The Outsourced CFO: Part 5 - Time to Raise Capital

Why Having an Outsourced CFO Increases your Chances of Being Successful

Funding.jpg

An Entrepreneurs Guide to Financial Responsibility

Part 5 Time to Raise Capital

At some point in every young company’s development, the need to raise capital rears its dreaded head. For many businesses, coming up with seed money or funds to expand can be a make-it-or-break-it moment. 

This capital is closely related to many of the concepts discussed in Parts 1-4 of this series, An Entrepreneur’s Guide to Financial Responsibility. Without an influx of cash at crucial milestones, your company could overrun its cash runway and even go belly up. 

Here are some key pointers for the timing, methods, and requirements of raising capital so you can stay ahead of your company’s financial needs. 

When Is the Right Time to Raise Capital?

Too often, start-up businesses wait until they are strapped for cash to start raising capital. The reasons for this are myriad: 

  • Under-staffing, especially in the area of financial officers

  • Overburdening and overwhelming of the founder/CEO, who is wearing too many hats

  • Poor understanding of the fundraising process

  • Inadequate financial record keeping (Part 2 of this series)

This is a huge mistake because often raising funds takes time. If the money doesn’t come through right away, a business can wind up having to lay off staff, eliminate product lines, delay launches, or potentially close its doors. 

As you may recall in Part 1 of this series, you learned about creating a cash runway, the amount of cash you have to keep your business afloat for a certain amount of time. Your burn rate is the rate at which you go through money along your runway, much like an airplane burning through the pavement on the way to takeoff. Once the asphalt runs out, that’s it--there’s no margin of error or extra terra firma to keep the vehicle moving. 

So, when is the right time to raise capital? For each unique business, the specific time is different. But one thing is common to every enterprise raising money: you have to do it before your funds get too low and you are in danger of running out of cash. 

It’s crucial to sit down and draft out a timeline for capital requests well in advance of need. For many business owners, this can be hard to visualize, so here’s an easy and super cheap method. Buy a roll of inexpensive white butcher paper at the grocery store. Unroll it on a large conference table, and create a timeline for your business, month by month, for the next year to three years. Mark down any important milestones related to the following: 

  • Your current cash runway

  • Any funding that has already been secured

  • Product or service launches, upgrades, or changes

  • Staffing additions

  • Outsourcing expenses

  • Changes to expenses (e.g., adding office space or technology)

  • Any significant events that involve financial outlay

Then, work backward to see how far before these events (at least six months) you need to start raising money for them. For example, if you plan to add three new employees in June and your current financial runway doesn’t cover those additional employees, you need to find the funding months before their on-boarding. So, you might target December of the previous year to start working on the capital needed to add to your staff.                   

The beauty of this method is that you can roll up your timeline and take it with you as needed. You can post it in your office as a daily reminder of your financial obligations. While it’s tempting to put all this information on a computer, out of sight is often out of mind. By all means, create a more sophisticated document with this information, but don’t bury it in your hard drive; keep it where you can see it regularly. 

What Types of Capital Are Available?

The type of capital you are seeking can also influence your timing for applying for it. There are many types of capital available to entrepreneurs these days, and it may be best to investigate several of the most popular forms:  

  • Venture capital: money from investors who usually want a return on their investment. This funding can take anywhere from a few weeks to a few years, depending on the amount and the investor.

  • Short-term loans and lines of credit: often used to cover unexpected needs, but may come with a higher interest rate. The bonus is this type of funding can often be procured within a month or less via a conventional bank.

  • Long-term loans: another type of bank loan, usually taken out for larger expenses, such as expansion or the acquisition of another company. Because of the large sum of money involved, these loans may take longer to be approved, up to several months.

  • Crowdfunding: funding from hundreds or thousands of individuals, each of whom contributes relatively small amounts of money, through platforms like Kickstarter or Indiegogo. Crowdfunding usually takes many months to achieve, often a year or more, depending on the time limit you set with the platform.

What Are Investors Looking For?

To qualify for any of the funding above, your business will have to provide documentation, ranging from a few forms to thick reports. Typical documents or files may include: 

  • Tax forms

  • Audits

  • Bank statements

  • Cash flow reports

  • Business plans

  • Pitch decks

  • References

  • Company marketing materials

Investors and lenders want to know they are giving their money to a reliable, organized, and profitable enterprise. If your business had to come up with these documents, how long would it take to produce them? Does the very thought of it feel like climbing Mount Everest? 

How Can Your Business Maximize Its Funding Potential?

At many young businesses, there simply is not the staffing present on the financial side to put together the documents they need for future funding. Fortunately, there is an answer that doesn’t involve a full-time hire: outsourcing the CFO role. 

Scrubbed offers turnkey business solutions that can address all of the issues discussed above, from the right time to raise capital to providing the documentation lenders and investors require. For as long as your business needs, whether a few months or a few years, you can receive assistance with: 

  • Accounting and financial reporting

  • Inventory management support

  • White label accounting

  • Audit and professional services

  • Tax preparation and filing

  • Corporate finance services

Get in touch with Scrubbed today for a free consultation on how we can help you raise the capital you need. Don’t wait until your application is due in a week. Plan in advance and know that with Scrubbed, you’ll have the expertise and documentation you need exactly when you need it. 

 

About The Author

 
 

Aira’s financial advisory expertise includes financial forecasting and modeling, financial due diligence, buy-side/sell-side support, drafting of business plans, and creating key performance indicator dashboards. Her risk management expertise includes corporate governance, internal audit, forensic accounting and enterprise risk management.

https://www.linkedin.com/in/airapineda/