Could the Structure of Your Balance Sheet Be a Red Flag For Investors?
Most small business owners and entrepreneurs are smart enough to know their growing businesses are like the treasure chest that holds the crown jewels—vehicles for creating major wealth and value down the road—if handled right. One typical step toward creating that value is attracting investment.
The good news, according to venerable non-profit innovation and entrepreneurship incubator MassChallenge, is that angel and venture capital investors are spending more money than ever. The bad news—they’re spending it on fewer companies. Let’s talk about why and what it means for your balance sheet.
Awhile back, MassChallenge published a 2021 CBInsights study of 101 failed startups that showed while the biggest reason companies didn’t make it was the lack of a market niche, a whopping 29% simply ran out of cash. Another 17% cited the lack of a viable business model. And 7% more said they just couldn’t attract investor attention. That’s a lot of bad mojo around company financials.
This doesn’t have to be your story. Even if business modelling and corporate financials aren’t your strong suit, and, let’s face it, for most entrepreneurs and small business execs, they’re not. What can you do instead?
Make sure you have a solid, convincing, and complete business plan.
Investors want to know you’re being realistic about the market, that you can quantify your potential as well as your performance. They want to see financial projections showing them clear evidence that your vision is viable.
Show them your financing GPS
You’re pretty sure you’ve figured out a way to make sustainable money from your idea. Maybe you’ve already got a reasonable track record under your belt. To get others on board with the dream:
· Make sure you have a detailed list of assumptions you’re making about the business.
· You know how much capital you need and when you’ll need it.
· Your financial forecasts hold up to outside scrutiny.
Be ready to flex your growth muscle
Most investors are looking for businesses that can scale. Forbes summed it up when they said you have to show them up front why your business has the potential to become really big. Beyond market metrics and inventory, that means showing you have a handle on your financials and key metrics and that you can articulate them coherently. In addition to the things we talked about above, they mean things like:
· Monthly burn rate
· Gross margin
· Lifetime customer value
· Customer acquisition cost
· Key components of gross revenues and gross expenses
· EBITDA (earnings before taxes, depreciation and amortization
· Roadmap and time to profitability
· Other key performance indicators of the business (KPIs)
Light up the exit signs
Investors want a solid return on their investment, which means you also need to have a firm exit strategy in place. Even if they’re willing to be patient and make a long-term investment in your company, they still need to know that at the end of the day, they’re going to be getting a significant return. All the metrics we’ve talked about give an experience buyer or investor the data they need to check whether or not your exit strategy holds water.
Um, sure, but how do I get all this done?
For small businesses and start-ups, working with the right CPA is like having an on-call CFO whenever you need it. It’ll simplify your life in more ways than you can count. A good CPA should support you at every stage of your company’s life so you can spend your time on your productivity and business goals. When you’re starting out as an entrepreneur, they’ll make sure you have the right compliance and reporting systems in place to lay down a strong foundation and provide financial analysis to help you create the business plan that will max you value as you grow. They can even help you pick the best accounting software for scaling so you can identify your most lucrative revenue streams at a glance.
As you grow, your CPA will make sure you stay on budget and your daily operations can continue without financial bumps. When you’re ready to attract investor or buyer attention, your CPA can oversee the whole process, giving you insight on your income and expense patterns, inventory management, and financing. They’ll also provide consistent budget reviews and reporting to keep you on track and build financial forecasts to support your decision-making around business growth and goals. This is our meat and potatoes at Market and Margin. Contact us for a free consultation to learn how we can help you make sure your business is investor-ready for the long term.