Many small and medium businesses that have approached me in the past to serve as Interim CFO (Chief Financial Officer) to locate funding have had no idea how much money they need. They will give a number but when I ask how did they arrive at that number, they usually do not know. They simply guessed or took very broad-based estimates based on no quantitative analysis. I recently had this conversation with a couple of individuals who own and run a health food company. If you don’t know what you really need and why, you will find it very difficult to obtain financing. You lose credibility if you don’t know the answers to these questions: How much do you need now? Later? Why do you need it? What will you use the money for?
“Why would I, as an investor or financier, invest in your enterprise or lend you money when you can’t articulate this basic information? Why would I invest on your hunch? I thought I was investing in a growing business.” These are the thoughts the lender or investor will have.
Most small to medium businesses have controllers, not true CFOs. Some do not even have that. Instead, they are still small enough to outsource their accounting to a firm or bookkeeper and individual CPA. Accountants look at historical data. Finance professionals look at strategy and what will occur in the future. To start to determine how much you need, first look at the amount of money it took your company to reach its current position, then determine what extra things you want to do to grow your company. If you hired 3 people to do X and now you need to hire 4 more, is that cost the same or do you have to pay more in todays’ market? These are the type of questions you need to keep asking in order to determine your company’s current and projected financial needs. Use all of this information and market data to calculate projections. Some accountants have finance acumen and can do this for you. Some don’t. If your accountant or controller can’t do this, it is imperative that you find someone who can – a friend who is a finance professional, your banker (if you have a great relationship), an SBDC or SBA advisor, or an interim CFO.
As I told the health food company, I highly recommend that you create a more detailed net income projection for 1-1.5 years (12-18 months), by month. This will enable you to better estimate how much money you will spend on production, personnel, packaging, marketing, etc. and when those monies will be spent. Then you’ll be able to determine any cash flow shortages (in other words, by how much you’ll be short) and when this will occur so you can plan well in advance to procure the funding.
Note: It’s much easier for startups, which by nature have no operational history, to develop better estimates when done monthly and summed than when estimated for one year at the outset. Ongoing businesses with multi-year histories can often prepare annual estimates fairly easily.