Running a company is a full-fledged job. Amid the daily operations, your financials are one of the most important elements that need to be organized and impeccable. If you're planning to raise capital for your business, now is the time to pull up your socks and solidify the financial statements. Accurate financials help investors aptly value your business and instill their trust in you as an owner.
At Cognate, a lot of our clients share how much they are questioned on their financials during the investor pitches. Clean financials equate to a strong foundation. Here are some of the common accounting pitfalls that can mess up your company's funding round. We try to keep things simple here and stay away from jargon.
Projections sans actual data
Financial modeling is very important, no doubt. However, the investors want to see the past trends from where the projections are coming from. Showing numbers purely based on industry and business assumptions will not land you anywhere. You need at least 2-3 years of organized data as a foundation for projecting future numbers.
Your real numbers will be looked at first because projections are rarely on target. One of the most important elements is recurring revenue. If your business is not revenue-generating, then getting funding is going to be very hard. Another thing, even though you have your projections, VCs and investors will also come up with their projections. Your actuals will be an important tool for you to not just win their trust, but also hold grown for your valuation.
Incorrect Financials
Can we even elaborate on this further? Oftentimes there are incorrect line items or wrong accounting methods used. Depending upon your business model you should be using an accrual or a cash system of accounting. An incorrect system will lead to incorrect financials and projections that are way off the mark. For example, if you're a high-growth tech company or you have a SaaS-based subscription model, you must use an accrual system of accounting- because often a lot of these have prepayments and recurring revenues.
No distinction between business and personal finance
Don't ever mix business and personal expenses. Keep these two apart. Failure to do so lands so many startups and small businesses in legal and tax troubles. Investors don't want such complications to start with. Mingling the two will land you in trouble and is also the biggest reason for financial audits.
No accounting software
If you're starting out then it's fine to use excel sheets or google sheets. However, for investors to take you seriously, you need robust accounting software. A lot of essential things such as reconciliation are automatically done by accounting software. The software automatically tracks your financials, points out errors and ensures that all the items are verified. Save yourself and your investors the labor of manual reconciliation and verification.
No Monthly Financials
Even though your business may be young and there isn't much monthly variation, you should maintain your financials in a monthly manner. You may not see much difference in the beginning. However, things will change once you start scaling our business. A lot of businesses prepare quarterly financials, however, at Greyleaf, we suggest you start monthly financial prep from the beginning to save yourself the hassle later. Keep in mind, that a lot of lenders provide revenue-based lending, so having monthly data will always be in your favor.
Conclusion
Before any funding round, make sure that your statement conveys these three things- revenue, expenses, and growth potential. Ensure that the most relevant KPIs are listed, drivers, assumptions are stated and financial statements are in order. Once your statements are clear, only then you can prepare yourself for potential objections from the investment board.
At Cognate we help startups and small business organize their accounting and bookkeeping. We want to see you succeed and are dedicated to ensuring that your operations are streamlined. If anything strikes a chord, get in touch today, and let's work together.
Until then
Happy Business
