You had an idea, you started a business and put that idea into action, you looked for funding, and you found a potential investor that likes that idea. The investor is ready to put money in and things are looking up. Your business is about to get the money it needs to ramp up activity. So what is the problem? Most startups strive so much for funding, they don’t necessarily think about the point at which someone says, “I love the idea and want to invest.” It’s those magical words you've been waiting for, but now what? Often those same words are just the beginning of the sentence which goes, “I love the idea and want to invest….so I will need to conduct my due diligence on your finances and records among other things.” Those other things include reviewing your burn rate, the runway you will need to get your product to market, etc. All these items revolve around finance, accounting, and budgeting. Remember, for a investor its all about the potential to make their investment back...times ten.
This is the point at which you start scrambling for the shoebox you stuffed with receipts, sift through drawers, print credit card statements, and find anything that resembles an invoice. Then you figure out what is personal and what is business related. Then you call a friend with “finance” experience and ask for help. This is a dire situation to be in. If you find yourself at this point, chances are that funding may be long-gone. What does it say about your professionalism and your business savvy if you have to keep an investor waiting a week, a month, or even two days to get them information that you should have readily available. We aren't talking about projections, we are talking about history.
The importance of keeping adequate books and records cannot be understated. Having a professional and not a friend who "went to business school" is imperative in your growth and funding strategy. When an investor asks for financial records, you should have it next day in their hands. These financial records will also be the basis for your budget going forward. Historical operating costs are a good starting point when estimating future burn rate, which will ultimately determine the runway your company has. Remember, why would an investor put money in, knowing the company will run out of money before the intended goal is met. Lining up your burn rate and development time line or your time to market, is critical for the success of your company.
If you are a founder of a startup, doing all the accounting and financial modeling can be slow and painstaking. More importantly, it takes you away from what you are best at...developing your startup. Contracting with a qualified accounting expert will expedite the accounting and finance process while freeing your time.
dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.