are high by industry standards,” says Ligeti, “it’s not necessarily a negative if you can make the case that you’re simply managing income for tax purposes.” After all, that’s what small business owners are supposed to do. “Ideally, the company is engaged in a business in which general and administrative expenses, as a percentage of sales, decrease as sales increase.”
The cash-flow statement.
For an even closer look at how the company works, most investors will settle down with the cash-flow statement. Overall, they want to see how capital-intensive the business is (i.e,, how many dollars have to be put into the business before one pops out).
“It’s not that a capital-intensive business is bad,” says Ligeti. “It’s simply that if a business needs lots of money, the equity investor needs to know it, because he or she is the person everyone is going to turn to as the business starts to experience growing pains.”
The balance sheet. Most investors will zero in on the intangible assets. For instance, if a company is capitalizing research and development (that is, treating expenditures for R&D as if they bought an asset), that’s good, because it shows a significant commitment to product development and improvement, which may power future sales.
Regarding accounts receivables, if there are any, many investors will take an interest in the revenue-recognition policies–that is, when during the sales cycle, the firm actually books its revenues.
“Growing businesses sometimes push sales out the door and book them right away, a policy that can be crippling with complex products or services that may take months to deliver to the satisfaction of the customer,” says Ligeti.
Going over the liabilities, Ligeti says that accounts payable can cause problems. Sometimes a $500,000 investment will get whittled down to $250,000 after the creditors stake their claim. Entrepreneurs should be prepared to explain the precise amount of accounts payable that will be paid from the proceeds of the investment.
Moving down the liabilities, if there are any term loans, investors’ comfort with them will vary directly with the length of the term. If it’s two years, that could be a problem. If it’s seven, that’s much better. Remember, at the end of each year, the net income or net loss gets posted to the equity section of the balance sheet. If the company has been stringing together a series of losses, the equity will be pretty thin. If the equity account is negative, the company is technically insolvent. At the very least, it’s running on fumes.
Finally, the investor will take a good look at the notes to the financial statements. “In fact,” says Ligeti, “so important are the notes that some investors actually read them first. Notes to financial statements are just one more reason that CPA-prepared financial statements are essential. Internally generated financial statements rarely have them, handicapping investors and inviting them to walk away until notes become available.
From Where to Go When the Bank Says No: Alternatives for Financing Your Business, Copyright (C) 1998 by David R. Evanson. Published by