Some business humorist once said: “You can recover from most any mistake in business except for running out of cash. If you run out of cash, they throw you out of the game.” Making sure the companies in which they invest don’t get thrown out of the game is the number one concern of all early-stage investors, which is why they usually begin their diligence by a thorough review of your financials. If your financials are in bad shape, you’re very unlikely to receive that investment.
Don’t get us wrong – investors do not expect entrepreneurs to be accountants, or even bookkeepers…but they do expect you to understand how cash moves through your business and how much cash you have. That means you must have a basic set of books that tracks and reports on the company’s transactions. And you need to have an understanding of those reports and be able to explain them to investors.
The Sage Growth Capital partners have collectively reviewed thousands of financial statements during our careers. Occasionally we see financials that are hard to understand, or simply make no sense. When that’s the case, we have to pass on the investment, regardless of the story, the sales, the growth rate and other really exciting metrics. Why? Because if we can’t understand the financials, this is a sign the entrepreneurs don’t actually know their business. And, this means we don’t have confidence that the entrepreneurs have control of their cash.
Example of What Not To Do
We recently passed on a company that on the surface we thought might be a good candidate for RBF funding. Sales were growing. Customers were returning to purchase more product. Margins were high. But…we couldn’t read the financials, even after several calls/requests to clarify.
Here’s their cash and equivalents accounts (names sanitized) from the balance sheet they provided us.
This was a company with about $1 million in sales, yet there were 26 accounts making up Cash and Equivalents (we shortened it to give you a taste for what was included). Some had positive and some had negative balances. There appeared to be receivables, credit cards, and loans included in Cash and Equivalents. How could the entrepreneurs do a basic reconciliation between the cash on the balance sheet and the cash in the bank with this mess? Probably they do not reconcile, and even more important, probably they do not use the financials to run their business. This means we could not rely on the financials for our analysis. No analysis = no investment.
Moral of the Story
Good bookkeeping is necessary for every business. Yes, it will help you get investors. More importantly you must have a handle on your cash position and you cannot do that without having good financial numbers. It’s ok if you don’t know how to keep the books yourself, but admit that fact and get a bookkeeper that can. They aren’t that expensive, especially when compared to the problems that will arise without good financials. Save yourself the headache down the road and get it right from day one.
Check out our Resources Page for links to blogs and other resources that can help you avoid other common pitfalls that will preclude you from receiving funding.
Sage Growth Capital makes revenue-based investments in companies who need growth capital. It is our mission to provide a more flexible funding option to growing companies who do not fit traditional equity or lending models. To learn more about Sage Growth Capital or to apply for funding visit: www.sagegrowthcapital.com.