Funding, funding, funding – the main talking point of entrepreneurs worldwide when asked about their biggest challenges. Many business owners believe that if they are able to get funding for their business, success will follow. Although funding is a critical part of any business, more often than not, it is not the core challenge. It is more important to ensure that businesses receive the ‘right type’ of funding that is supported by a ‘good’ business model.
Funders such as banks, private equity and venture capitalists typically evaluate whether three things are present in a business when deciding to advance funding:
• Good idea – does the business solve a problem that people are willing to pay for?
• Good people – does the business have a strong team that can be trusted?
• Good returns – does the business generate a good return on investment?
Most entrepreneurs often struggle with communicating the returns their business will generate, backed by good data. Maintaining and improving the data in a business can provide the confidence a funder needs to move to action. This begs the question – what is good data?
We propose starting with three core sets of data to enable better decision making and provide confidence to potential funders:
1. Good customer data
A business that doesn’t have a detailed understanding of customer needs is shooting in the dark. By understanding the needs that a business meets for its customers, this assists in developing a value proposition and a pricing model. Simple customer analysis can help business owners build trust with their customers.
2. Good profitability data
Businesses must generate returns to cover costs and provide income for business owners. This includes understanding the break-even point (income received equals costs paid), profit margin and relative profitability of different product lines and services. Simple profitability analysis can help business owners to focus the business.
3. Good cash flow forecasting
Regular updates to cash flow forecasting, based on changing business conditions, are critical for businesses. This includes understanding if and when a business is likely to run out of cash, or when you will have sufficient cash flow to fund growth. Simple cash-flow analysis can help business owners decide the type of funding that makes sense.
Cloud-based solutions enable business owners to more easily maintain and improve their data. At Outsourced Finance, we provide interactive dashboards that display important data in one place that can be easily shared. This enables business owners to:
1. Tailor the dashboard with KPIs for easier decision making
Quickly and easily create KPI (Key Performance Indicator) dashboards supported by real-time cloud accounting
2. Regularly review their cash flow forecast to understand risks
Review your cash flow forecast on a regular basis to evaluate funding needs
3. Share their data in an easy and controlled manner
Easily share important data with funders such as your bank
It is important to understand what a ‘good’ return on investment will be for a potential funder. The definition of a ‘good’ return varies across funders based on the type of funding advanced and their hurdle rate. For a bank advancing credit, a return above the prime interest rate might be considered a ‘good’ return. However, for a venture capitalist investing equity in a growing business, will likely consider +25% return on investment as a ‘good’ return. It is important for business owners to understand what return a business can generate before deciding which form of funding is best for the business.
Are you struggling to get the ‘right type’ of funding for your business? Contact Outsourced Finance and let us guide you!