You’ve been bootstrapping the company with your own money, plus possibly with contributions from friends and family. Now, with the business maturing and succeeding, you are ready to seek out investors to help you grow. So, are you ready?
I should clarify. Readiness is more than just knowing you want to look for investors. I’m talking about ready-ready. Ready to sell yourself to the potential investor because you have all the key information you need. You have a very clear idea of how to grow and a very precise idea of how much money you need to do it.
Getting to that stage is a serious and necessary undertaking. Let’s look at how you get started.
Investors need KPIs
Think of it as your most consequential report card. The details matter. A report on the company’s financial health and activity should include:
Net profit: The money that a business has left over after paying all expenses, which answers an investor’s biggest question, “Are you making money?”
Sales and sales growth: No matter how amazing your product or service is, are customers buying it? Investors will want to see steady upward trends in sales.
Customer acquisition costs: How much does your business have to spend to acquire one new customer? This is calculated by dividing what you spend on marketing by your number of new customers.
Churn rate: Once you get customers, can you keep them? A low churn rate can compensate for a high acquisition cost, depending on the business. Low churn can also signal that you are less of a risk because your numbers show steady repeat business.
Debt: How much you have matters a great deal. One of the most common debt measures is the quick debt ratio: Current assets (excluding inventory) divided by current liabilities. Can you meet your obligations exactly, or do you have more flexibility?
Keep in mind, debt can be alarming to investors for two main reasons:
- If you go out of business, debt holders get their money back before investors do.
- Debt payments eat up your cash.
Accounts receivables turnover: How long it takes you to collect money from customers. Investors want to know two main things from this number:
- Are you willing to do what’s necessary to make sure you get paid?
- How stable are your customers?
Break-even point: A specific sales target that will cover your expenses and get you to profitability. Some short-term losses are acceptable, but investors want to see what it takes to get out from under the losses.
Personal financial investment: This isn’t to minimize your sweat equity. It is an indicator that you are a person who believes in your business.
So, are you ready-ready?
Your potential investors need a formal record of your financial activity. It must provide an accurate picture of the current situation, and a forecast of your future plans.
It’s a complex creation that starts with your day-to-day bookkeeping. You are only ready-ready when you are 100% sure you have a clear picture of your company’s financial position.
The bottom line: Reach out to an accounting professional who specializes in helping small businesses prepare records for your investor pitch. Nothing will sink your chances faster than inaccurate books that generate faulty KPIs. Additionally, they can advise you on finding the right investors, including what business and community connections are important to have as you look for a match. I’m available for a chat any time. You can schedule a consultation on my calendar right here: Contact Us – Brigade Bookkeeping.