Entrepreneurs often get the attention of the Dragons’ with great products, but ruin their chances of investment with a lack of knowledge about the financial side of the business.
When it comes to investors asking difficult questions about the sales, costs and profits of the business, if you don’t know the answers, this could either make or break a deal inside the den.
Gary Turner, co-founder of accounting software company Xero, who shares everything you need to know to avoid getting caught out:
- Understand your numbers
A lot of entrepreneurs get carried away with the idea of their product or service, they fall in love with it and get fixated on the design of how it looks that they have no sense of their financials. Not only do they not know their numbers, they don’t understand them. You are going to crash and burn if you can’t withstand the challenging questions about your finances and profitability in which you need to break even.
Be prepared to be cross examined on any aspects of your numbers, because in order to get somebody to invest in your business that you’ve got to convince them that you’re not a high risk. Of course, there’s always going to be a degree of risk when bringing any new product to market, but actually that risk increases significantly if the management and the finical control of the business is in any doubt.
Nobody will have confidence in you if you don’t understand your business. Why would I give you money when you’re product is a great idea but you don’t know what you’re numbers are?
- Know your sales channels
There are multiple channels that your product could be sold on; online, physical retail, face-to-face, but you need to have a really clear understanding of how you are going to take your product to market in the most effective way. What are your sales channels? How do they work? Do you need to hire a team of sales people? Are you going to be selling exclusively online? How are you going to get people to your website? How are you going to capture those sales?
Knowing what your strategies are for getting customers is an important part of that and having some real clarity about what your sales channels are, what your approach will be when you go to market, what you think are commercial targets for your first year or couple of years of sale and how they relate to provability and getting cash into the business.
- Plan for unexpected costs
Often you don’t know what you don’t know, and it’s hard to plan or make contingencies for things that may or may not transpire. Therefore, it’s important before you get to point of looking for investment, that you’ve actually done enough research into the industry that you’re moving into, who the competition might be, what the primary channels to market are, and how much investment may be required.
For example if you’re selling online, you’ve got to spend money on driving traffic to your website. Have you made a provision for that? Is that enough to satisfy the demand that you need to fill with sales?
Having an understanding of not just the obvious things, like product design or building a website, that’s the easy stuff. It’s actually about the costs around actually building awareness – spending money on social media, spending money through different advertising or publishing mediums – which you haven’t accounted for. Marketing and building a brand, can be a very expensive process so be clear about that.
- Estimate the future of your business
At what point have you managed to grow your sales and your income to the point where that you get to cash flow break even? Is it a year from now? Two years from now? How much money do you need to survive until you get to cash flow break even? What are your growth milestones?
The answers to these questions are important – ensure you have the details of financials and rejections for every month of the businesses existence, not just how you think you may do with sales this year, you need to break it down and have real visibility.
The first few months is really critical and having a monthly, quarterly and yearly business plan and even breaking that down literally from day to day so you know how your business is tracking, you’re on top of it, you’re measuring it and you’re not getting distracted by all the other aspects of the business.
If you do it right you should be able to survive tough questioning from people who are possibly much more experienced than you. Think of projections, milestones, when you’re going to get to break even, how much money you need to set aside to be able to fund the business until you reach that point.