I’ve enjoyed a 30+ year business career that includes stints as a CPA, tax director of a Fortune 500 company, CFO for a large private company, and CFO/CEO for numerous start-ups. I’ve presented investment opportunities to VCs from Boston to LA. I’ve been told no by almost all of them (too small, too large, too early, too late). Along the way, I have enjoyed a few successful exits and a few more that were either terrible ideas or terribly executed—or both!
As a former entrepreneur, the current founder and CEO of C-Suite Now, and a financial advisor to many early-stage companies, I’ve sat on both sides of the table: as a start-up entrepreneur seeking funding and a VC evaluating investment opportunities. Here are a few tips to help you avoid some of the financial mistakes entrepreneurs make when positioning their companies for future rounds of funding.
I often see very impressive business plans and executive summaries. They usually succeed at articulating a compelling story that captures the uniqueness and size of the opportunity. They often fall short of following that narrative with a realistic and credible financial plan.
While no investor believes you possess the proverbial crystal ball, it is important to think through the critical early stages of your business and lay out a financial forecast that shows your understanding of the phases of growth and the financial resources needed to execute your plan. A five-year monthly financial plan allows you the opportunity to demonstrate your understanding of this process and a realistic timeframe for launching and nurturing the business after launch.
I’ve seen numerous financial plans that include an income statement only. The most critical part of the plan is the cash flow, and in most cases, that can’t be determined from an income statement alone. Forecasting the balance sheet will reveal a thorough understanding of critical investments needed in inventory and capital assets like equipment, product development, intellectual property, platform development, etc. Of course, accounts receivable and accounts payable may play a role in the funding needs of your company, so properly forecasting those is crucial.
If the proper work is done forecasting the income statement and balance sheet, an accurate statement of cash flow is simply an exercise in mathematics. It will show your cash burn and needs in an easy-to-understand and familiar format for potential investors.
An easy-to-digest format allows potential investors to focus on the narrative rather than searching for hard-to-find answers in your financial presentation. Most of the time, that results in lost credibility, which will end most opportunities.
Building the financial plan requires a lot of work. Once completed, keep it updated with current monthly results and changes to forecast assumptions so that it can be confidently provided to potential investors and board members on short notice. This will also keep you informed and conversant about your financials, enabling a deeper understanding of your business.
It is easy to let the tail wag the dog and prepare financial projections built to impress potential investors. Most of the time, this results in lost credibility and, therefore, lost investors. If not, it leads to elevated expectations that can lead to investor disappointment over missed forecasts. That usually leads to a domino effect of bad decisions that negatively impact the long-term opportunity rather than healthy decisions based on accurate information and strategic foresight.
I learned the hard way that most business plans take twice as long and cost twice as much as I anticipated. Capturing market share may also take longer than anticipated. Building in the REAL costs of executing your plan with proper expectations of product or platform development, customer acquisition, human capital development, logistics, etc. will best serve you and your ultimate stakeholders in the long term.
At C-Suite Now, we look forward to learning about your dreams and sharing our knowledge and experiences to help you on your journey.