Slack community, “we’re in a pivotal moment right now,” Celeste says. She recommends using this time to develop your team, share best practices, and empower them to be part of the solution. 

For leaders who have navigated previous crises, today’s volatility may leave some teams  feeling like it’s Fall 2008 or even the early 2000s. But for many employees, it’s important to be aware that this may be their first major economic crisis.

Remember: “This is a moment of personal growth and learning and development even if it's stressful,” Michael says. “A lot of companies don't make it through these kinds of crises. And those who don't create opportunities for those who do, which means those who can manage the risk carefully end up being a lot stronger and faster as a result.” 

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Check out these other helpful resources for storing and managing your startup’s cash:

Getting started with cash management 

Founder Considerations for a Cash Management Policy 
To develop a sound cash management policy, consider these guidelines by GGV Capital with B Capital Group, General Catalyst, Greylock, Kleiner Perkins, Mayfield, and Redpoint. Read more

How to Optimize Working Capital with Treasury Fundamentals [J.P. Morgan]
From freeing up internal liquidity to scrutinizing external funding, explore how to better manage your startup’s working capital. Read more 

Treasury Management Throughout the Lifecycle of a Startup [Arc]
Learn how founders with limited resources can duplicate the results of a full-fledged treasury management program. Read more

How to Adopt an Effective Cash Management Strategy for Your Startup [Mercury]
Discover how to strike the right balance between earning, spending, and investing for continued growth. Read more

Four Cash Management Tips for Startups [The Wharton School]
Even though the world has changed since 2014 when this piece was first published, many of the tips are still relevant today. Read more

Taking cash management to the next level

A CFO’s Best Advice for Budgeting Amid Macro Uncertainty [Managing Partner Glenn Solomon at GGV Capital]
Just as a football team may have 50 plays that it plans to run going into a game, Domo CFO Bruce Felt shares how scenario planning can help you shift strategies without missing a beat. Read more

Turbulent Banking Sector Renews Interest in Cash Management and Investment Policies [Goodwin]
From being mindful of maturities to paying attention to third-party risks, here are some ways to manage your cash and investment risk effectively. Read more

Treasury Is the Most Underrated Team in Your Company [Toptal]
Once you understand the basics of treasury management, learn how to structure your startup’s treasury team with key functional roles for maximum productivity and efficiency. Read more

For founders and leaders at GGV’s portfolio companies, check out our Founder Portal for resources and templates including sample investment policies and more.

*Represents a company in GGV’s portfolio