Editor’s note: “The Angel Connection” is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share with readers advice for entrepreneurs seeking investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast. The Angel Connection is published weekly.
RESEARCH TRIANGLE PARK – Too many entrepreneurs freeze when asked how much money they are raising and what they are going to do with it. This can’t happen because you will lose all credibility if you don’t have a well thought out answer. It is essential that you know the financial dynamics of your business and their contributions to cash flow.
Your explanation of your cash needs has to be in sync with your overall operating plan, so that investors know that you know what it is going to take to meet your business targets. Yes, cash is king.
Do Your Homework
Do your financial homework and be able to explain in some depth how much money you need to take you to a positive cash flow position. This requires a complete financial forecast of your business that shows all the key details of revenue generation, cost of goods sold and operating expense that eventually result in a profitable business that produces cash. You can’t simply explain your income and expense dynamics. That’s not cash flow. Be conversant in the issues of revenue claiming and accounts receivable.
Have a policy for accounts payable. Know your capital needs and how they are going to be financed. Know the impacts of equity infusions and the various funding alternatives that you are considering. Yes, it is only a forecast, but investors will know that you at least understand the financial dynamics that are going to drive your business results and that you are focused on the management of them.
Uses of Cash
Be able to explain what you will be using the money for and the milestones that will be achieved. Your uses of cash could be for marketing programs, sales operations, customer support, channel development and many other good uses. Investors want to see that you know what the money needs to be used for in order for you to reach the most important milestones of your business, which will probably be in the area of achieving sales results.
Show that you know how much money is going to be needed to achieve these milestones.
Ask for Enough
Although your cash flow statement is your guide to determining how much cash you are going to need to run your business without running out of money, it is wise to make sure you have enough reserve in the event your plan changes. Ask for enough money to give your business a good nine to twelve months of cash reserve in the event you don’t make your revenue goals.
You will need the extra runway to give yourself enough time to meet your milestones and perhaps raise more money. Raising money when you are nearly out of money is a terrible position to be in.
Know your cash dynamics and the details of your entire financial model. Investors will be impressed that you have thought it out, although everyone knows the actual operations of your company will probably be quite different once you get into it.
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.