Talk to any investor about the market about how they decide which companies to invest in, and you’ll find that they ask one question over and over: What’s the risk level? For startups trying to get their companies off the ground, mitigating risk is crucial.
All investments are inherently risky, but anyone who’s going to pump cash into your dream is looking for a safe bet. If you’re out there talking to investors, presenting a pitch deck, talking to banks, or even asking friends and family for support, know one thing: they’re going to go over your company’s history and accomplishments with a fine-toothed comb. They want to know that whatever they invest, the odds are high they’ll see a return.
Ten out of ten times there’s one factor that could stop a deal in its tracks—sloppy books.
Clean books indicate that you know how to run a business, and they provide basic facts about the health of your business that are irrefutable. Investors are going to want to see how you grew from the day you launched until you entered their boardroom, and they’ll look to your books as proof of that growth. If your books are a mess, they won’t get the answers they’re looking for and they likely won’t trust that you’ll know how to manage their investment.
If you feel like you’re almost ready to pitch investors, it’s critical to take a good hard look at your books. What can you do to check their validity? Where do you start? We’ve collected a few helpful tips to set you on the right path.
The longer you wait to clean up your books, the more expensive and time-consuming it will be. If investors are on your horizon, the best thing you can do for your business is to start the clean-up process right away.
The process takes time and will require the help of a trained professional, who likely charges by the hour. Isn’t it better to invest in your business than in your accountant’s rate? Get ahead of that expense now, and you’ll thank yourself later.
Clean Books Have Power
It’s easy to misjudge cash on hand, especially if your company is subscription-based. For many companies, losses are hiding in plain sight, and prepayments and recurring contracts make it easy to misjudge projections. When you have accurate accounting numbers at your disposal, you can avoid these kinds of issues and make smarter decisions about how to run your business. Investors will want to make sure you have a clear understanding of how to analyze your own company’s finances. You may not need to know all the in’s and out’s of accounting, but you do need to know how to read financial reports and use them to impact your business.
Investors Love Transparency
Clean, concise, easy-to-read financials are a clear sign to investors that you’re not trying to hide anything from them. When investors come on board, they will want to maintain a strong relationship with you and to work together as partners. Sharing financial data with investors in a transparent way extends the invitation for partnership. It implies trust and willingness to let them into the process.
Clean Books Are the Law
Your shareholders are entitled by law to have access to clean and professionally maintained financial records and statements. It’s essential for companies of all sizes to be compliant with the Generally Accepted Accounting Principles (GAAP). GAAP-compliant books are one of the first things an early stage investor will look for.
Prepare for an Exit
One thing startups always have on the table is the possibility of an exit through acquisition. If you made it through a few funding rounds and potential buyers are sniffing around, bad books could cost you big time by sending those buyers running. Whatever your exit strategy is, clean books can help you on the road to that vision. Messy books, on the other hand, can only hurt you.
Don’t let your books decay into a patchwork spreadsheet of numbers and guesses. Work with an accountant or take advantage of some accounting software to get your books in order. When it comes time to pitch to investors, the only thing you’ll need to worry about is your pitch.
If you’ve got questions about the process of going through funding rounds, check out our other blog posts on the topic. We’ve been there ourselves, and we’ve written about it.