How to adopt an effective cash management strategy for your startup

Written By

Dan Kang, VP of finance

Illustration for blog post about adopting a healthy cash management strategy for startups | Mercury
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Cash flows in and out of your business every day. Handling these inflows and outflows, along with your cash balance at any point in time, is called cash management. But to do it well goes beyond just the daily administration of capital to meet short-term obligations. Strong cash management requires a careful financial strategy that scales alongside your company and strikes a balance between earning, storing, spending, and investing for continued growth. A good cash management strategy is also an important part of ensuring that your startup’s money is well-protected and adequately insured.

Why is cash management important for startups?

You’ve heard it before: Cash is the lifeblood of your business. That makes proactive cash management a critical component of business health, one that ensures your startup’s sustainability by preserving, protecting, and growing capital.

A good cash management strategy matters in any environment, but it can be especially crucial during periods of macroeconomic uncertainty that may precipitate inflation and interest rate fluctuations. When interest rates are low, an effective cash management strategy can mean monitoring cash flow trends and optimizing the use of working capital so that you require less cash to actually operate your business. When interest rates are high, it can mean making sure your cash is working harder for you and earning meaningful yield.

And in any climate, a sound cash management strategy helps make sure that your money is held in the safest place — or places — possible, and allocated in a way that reduces your exposure to unforeseen risk, such as in the case of a bank failure. Diversifying your cash across different accounts — much as you would diversify your assets when investing — can help safeguard your funds by eliminating the risk of encountering a single point of failure.

As you mull over what cash management approach makes the most sense for your startup in any given climate, your best bet is to think carefully about:

  1. How well-insured, diversified, and protected your funds are.
  2. When you might need access to cash in order to meet your obligations.
  3. How you want to invest your money so that you can earn the safest yield.

Key considerations for startup cash management

Raising money for your startup is no easy feat — and poor cash management, or a total lack of cash management strategy, can leave your hard-earned (or hard-raised) cash in a risky position. Rather than operate without a plan in place, you want to manage each dollar responsibly and make it go further. Mastering this requires striking a dynamic balance between three main factors: liquidity, risk, and yield.


Where do you store your money and how quickly can you access it? When you think about investing in a security, for example, you are technically locking up your money. Without proper planning, this can put you at risk of not having enough cash to meet your short-term obligations. To minimize liquidity risk, it’s imperative that you forecast your company's financials and calculate how much capital you need over different periods of time, ensuring that you have access to a robust runway.


While the first role of cash is to fund your business operations and growth, excess cash can be used to earn financial returns. Just as you would when running any other part of your business, it’s important to weigh the risk against the reward before making any decisions. As a founder, this might mean evaluating your own risk appetite as well as that of your investors and board.

At the bare minimum, it’s important to ensure that the cash held in your bank account(s) is adequately insured. While the standard per bank FDIC insurance limit is $250K, companies are regularly holding sums well above this coverage maximum in their operational accounts. To that end, it’s important to consider what the right banking arrangement looks like for your company — whether that means holding your cash at multiple banks in order to expand your coverage, or working with a banking

Mercury is a fintech company, not an FDIC-insured bank. Banking services provided by Choice Financial Group and Evolve Bank & Trust ®️; Members FDIC. Deposit insurance covers the failure of an insured bank.
1 provider that allows expanded coverage through a single banking relationship, as is the case with Mercury, where our partner banks and sweep networks
Mercury's sweep networks are offered through its partner banks, Choice Financial Group and Evolve Bank & Trust®; Members FDIC.
2 offer customers up to $5M in FDIC insurance coverage.

Besides the cash held in your FDIC-insured account(s), there is a wide range of funds and securities you can invest your excess uninsured cash in, such as government securities (including U.S. treasuries) and corporate bonds, and they each vary in their maturity terms and credit ratings. For instance, while corporate bonds usually promise higher returns than government securities, they also carry additional incremental risk. If the corporations you’re investing in can’t pay back their debt, your money — and by proxy, your board’s investments — could start to evaporate.

You also don’t want to place all your eggs in one basket, such as by overinvesting in a single industry or sector, as this can further heighten risk. Mutual funds allow you to diversify your portfolio, making them a great alternative to investing in several individual securities. This in turn unlocks greater potential for growth.


The flip side of risk is yield. Yield is a function of not only the security issuer and their creditworthiness, but also the maturity of the security or portfolio. Though not always true, yields are generally higher for longer-term securities since investors need to be compensated more to have their cash tied up for longer. Just remember: higher yield usually means higher risk, so the key to sustaining safe, consistent returns is finding the sweet spot between high yield and low risk.

