What Would An Investor Think of Your Financials?
As we’ve discussed previously, there is no better time to find investors for your company. For the past seven years of recovery from the Great Recession, there has been an abundance of financial capital. In fact, what was once considered a scarce resource is now abundant and inexpensive.
Bain’s Macro Trends Group estimates that global financial capital has more than tripled over the past three decades and now stands at roughly 10 times global GDP. And as basic supply and demand would dictate, as capital has grown more plentiful, its price plummeted. Today, in spite of recently raised interest rates, we are still at historic lows.
Because while increased interest rates have caused bank debt to be more expensive and may reduce the abundance of investor capital slightly, it only serves to put more pressure businesses to be higher-quality investments.
9 Key Points to Address to Secure Financial Investors for Your Business
So what does that mean, exactly, for businesses looking to secure investors?
To answer that question, it’s critical to think like an investor – but the fate of the investment hangs ever-so precariously on one question: ‘Are you making money?’ And you can’t answer that question accurately with inaccurate financials.
In order to successfully woo a prospective investor, your financials must compellingly address each of the following:
Profits are good, unsustainable profits are bad, and losses may be good if they lead to profitability as you scale, so you’ll need to provide a clear outline of your net profitability.
Do people buy what you’re selling? An established record of sales means investors won’t have to take on the risk of asking that question themselves.
Sales are great – but only if you’re making money. Investors will need to compare your margins against industry standards. If margins are low, your financials should demonstrate a plan to improve them. For early-stage businesses, your financials should demonstrate how economies of scale will reduce costs as you grow.
Cash is king so investors consider cash in the bank an indication of sustainable operations that can deal with unexpected problems and capitalize on new opportunities.
Investors need to know two things about your customers: Are they buying what you’re selling and if so, can you keep them once you get them?
Your product may be profitable as far as materials and labor are concerned, but the acquisition cost will help investors determine how much it costs to land one new customer.
Customer Churn Rates
Your churn rates tell investors if you can keep customers after you get them. Low churn rates can offset high acquisition costs and can indicate reduced risk.
Debt scares investors – and understandably so. But accurate financials can provide a quick debt ratio: current assets excluding inventory divided by current liabilities. The higher the quick ratio, the more financial flexibility you have.
Accounts Receivable Turnover
How long does it take you to collect money from customers? If you’re slow to collect and show a large percentage of write-offs, this could indicate greater risk.
When can investors expect to see a return on their investment? Your break-even point should indicate a specific target at which point expenses will be covered in order to get to profitability.
This is an often overlooked and undervalued inclusion in financials as it can be harder to quantify, but it’s critical: Do your financials tell a story? Are your financials current, accurate, relevant, and aligned with the model and story you’ve already shared with investors?
Investing in a business can prove risky so investors expect accurate accounting and financials to demonstrate increased odds of success and reduced risks.
See How CFO Alliance Can Help Your Business
If you’re concerned about the state of your financials or simply want to start your business on the right financial footing, our team of financial leaders can help. Our outsourced CFO and Accounting as a Service offerings provide all the support you need so you can secure the investors you want.
Contact us today to see how CFO Alliance can help you grow your business.