Preparing to Raise Funds

In the search for funding, the first step is to make sure you are able to satisfy potential funders that you know what you’re doing.  Most first time entrepreneurs don’t get this and view the demands of potential funders as time consuming, time wasting and an unnecessary imposition.  However, there are two things you should understand, the first being important and the second invaluable.

A provider of funds needs visibility and comfort that the funds being made available are “safe”, i.e. your business is sound and you know what you’re doing.  This is important because if you don’t understand and provide what the funder wants, you are going to find it difficult to raise funds.

The second point is something you really need to understand and if you grasp this quickly, fund raising will become much easier, much quicker and much less painful; and there is a huge added bonus.  Being prepared to raise funds and provide the information required is actually being prepared to run your business properly.  Every bit of information you will be asked for will be something you should know anyway.  You should be able to provide 90% within one working day of being asked for it.  So the preparation is actually stepping up your own information flow to a level that will have a significant positive impact on your running of your business.  Here are a few paraphrased quotes I’ve encountered in very real situations in the past;

“I just don’t have the information to run my business.  I have masses of paper and figures, the board pack is inches thick but I can’t see how we’ve done and where we’re going.  We’ve breached bank covenants and the additional interest is swallowing all our profits.”

MD £15M turnover, profitable retail business.

“I can’t stand banks.  I needed a short term overdraft to cover a cash problem when two large customers delayed payments.  The bank refused and I had to borrow against my house to meet payroll.”

CEO, £5M turnover, profitable technology business.

“We just don’t have enough information at board meetings.  We’re making decisions but they’re based on gut feel and we’re concerned whether we’re doing the right thing”.

CEO, £7M turnover, profitable B2B financial services business.

I hear comments like this all the time and I’m continually amazed that businesses can grow to this kind of level before they inevitably hit a serious problem; simply because they didn’t have the information they needed.

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So, what do you need to do to be prepared………..

There are different levels of preparation required depending on the type of funding you’re after, i.e. the amount of information required to secure an overdraft is less than that to secure equity investment.  An Initial Public Offering or listing on a stock exchange requires even more information (and actually goes significantly beyond that which you need to run your business).  For this article, I’ll deal with the easiest and cheapest source of funds for a profitable business, i.e. bank funding.  For a cash burning business you will probably need to wait for the next article.

The best way of explaining this is to consider the source of the second quote above and a real situation I became involved with.

So, having borrowed cash against his house and rescued his very good business from some unexpected and serious turbulence and a possible terminal ending, he decided he needed some help.  This is where I became involved.

I found a business that was considered within its industry as having the highest technical competency and the “go-to” company for solutions to the most difficult technical problems.  Its customers were large, international, industry leading businesses and its employees were of the highest technical standard.  Turnover had grown over 7 years from start-up and was growing at about 25% year on year and very profitably.  The difficult stuff had been done both technically and commercially but the easy stuff had been neglected and that had almost been fatal.

Business processes and financial controls were, at best, Heath Robinson and at worst non-existent.  Management information and metrics were handled by a plethora of spreadsheets in each department, many of which contained mostly the same information in different formats, i.e. multiple databases, none of which stacked up with each other.  All info’ was at least 2 weeks out of date and of various quality and accuracy and all backwards looking at what had been done in the past.  There was not a forecast in sight excepting an incomplete and inaccurate short term cash forecast.  Management accounts were more like a receipts and expenditure account and balance sheet and completely inaccurate starting with the revenue figure.  They did know what work they had completed and were invoicing reasonably accurately so that was a start.  This is how I went to work;

1.  First priority, sort out the short term cash flow forecast.  Knowing where you are on cash in the near term and your vulnerabilities is as basic as it is important.  It’s relatively easy to do.  Working out cash receipts from outstanding invoices to customers (debtors) and cash payments from outstanding invoices from suppliers (creditors) and adding other receipts and costs, e.g. grant income, payroll, taxes and interest, it was pretty straightforward to do a cash flow.  Taking yesterdays closing cash balance, adding receipts and deducting payments, cash balances could be forecast forward on a daily basis over an 8 week period.

2.  Next was to get some sales forecasts.  The sales team were using an online Customer Relationship Management system in a haphazard way.  Encouraging the guys to use the system in a standardised and systematic manner we gained visibility of sales pipeline and, with regular sales team meetings, we arrived at reasonable short term sales forecasts.

3.  In parallel, the technical project managers were encouraged to do forward forecasts on each project.  Amazingly they were doing resource forecasts for customers in various formats but there were no internal resource or revenue forecasts.  Not surprisingly, on customer forecasts, technicians were included on more than one project at the same time leading to management difficulties in future.  With standardised project forecasts and sales forecasts, we could produce revenue forecasts over the next quarter.  We could also forecast any shortfall or surplus of technician resource.  In this instance the company was growing fast, so there was almost always a shortage.  Now we could plan our recruitment target numbers right down to skill sets required.

4.  Again running in parallel, we did a full review of the metric information.  Metrics (also termed Key Performance Indicators) are the dynamics that lie behind the business.  They can be reduced to a few core sensitive metrics.  In this case they included technician utilisation rates (billed hours as a percentage of available), charge out rate per technician day and billable headcount as a percentage of total.