Cash management strategies for startups

Depending on your company's stage, the balance between liquidity, risk, and yield may look different. For example, if you're an early-stage company, you might start with a simple strategy of using sub-accounts to store cash and manage expenses. On the other hand, if your company has reached a high-growth stage, you might opt for a more mature cash management solution, such as an automated treasury account.

As you determine which approach makes the most sense for protecting and growing your startup’s cash, it helps to have the following three categories of cash inform your strategy:

  • Liquid: Six months of operating expenses held in a bank account that places deposits in a network of banks that together offer the appropriate cumulative FDIC insurance to cover all or most of those funds.
  • Short-term: Funds above the FDIC insurance limit that are held in short-term U.S. government-backed securities via a FINRA-regulated broker-dealer. Funds managed by broker-dealers are generally considered lower-risk because broker-dealers are prohibited from using customer funds or securities for their own purposes or even from commingling those funds/securities with their own.
  • Strategic: Funds meant to serve well-capitalized startups for the long-term invested in bespoke ways that diversify risk even further and give startups more control over how, where, and for how long their idle cash is invested.

With those cash categories in mind, here are a few effective strategies you can apply to your cash management playbook:

1. Calculate how many months of operating expenses you need to keep readily accessible.

Part of maintaining healthy liquidity — and properly allocating funds into the three categories mentioned above — is making sure you have enough cash available to meet your ongoing obligations, such as your operating costs. This begins with forecasting your cash flows and needs over the next 12–15 months by understanding your revenue outlook and expected expenses.

Having a strong budgeting and spend control process can increase your likelihood of sticking to your forecasts and help you catch things before they veer you off course. Keep in mind that because the goal of runway forecasting is to inform real-world cash management decisions, it pays to be realistic as opposed to aspirational. This helps ensure that you don’t find yourself in a tight position if things don’t go according to plan.

Did you know?

As you calculate your liquid cash needs over the coming months, Mercury makes it easy to ensure that the funds held in your account are insured well above the standard per bank FDIC insurance limit thanks to our partner bank model, which offers customers up to $5M in FDIC coverage through a sweep network.

Deposits in checking and savings accounts are held by our partner banks, Choice Financial Group and Evolve Bank & Trust, Members FDIC. Certain conditions must be satisfied for pass-through insurance to apply.

Learn more about how Mercury works

Truthfully, most companies need more margin for error in case something unexpected arises. In those cases, roughly six months of burn is recommended. The important thing is to make sure you’re always taking your company’s working capital needs into consideration. For example, if the turnaround for getting paid by your clients can interfere with your deadlines for paying upfront costs like inventory, plan to have more operating funds available so that you don’t have to wait for your customers to pay up.

2. Open multiple checking accounts or sub-accounts for different designated purposes.

As a company grows, so does the number of functions it executes. With higher volumes and an expanding team, incoming and outgoing payments begin branching off into operations/payroll, accounts receivable, and accounts payable. Increasingly, it may make more sense to silo these activities into different buckets rather than try to command them from a single checking account. Although it seems contradictory, this separation can give you a more complete picture of your overall spending and ensure that you don’t overspend in any one area. It also gives you the visibility necessary to make accurate cash flow projections, which is important for planning around liquidity needs.

To separate your cash flows, you can either open sub-accounts under your existing checking account or — if your bank or banking partner offers the option, like in the case of Mercury accounts — you can open multiple business checking accounts. It could be as simple as separating your incoming and outgoing payments, or as sophisticated as creating different accounts for rent, office expenses, and employee spending. You can even arrange joint accounts to co-manage with your business partners.

Armed with the right approach to organization, you’ll be able to match your various sources of funding to your capital flows, allowing you to monitor your cash flow in real time, maintain a healthier bottom line, and even get a head start on setting aside money for your taxes.

3. Put your idle cash to work with automated treasury management.

For most companies, your cash position will change daily, meaning it can be tough to constantly stay on top of when you should or shouldn’t invest your cash. On the one hand, not taking action could mean leaving excess idle cash in accounts that don’t earn yield for you. On the other, defaulting to a strategy that calls on you to take frequent manual actions could mean making emotional decisions rather than carefully considered ones.

