Key Takeaways:
- Robust financial reporting is crucial for companies seeking investment.
- Common fundraising challenges for growth companies and startups include disorganized records, unrecognized tax exposure, and inability to produce timely and accurate financial reports for investors.
- To prepare for fundraising, companies should clean up their books, implement proper financial and operational processes, address industry-specific accounting challenges, develop internal controls, and prepare investor-ready reports.
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Raising capital powers your growth and innovation. However, all your time and efforts can be derailed without clear and accurate financial reporting.
Investors want to see clean books, accurate forecasts, and explanations for variances before they commit capital. By improving your accounting and financial reporting processes now, you will avoid delays or, worse, an inability to close the round.
Navigating Common Fundraising Challenges
Many growth companies — particularly startups — find themselves in a common predicament when it’s time to raise funds:
- Incomplete or disorganized financial records
- Lack of U.S. GAAP (Generally Accepted Accounting Principles) compliance
- Inability to produce timely, accurate reports for potential investors
- Unrecognized tax exposure and failure to optimize tax structure and credits
If this sounds familiar, you are not alone. Companies often reach out for help only after investors have requested data or raised issues they cannot address. Don’t put yourself in this position — get ahead of investor and diligence requests with proactive preparation.
Key Financial Information Investors Seek
When assessing companies, investors typically look for information such as:
- Historical and forecasted revenue run rate
- Customer acquisition costs
- Margins
- Key performance indicators (KPIs) specific to your business model/industry
- Cash burn rate and runway
- Accurate and up-to-date cap tables
- Proper revenue recognition
- Understanding tax exposures and structure
Without solid financial reporting processes in place, providing this information accurately and promptly can be challenging.
Steps to Improve Your Financial Reporting for Fundraising
Here are some key areas to focus on as you prepare your company for fundraising:
1. Clean Up Your Books
Before you can present compelling financials to investors, you need to get your books in order. Many early-stage companies operate with messy accounting records, often due to a lack of in-house expertise or resources. However, this can severely hinder your fundraising efforts.
Start by conducting a thorough review of your financial records. Look for inconsistencies, errors, or gaps in your data. You may need to recode transactions, reconcile accounts, or even restate past financial reports. While this process can be time-consuming, it is essential for creating a solid financial foundation.
2. Implement Proper Processes
Establish best practices for key financial processes, such as:
- Bill pay — Establish clear policies and define approval levels, responsibilities, and authorization.
- Payroll — Handle payroll efficiently and accurately, reflecting all compensations and deductions correctly. Partner only with cloud-based payroll providers that offer an annual SOX (Sarbanes-Oxley) compliance report. Review this report annually and confirm that recommended user controls are implemented to protect sensitive payroll data.
- Invoicing — Use integrated accounting software to centralize invoicing to reduce manual errors and automate routine tasks. Set clear timelines for invoice creation, approval, and delivery to clients to maintain a consistent revenue cycle.
- Key account reconciliations — Regularly reconcile key accounts such as cash, accounts receivable, and revenue to identify discrepancies and keep accurate records.
- Segregation of duties — Put controls in place to reduce fraud risk, such as having different people write checks and reconciling bank accounts.
- Periodic reviews of tax exposure — Conduct regular reviews to assess the impact of changes in customer demographics, employee locations, and business models on tax exposure.
3. Address Specific Accounting Challenges
Depending on your focus and business model, growth companies often face unique accounting issues that require special attention. For example, compliance with ASC 606 for revenue recognition — which can be complex. If you have raised a portion of your capital with simple agreements for future equity (SAFEs), make sure you have properly classified the funds.
For software companies, correctly capitalizing software development costs is crucial. These issues can impact your financial statements and valuation.
4. Develop Robust Internal Controls
Implementing strong internal controls improves the accuracy of your financial reporting and gives investors confidence in your data.
Establish clear segregation of duties in financial processes to prevent fraud. Implement regular review and reconciliation procedures to catch errors early. Document all your policies and procedures, creating a clear trail for auditors and demonstrating to investors that you have a well-managed financial operation.
5. Prepare Investor-Ready Reports
Investors want to see more than just your financial statements. They’re interested in metrics that provide insight into your company’s growth trajectory and operations.
Include detailed cash flow projections to show how you’re managing your runway. Develop realistic revenue forecasts based on historical data and market analysis. Create KPI dashboards that highlight the metrics most relevant to your business model. Prepare detailed expense breakdowns to demonstrate your understanding of your cost structure and ability to manage expenses effectively.
How MGO Can Help
With extensive experience working with growth companies and startups, our knowledgeable advisors can identify areas for improvement in your financial and tax processes and data, help you implement changes, and even assist in creating investor data rooms and presentations.
Reach out to our team today to get the support you need to fund your future growth and innovation.