So, you're trying to raise money for your startup. Every company that's ever gone looking for investors knows there's going to be a lot of paperwork, and many questions. And of course investors are going to dig deep into the company's financial history, and make some predictions on what the future holds.
If you're a startup CEO, you're used to running your business fast and lean because every dollar counts. And when you finally do get those dollars from investors, they can change everything. But you've got to do the legwork first.
If you want to attract top VCs, your books must be sparkling and squeaky clean. Funding isn't going to magically appear, and these folks want to know that the money they invest will be spent correctly.
Every day, there are countless startups flooding investor inboxes looking for that injection of cash so they can continue building world changing products. But without the proper paper trail, that money might never come.
You'll need accurate and organized financials to raise money for your startup, and these are our pro tips on how to get there.
Venture capitalists interested in funding your startup will want a look at your books (this is especially true at the Series A level). But if your company’s financial data is riddled with errors or missing important details, this is a big red flag and a dead giveaway that you're using the wrong accounting methods.
Two tips for this:
If you're a Saas-based startup with constant monthly contracts and prepayments, this needs to be precise because you're not using accrual accountings and may be selling your impact short due to deferred revenue. And if you can swing it, working with a quality CPA is a great way to mitigate the risk of having messy books.
Notes on your phone, an Excel sheet, and a written down notebook ledger is not how you manage your business' financials. Full stop. Sure, it works when you're just getting the wheels off the ground, but when you're trying to raise money, VCs, banks, and investors will want to see clean, itemized accounts for every dollar spent. Accounting systems like Quickbooks or Xero are a good way to check this box and help ensure the venture capital fund raise will go smoothly.
If you're expecting to get a big check, an investor will want to see as precise accounting as possible, so invest in accounting software immediately.
This one might seem obvious, but you’d be surprised at how many companies don’t do this correctly. A monthly snapshot shows investors you're working on constant growth, and can illustrate revenue trends. Without these numbers, it can be difficult to rate fundraising targets.
Compiling a monthly financial report helps anticipate economic trajectory like identifying upcoming costs (tax payments or legal fees.) It could mean expansion: budgeting for new hires and higher rent. This data is something investors will want to know, and these things should be considered in future planning regarding your books.
And if you're working with a traditional lender, these numbers show how you can manage the percentage they'll be looking for in loan repayment.
Again, this may seem like an obvious one, but this happens all the time. And it’s a big one for many lenders and VCs – they do not want to see these two accounts mixed. Have two separate accounts for the business and you, the person. Combining the two is how you get audited come tax time.
And if you don't do this, most investors or banks are not going to do business with someone who can't follow the most basic accounting principles.
Audits are no joke and can tie up time and money, which is something few VCs are willing to do. Getting your numbers in order early on shows you're serious about success.
An invoice and receipt walk into a bar…. Seriously, though, these two things are not the same. Mixing these documents up is a sure-fire way to screw up your books.
An invoice is a bill sent to customers for services provided line by line. Invoices are critical because they show what frequency work is done and money is coming in, and a receipt shows the customer has paid the bill. It can become an accounting nightmare and a red flag for investors if you mix these two up.
Suppose you've done the things listed above, fantastic. If you've gone so far as working with an accountant, that's even better. Professional accountants and bookkeepers keep a strict eye on what's happening with the money; they're typically aware of the best practices and possible ways to save money or utilize it better.
A good accountant is a part of your team and can help you handle growth transitions, such as hiring employees or taking on more office space. They'll look after the details (payroll, employee tax management, property tax, utility payments and so on), and can present facts and figures that back up why you're a good fit for funding.
You need to know where the money is coming from, and going, right? Investors especially will want to know this. Some companies produce weekly statements down to the penny. Cash flow statements provide a snapshot into cash movement and act as a monitor of income direction. This also enables investors to use the information about historic cash flows of a company for projections of future cash flows on which to base their investment decisions.
Investors consider the cash flow statement as a valuable measure of profitability and the long-term future outlook of an entity. It can help to evaluate whether the company has enough cash to pay its expenses. Pretty important right?
Overall, it’s a great time to raise capital. But in order to do so, it’s critical to keep organized, clean books so you’re fully prepared when you start to have conversations with investors. It really could mean the difference between getting that seven-figure check or not!
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