5.  The management accounts were sorted out with a bit of accounting skill.  Financial controls and procedures were instilled including a purchase order processing system so we could see and control what we were spending and spot duplicate supplier invoices.

6.  Armed with the above, it was now possible to produce Profit and Loss, Balance Sheet and Cash Flow forecasts over 5 years and dovetailed with short term revenue and cash forecasts.  It allowed us to fully model the business and run scenarios on changes to any of the key metrics.  We could then plan how we could move metrics favourably and see immediately the impact on profitability and cash over any chosen period.  Now we were rocking.  We demonstrated that to lift our growth rate from 25% per annum to 50% it would swallow cash into working capital reducing our available cash to near to zero, i.e. not much headroom if a customer delays payment for whatever reason.  So, we needed to talk to the bank to arrange an overdraft facility.

7.  A meeting was arranged with the company’s bank.  It did not go well.  A provincial bank manager, treating the company as a mom and pop outfit clearly had little but contempt for the company’s management.  His nonchalant attitude was predicated on the CEO’s last minute request for an overdraft the previous year.  Here lies two lessons; messing up a relationship like that blows your credibility away and is extremely difficult if not impossible to recover.  Secondly, if you bank with a provincial branch you are unlikely to access the right calibre of relationship manager.  At some point, you need to move to a city centre regional branch.  Anyway, no amount of persuasion was going to work with this guy.  He showed his calibre as he expressed his surprise when we informed him we were moving banks.  As nonchalant became truculent we showed him the door and moved on.  A key point here is that when you are prepared, you are in control and when you are in control, you make the decisions that affect your business, not your bank.

8.  Because we were able to demonstrate to our new bankers our forward forecasts and various scenarios and why we wanted the overdraft facility, it was a straightforward deal.  We could show that we didn’t need their money to survive but that it would help as headroom to allow us to use our cash more aggressively to grow faster; they were comfortable with that.  They could see that not only had we considered various scenarios but that we could adjust our forecasts and assumptions easily and see any problem coming a long way in advance.  The account came with an overdraft facility equivalent to over one month’s revenues, a significant leasing facility for capital expenditure and substantial credit card facilities.  Further on, we arranged a large revolving credit facility (RCF) to set up an offshore centre.  We lifted growth to over 50% year on year turning profits of over 12% and spinning off cash.  We never used the overdraft and dipped into less than half of the RCF.

9.  We followed up with substantial Government grant funding, again secured without a hiccup.

Along the way, we created and drove an internal Enterprise Resource Planning system ditching management by spreadsheet and its accompanying mistakes, arguments and manual labour.  Our information now was virtually real time and accurate and our focus had spun 180 degrees from looking at the past to looking to the future.

Having good forecasts and a flexible model helped us as we formalised our strategic planning.  The boards focus moved away from entirely focused on the here and now to looking at our market, opportunities, threats and our overall objective.

The key point to note is:  I have demonstrated above how a business was transformed in being able to manage itself properly.  The focus of the information was in running the business.  The fund raising was easy because the information was already there and in use.

Banks offer various types of funding from simple overdraft facilities to invoice factoring or invoice discounting through to more complicated facilities such as the RCF mentioned above.  Note:  A bank will insist on security on facilities so don’t be surprised.  Mostly there are standard terms and conditions that are non-negotiable.  You can expect a debenture and fixed and floating charge over all the assets of the company as a minimum.  There are set up charges, ongoing monitoring charges, interest rates and covenants all of which certainly are negotiable and you should negotiate to the minimum you can get away with.

Here is a summary, what you need to maintain a good relationship with your bank on a monthly basis;

1.  Up to date management accounts for the year to date and any covenant test calculations.

2.  P&L, Balance Sheet and Cash Flow forecasts covering at least 12 months and any covenant test forecasts.

3.  Pipeline (all opportunities) and sales forecasts and a written commentary of performance.

4.  Detailed and sound explanations of any significant variances to forecast, P&L, Balance Sheet and Forecasts, preferably written.

5.  Aged Debtor summary reconciled to balance sheet.

6.  Aged Creditor summary reconciled to balance sheet.

7.  Fixed asset schedule and a schedule and explanation of anything else the bank has security over.  Be prepared to explain anything on the balance sheet – you should have reconciliations to hand but the bank is unlikely to want copies.

8.  A general overview of how the business is performing and explanation of how you will resolve any           significant problems

Remember, your bank relationship manager has to produce an internal report and the more you give him that he can cut and paste from the happier he will be.

Here is a very important point; if there is a potential problem, raise it early and give yourself plenty of time.  Banks (and all other funding providers) hate surprises.  If you delay tabling an issue, the problem only gets and harder to table with time.  Don’t put yourself in a situation where you’re delivering bad news you should have at least referred to months ago.  That can destroy relationships.  Even if you only highlight something that might happen and explain that it probably wont, it gives your relationship manager comfort that you won’t leave him high and dry trying to explain to his superiors why he didn’t know XY or Z.  In this regard, your relationship manager is very much at your mercy since you provide him the info’ he recounts internally.  Keep him comfortable on this and getting what you want from him will be infinitely easier.

The next article deals with moving to equity funding and the additional preparation you need to make.