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
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
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
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
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.