Investors at all levels encounter companies that have a great business concept, brand, strategy, team and even sales traction. The frequently missing card in the hand, the one that might or might not be a deal breaker, is the boring one. Financial literacy. Even basic financial literacy. The nature of high growth companies is often a strong tech background coupled with creative ability, neither of which are necessarily totally compatible to having a strong head for finances and a feet on the ground approach to commercial endeavour and enterprise. Entrepreneurs are often bad at, or just bored by, accounting. And yet to successfully raise funds, and crucially, to successfully manage finances once raised, a moderate comprehension of cash flow, balance sheets, profit and loss, and accountancy practices is something every CEO/COO should discipline themselves in.
Expanding on this, there’s Pre Funding advantages to understanding accounts, and Post Funded requirements to understanding them.
Pre Funding: (Pre Series A) What the CEO/Founders should know: Explained by Simon Wax of Buzzacott
There are many great business ideas that never become a reality because of lack of funding and lack of know-how. Investors are not simply buying into an idea. They are also putting their faith in a management team’s ability to deliver a product to market and to run a successful business. This includes, being able to deliver: a sensible and coherent business plan, accurate management information, financial forecasts and statutory compliance.
In the early stages of a business, the entrepreneur will naturally be focusing the majority of their time on developing their product. It is hard however to juggle this with the equally pressing need to maintain sound financial management of their business.
Moreover, in the fast-moving tech sector, another dilemma for the pre-funded entrepreneur is marrying the need to get their idea to fruition as quickly as possible with the lack of funds to buy in expertise in order to help.
Entrepreneurs need to understand what capabilities and skills they have themselves and what they need to buy-in help for. They need to see accounting, and other advisors, as valuable parts of their team. It is therefore important to work with advisors who understand their sector and who buy-into their idea. This is also important because the network and contacts of the advisors can often be as valuable in obtaining the right investor as the accounting services that they provide.
In the early stages of growth, a good accountant should match the level of advice with the limited resources available to the business. They should also be looking to build a long term relationship with their client. They should be prepared to invest time and effort at this early stage in the knowledge that if the business succeeds and grows, there will be more advice and services that will be needed in the future.
Entrepreneurs also need to become good at explaining their idea both verbally and in written form. Serious investors will be presented with many business ideas. It is therefore important for an entrepreneur’s business plan to be both succinct and coherent in order to maximise the chances of them finding an investor who can provide that all-important seed finance. Often less is more. A business plan needs to be only a few pages long and should be able to explain:
- The business idea
- The management team
- The strategy
- What is needed to achieve success
- The challenges and how they will be addressed
- The likely exit route
All of the detailed information and financial models need to be available but can be provided later. It is also important to structure the business in a manner that will attract investors and also incentivise the management team who are going to help to grow it. Tools such as staff incentives schemes (e.g. EMI options or growth shares) are a good way to incentivise staff to help achieve growth in the business when cash is tight.
Seeking advice on whether the business is eligible for the government’s Seed Enterprise Incentive Scheme (SEIS) and Enterprise Incentive Scheme (EIS) is a good way to ensure that the company is attractive to private investors. SEIS and EIS reward private investors with tax incentives to invest in eligible business.
Post Funding: (Post Series A) What CEO’s/CFO’s should know: Explained by Simon Wax of Buzzacott
Entrepreneurs that obtain initial finance should congratulate themselves – it is not easy. However it is dangerous to spend too much time doing this, now is when the real work starts. Series A funding can run out extremely quickly and it is important that companies spend the initial money wisely. Again it is important to strike a balance between keeping the business on the straight and narrow with good financial management, and investing in product development and testing to prove that the business model works. This will enable the business to obtain the next round of funding at, hopefully, a higher valuation.
A business should obtain a financial management system that fits the size and complexity of their company. There are many available systems but the key factors in choosing a system are:
1. Accessibility: it should be accessible to management and advisors – so ideally a cloud-based product;
2. Integration: so that the financial systems talks to the sales or operating system;
3. Scalability: so that the company does not have to change systems as soon as it grows.
A good accountant should be able to support an entrepreneur by:
1. Advising on the most appropriate type of accounting software;
2. Offering training so that the entrepreneur can perform some of the financial function themselves if they choose to, to minimise unnecessary costs;
3. Being flexible and adapting the scope of their services and support as the business grows.
In terms of supporting cash flow in this early phase, the research and development (R&D) tax credit may be available to a company. This allows the company to obtain tax credits, and in some circumstances, cash back from HMRC in relation to the spend that they incur on R&D activity (e.g. developer costs or salaries) to develop their new idea. A knowledgeable accountant will be able to advise on whether the activity of the company is eligible to claim the R&D tax credit and to use their sector knowledge and their tax skills to write a claim in order to maximise the chances of success.
An entrepreneur would be wise to stay in regular contact with their investors throughout this post Series A funding phase. Demonstrating that the business is being run well and that the goals and targets are being met will maximise the chances of obtaining further funding from the initial investors, who should be emotionally and financially invested in the success by now. Now that the business has hopefully begun to demonstrate that it is financially viable, there are more types of funding options available to an entrepreneur. This often takes the form of bank debt – an entrepreneur should build a relationship with their bank manager so that they also understand the growth potential. There are also many other types of alternative funding. A good accountant or advisor should be able to explain these to an entrepreneur and be able to advise on which is most appropriate. They should also have access through their network to sources of institutional finance (e.g. private equity and venture capital) as well as other types of alternative finance (e.g. crowdfunding).
An entrepreneur would be wise to stay in regular contact with their investors throughout this post Series A funding phase. Demonstrating that the business is being run well and that the goals and targets are being met will maximise the chances of obtaining further funding from the initial investors, who should be emotionally and financially invested in the success by now.
By Simon Wax, Buzzacott