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Bridge the Investment Gap

How to make your company stand out

By Douglas R. Askam

dollarsignWhen it comes to wresting money from investors, you need to do more than tell a great story of your past, present and what you see as the future.

You’ve got to quantify that story with numbers, as well as words.

It may seem rudimentary that to obtain financing, you need sound financial statements. Yet I continue to see it’s a problem with a large percentage of small or start-up business owners.

Today’s business world thrives on information. Bankers and investors are no different. They especially have an insatiable hunger for information, given the financing decisions they make on a daily basis.

So how does a growing company with a great story differentiate themselves from what appears to be similar companies looking for some type of funding?

The answer is to provide reliable, accurate, and comparable numeric financial information that communicates the past, present, and future “story” of your company.

GAAP – Generally Accepted Accounting Principles

When you send your business and financing plan to a banker or investor, your company and its “story” is being thrown into a pool of funding candidates.

Bankers and investors are looking for financial information that is reliable, correct and comparable to presentation standards. In the United States, this is known as GAAP or Generally Accepted Accounting Principles.

GAAP are accounting rules for the preparation, presentation, and reporting of financial statements. Be proactive with the preparation of your historical financial statements and adhere to these accounting rules, which allow non-accounting individuals, such as the banker and investor, to be able to compare your company as an investment opportunity to another company.

Value Drivers

Many business owners believe their business is worth more than bankers and investors think it is. They also believe more money is available to them than the funding sources will provide.

To help bridge this gap, I recommend adopting three value drivers of a well-run and professionally managed company.

1) Management Team

Many businesses are controlled by a single owner who is heavily involved in all aspects of day-to-day activities. You have to ask: What disruptions will the business undergo when the owner is away?

Professionally managed companies will have an owner who is “working on the business,” not “working in the business.”

Working on the business includes setting company direction, providing leadership, developing and preserving the culture, driving new products and service offerings and developing new and existing customer relationships.

Funding sources may be more interested in a company that has management depth, which reduces the risk of having reliance on a single person. This occurs when the business owner performs the majority of the daily tasks or is “working in the business.”

2) Financial Strength

Financial strength from the aspect of a funding source is not necessarily just ratios and other data, but includes the financial management and accounting talent in a company.

Obviously, any funding source, be it a banker or investor, is looking at the traditional balance sheet and income statement. What may differentiate your company from the competition will be your accounting talent, which provides trust, experience and reliance upon the financial information provided.

Nothing causes more distrust of financial information than financial information that is incomplete, not in accordance to GAAP or inconsistent from month-to-month or between years.

Financial information also should include information that shows a funding source that company management is on top of its financial situation.

Many times, this additional information is requested as part of a due diligence effort of the banker or investor, and nothing shows more financial strength than to provide the immediate response, “I can e-mail you the electronic file tomorrow.”  The following is a list that will create a “wow” effect to a funding source:

•           Monthly and annual prior year comparative balance sheet and income statements

•           Monthly income statement variance analysis

•           Budget to actual comparative income statements

•           Sales and gross margin trend analysis

•           Sales forecasts, backlog reports, and pipeline detail

•           Breakeven analysis

•           Profit/loss by product line and business segment

•           Industry benchmarking analysis

3) Operational Systems

Technology can be a huge differentiator. No matter your industry, if you are not taking advantage of technology, I can promise you that your competitors are, and funding sources may be taking your operational systems into consideration during their due diligence and evaluation process.

The use, or lack, of technology provides insight, whether this was intentional or not, to your potential funding source as to your existing operational systems.

If an investor deems that bringing the business’ systems up to par will require additional technology investment, the investor will discount their price to bring unacceptable technology and operating systems up to a higher level.

Communicating the Future

The last piece of the puzzle in communicating your “story” to potential funding sources is the future plans or strategy of the company.

The future plan and growth story is best told by an integrated financial statement that projects the financial results of the assumed business plan and the effects on the balance sheet, income statement and cash flow statement.

Investors dislike uncertainty. Projections backed with solid numbers allow you to tell your story with conviction and in a language money people can understand.

Editor’s note: This article appears in the August 2010 print edition.

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3 Responses to “Bridge the Investment Gap”

  1. […] Read the full article on InventorsDigest.com » […]

  2. I think it’s important to point out that many investors will only consider backing a venture if an innovator has obtained a patent (or at least has filed a provisional patent application) for his or her invention. Not only does this let an investor know that the inventor is serious, but it also provides a measure of financial certainty. Whether or not an inventor chooses to obtain patent protection, it’s always a good idea to consult a qualified patent law professional as soon as possible, if only to obtain advice and devise an IP strategy.

  3. Isagenix says:

    Good down to earth advise. If only the banks followed it themselves!

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