John Gillespie has been working as a "floating" CFO or "CEO on demand" for almost 10 years. Through his company, Beyond the Bottom Line, he´s helped many start-ups manage their cash flow, put together financials to apply for credit lines, helped with projections and polished financials in anticipation of raising capital.
I spoke to him recently about what advice he would give companies about getting their books in order prior to seeking venture money.
"One of the most important things," he said, "is that you´re internal financial statements are GAAP compliant." Generally accepted accounting principles (GAAP) are standards and rules for reporting financial information, as established and approved by the Financial Accounting Standards.
Secondarily, Gillespie suggests the company has its financials audited. "This does not mean a compilation or review," he said. "You should have an independent auditor, not your accountant, review your financials." When hiring an accounting firm Gillespie suggests CEOs and CFOs ask the following: Has your firm worked with a company my size? How well do you know my industry? Are you familiar with the business model?
During this process management should make sure there is no discrepancy between the financial model being presented in the business plan and what the actual financial statements look like. "Investors want to see that if you say you´re going to do `X´, you are doing "X,´" Gillespie said.
In regard to sales projections Gillespie cautions that you need to convince people you can execute on the sales revenue. "If you tell a VC that you´re going to be at $5 million the following year, they´re going to ask, `How?´," Gillespie said. "Drill down. You´re going to have five sales people, each will be selling X amount in sales. You´re going to reduce the sales cycle by spending X on marketing."
Gillespie says the biggest mistake many make when creating a business plan is that the models aren´t interactive enough. "Often you´ll see plans which ramp up the revenue without ramping up the overhead," he said. "For instance the revenues increases to $200 million, but the expenses stay at $5 million" (Gillespie recalls one faulty business plan where the management put in salaries, but neglected to include payroll tax).
To avoid this, Gillespie suggests companies create interactive spreadsheet with the income statement, sales and overhead linked together, what he has calls a "dashboard." "Scenarios change," he said. "There needs to be a realistic income statement that can scale automatically within the model. Figure out the parameters ahead of time and put them in the spreadsheet."
But it´s not enough just to have the financials on a sophisticated spreadsheet. When sitting down with potential investors CEOs and CFOs need to have it internalized. "You should know the economics of how your business model works," Gillespie said. "If your business is scaling, know that you have to add one person for every two customers or whatever the metric may be. You have to know how the economics change as the business scales."