If you asked investors “How do you decide where to invest? Which companies are your preferred choice for investment?,” you will usually get the same answer: it depends on the risk level.
Every investment is fundamentally risky, and mitigating risk is critical for investment managers. If you are going to attract an investor, you need to realize that every investor is looking for a safe bet. To do so (as best as possible), your books must be in order to instill investor confidence.
In most cases, bad books are one of the quickest ways to turn investors from your business.
Why Do Clean Books Matter?
An investor wants to see clean books because they provide them with:
- Basic facts about the financial health of your business
- A clear picture of how you grew your company, and where it’s growth is going
- An indication that you know how to run your company
If your books aren’t clean enough, the investors won’t be able to see any of this. What’s more, if your books are a complete mess they will see that there’s no reason to believe that their investment in your company will be worthwhile.
So, before starting to pitch to investors, it’s essential for you to take a good look at your books to determine if they are bad or good.
What can you do to check the validity of your books and where do you start with that?
Start Clean-up Immediately
You should never wait when it comes to getting your books cleaned up. The longer you stall, the more expensive and significantly time-consuming it will become.
If there is any talk of investors, starting the ‘clean-up’ process as soon as possible is the highest leverage activity you can do.
Fair warning, the process requires the help of trained and skillful professionals and can be very time-consuming.
This will cost money, but will payoff when it’s time for a funding event by:
- Time saved in due diligence to expedite a transaction
- Preserving or enhancing your valuation
Be Transparent With Investors
Simply put, investors love metrics. They want to see a clear sign that you are not hiding anything by showing clean, concise, and easy-to-read financials.
Companies often forget how vital and influential clean books are, especially in the case of subscription-based businesses.
Losses are often there on the surface, yet can be missed if prepayments and recurring contracts cause you to misjudge projections.
If you have clean books, you and potential investors will have a clearer sense of the business’ financial health, and start making smarter, strategic decisions when it comes to how the business and its finances.
That’s more than merely convenient; it’s essential as investors want to see that you have a firm grasp on your company’s finances. They also want to know that you can effectively analyze what you have.
You don’t need to know everything about accounting or be an accountant yourself, but you have to:
- Know how to read the financial reports in your company
- Use these report insights to improve your company with strategic decisions
All of this also matters to investors because they, as shareholders, have a right to access clean and professionally run books. It’s crucial for all companies that are compliant with the Generally Accepted Accounting Principles, or GAAP.
Books Lead to a Good Exit Strategy
Many businesses are looking to exit through acquisition. If you’ve passed a couple of funding rounds, buyers are now probably looking into your business. Knowing your books should be a cornerstone of your exit strategy if you’re looking to become an attractive acquisition.
Clean books can bring them a step closer to buy, while bad books will quickly send them away.
While it’s impossible to predict when an offer will arrive, working with professionals to get your books in order will have you prepared when the time comes to meet with investors. Instead of being bogged down with financials, you’ll be free to focus on what matters: completing the transaction.