If you truly want to make your money work for you, find something you can just set and forget so that you have more time to build and run your company. For this, a treasury management account may be your top horse. Unlike a savings account, where you’re setting aside cash reserves that you don’t expect to make returns on, the purpose of a treasury account is to help you earn yield on your idle cash by investing it in money market funds. These are mutual funds that include securities that offer high liquidity, short-term maturity, and low risk, such as U.S. Treasury bills.

In particular, you’ll want to look for a treasury account with a trustworthy provider that offers competitive yield, high liquidity, and low fees while still keeping your cash safe in conservative funds. Money market funds are a notably safe option because they offer minimal risk and mature within a short period of time. In the case of Mercury Treasury,

Mercury Treasury is offered by Mercury Advisory LLC, an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. SEC registration does not mean the SEC has approved of the services of the investment adviser. Mercury Treasury is not insured by the FDIC; not deposits or obligations of Choice Financial Group or its affiliates; not guaranteed by the bank or its affiliates; and may be subject to investment risk, including possible loss of principal.
3 for example, we offer access to a Vanguard money market fund that is 99.5% invested in U.S. government-backed securities
This communication does not constitute an offer to sell or the solicitation of any offer to purchase an interest in any of the Mercury Advisory LLC, investments or accounts described herein. All investments are subject to the risk of loss, including the loss of principal. No representation is made that any investment will or is likely to achieve its objectives or that any investor will or is likely to achieve results comparable to those shown. Past performance is not indicative, and is no guarantee, of future results. Investments made through Mercury Advisory are not covered by FDIC but may be covered by SIPC. Some of the data contained in this email was obtained from sources believed to be accurate but has not been independently verified. Please see full disclosures at
4 and held 100% in the customer's name.

In addition to selecting a treasury solution that balances yield, liquidity, and risk, you should also ideally look for a solution that allows you to schedule auto-transfers and create rules to automate more of the money movements between different accounts, with the ability to top off funds when needed.

Keep in mind: An important aspect of treasury management goes back to having a strong handle on your runway projections. By understanding how much cash you’ll require over time, you can ladder maturities according to when you need to access that cash.

Say you currently have $5M in cash today. Based on your burn rate, you need $1M to cover burn for the next three months, $2M for the three months afterward, and another $1M for the three months after that. You’d want to invest $2M in short-term securities that’ll mature in three months’ time and $1M in securities that’ll mature in six months’ time. That way, you can earn yield on those amounts you don’t need immediate access to, but they’ll be available when you expect to need them.

Again, you’ll typically earn a higher yield for longer maturities, but you don’t want to over-allocate to long-term maturities if you don’t have strong certainty in your forecasts. Having to sell before securities mature subjects you to market price fluctuations — even traditionally stable securities, like U.S. treasuries, can see meaningful volatility in certain market environments. The best way to shield yourself from volatility is to minimize frequent buying and selling.

4. Avoid chasing higher yields through high-risk investments.

It may be tempting to seek out non-traditional cash vehicles that promise high yields, but as the saying goes, there’s no such thing as a free lunch. If you’re dead set on chasing higher returns at all costs, it's important to acknowledge the risk that you — and by extension, your company and investors — would be taking on as a result.

A good example of this is cryptocurrency. While traditional bank and brokerage accounts are usually FDIC- or SIPC-insured so that some portion of your money is protected in a broker default, high-yield crypto accounts are often completely uninsured. This means that if any of the crypto company’s institutional investors fail or go bankrupt, you could suffer serious losses as a result. Additionally, cryptocurrencies make poor savings accounts because they suffer from high price volatility, fluctuating in accordance with market conditions. In that regard, they can expose you to unnecessary potential losses that will be difficult to explain to your own investors, lenders, and employees.

Accessing your cash can also be its own headache — rather than allowing you the freedom to withdraw your money and close your account at your choosing, some “crypto savings accounts” impose withdrawal limits and restrictions that could jeopardize your liquidity in an emergency. They may also charge fees for withdrawals, which can add up if you have a high transfer volume. Ultimately, your risk is your own, so it’s up to you to do your research and understand what’s at stake.

From leveraging a banking approach that maximizes FDIC insurance on your funds, to investing idle cash in a secure money market fund through an automated treasury account like Mercury Treasury, a sound cash management strategy ensures that your startup’s money is well-protected, adequately insured, and thoughtfully allocated.

To learn more about how Mercury helps startups of all sizes and stages manage bank risk and protect more of their cash, discover Mercury Vault.

Written by

Dan Kang is the VP of finance at Mercury.

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