Eloquent Numbers

A pro explains how a well-done financial statement can help turn a potential investor into your biggest backer

ever there was a place in the projections to simply let costs increase each year by a factor, this is it. Supplies are not expensive. Calculating the costs of centralized operations, such as executive and administrative staff, is fairly straightforward.

Where companies go wrong is with the selling expenses, according to Peter Moore, a principal with Banking Dynamics of Portland, Maine, a corporate financial consulting firm. Moore says that entrepreneurs who suggest too many kinds of selling costs clue investors to the fact that they’re uncertain how to sell their product or service.

Operating income, or the operating margin.

This is the famous bottom line, defined as gross income less selling, general and administrative expenses.

Where operating margins exceed industry averages, have a tenable explanation of why. In the same way that technology, management style and manufacturing techniques can cause a breakthrough on the gross margins, so too can paradigm shifts have a salubrious effect on operating margins.

In general, if the operating margin as a percentage of sales is small, it’s a turnoff for most investors. There’s little room for error, and it’s harder to create the kind of value that offers an exit for investors.

It may seem odd to say, but the first step toward making a good financial presentation is to actually have historical financial statements–one for each year the business has been in existence, or for the most
recent five years.

Owners and managers of start-up companies are often prone to think they don’t need financial statements because there’s not much to put on them. This isn’t necessarily the case.

First, if founders invested a lump of cash to get the business started, which is an extremely strong selling point, financial statements irrefutably document their commitment. Second, for founders who are working without pay or at less pay than to which they may otherwise be entitled, financial statements give them a place to document the company’s growing liability to them.

It’s also worth pointing out that to raise money, it borders on necessity that historical financial statements be prepared by a certified public accountant (CPA).

Even the lowest level of scrutiny offered by a CPA provides a high degree of comfort to investors. Simply having financial statements can’t completely carry the day, however. They’ve got to say the right things.

The income statement. According to Peter Ligeti, a general partner with Keystone Venture Capital Management Co., which finances companies from the so-called first state and thereafter, “most investors look at gross, operating and net margins to see if they’ re in line with industry averages.” Next, they’ll tend to look at the trends in contributions to revenues, if the company has more than one product or line.

In addition, most investors will be looking at whether or not the revenues are recurring in nature–that is, are they coming from new or existing customers? “Obviously, says Ligeti, “it’s much less expensive to generate revenues from existing customers than it is to go out and find new ones.”

Next are the general and administrative expenses. “If these

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