Many small and medium businesses that have approached me in the past to serve as Interim CFO (Chief Financial Officer) – when I was providing such services through a previous company – to locate funding typically had no idea how much money they needed. They would put forth a number but could not explain how they arrived at that number i.e., they were very, very vague. Essentially, these owners or executive team members guessed, made an educated guess or used broad-based estimates based on zero quantitative analysis.
Consider this from the investor or lender’s perspective.
If you don’t know what you really need and why, you will find it very difficult to obtain the financing. If you don’t know the answers to these questions, you will lose credibility. The questions are: How much do you need now? How much do you need later? Later is when – 3 months, six months, 1.5 years? Why do you need it? What will you use the money for?
If I am an investor or lender, and you don’t know the answers to these questions, here are some of the thoughts I would have: Why would I 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.
So, how do you determine your business financing need?
Most small to medium businesses have controllers not true CFOs. Some do not have that. Instead they are still small enough to outsource their accounting to a firm or individual CPA. Accountants look at historical data. Finance professionals look at strategy and what will occur in the future. To determine how much you need you must look at the amount of money it took your company to reach it’s current position, then determine what extra 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? 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.
Create a financial projection to help determine the amount.
As I told several companies, 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.