Avoiding Financial Pitfalls: Best Practices for Managing Company Finances After Receiving Investment

Proper management of finances post-investment

Embarking on a new venture is an exhilarating journey filled with possibilities and challenges.  And now that you’ve managed to raise funding, things are about to get even more interesting. Far from being the end of the journey, this is just the beginning. However, without proper financial management and keeping your investors up to date with post-investment financial reporting, even the brightest ideas can falter. 

Successfully managing new venture finances alongside your investors is a critical skill that can make or break the future of your business. From developing realistic budgets and monitoring cash flow, you will need a roadmap to follow post-investment.  Here are a number of key steps that will help you confidently manage your company finances and set a course for long-term success.

  1. Cash Flow Forecasting: Develop a cash flow forecast that projects your expected cash inflows and outflows over a specific period. This should include anticipated sales, collections from customers, payments to suppliers, operating expenses, and other cash-related transactions. If you have an idea of your expected cash inflows, you can prepare for downtimes and build up a cash reserve.

  2. Get your money in faster: Invoice immediately and make sure to follow up on all your late payments. Most invoicing software systems have automatic reminders in place to make your life easier. You might also think of incentivizing early payments. After all – money is the bank is where it’s at.

  3. Manage your payments: If possible, take advantage of favorable payment terms with suppliers and negotiate extended payment periods to preserve your cash flow. However, always make sure that you honour your agreements and keep your suppliers on your side.

  4. Optimize inventory: Well-managed inventory means that your money is working in your business, not tied up on storage units. Conduct regular inventory audits, analyze sales patterns, and identify slow-moving or obsolete items in order to optimize inventory levels and reduce carrying costs.

  5. Keep an eye on operating expenses:  Review your operating expenses regularly and see where you can reduce costs without compromising quality or productivity. Negotiate bulk deals with vendors, explore cost-saving measures such as energy efficiency initiatives, and implement lean processes to streamline operations and reduce waste and time to market.

  6. Explore financing: As a last resort, financing can get you out of a crisis. However, carefully evaluate the cost and terms of financing options to ensure they align with your business needs and cash flow requirements and make sure that you can handle your repayments.

  7. Optimize your working capital cycle: Aim to minimize the time it takes to convert raw materials into finished goods, sell those goods, and collect cash from customers. This keeps the cash in your bank account and gives you the liquidity that you need in order to move your business forward.

  8. Stay on top of everything: Continuously monitor your cash flow, working capital, and financial performance in order to see where improvements can be made. Regular reporting is your friend post-investment.

  9. Leverage Technology: Utilizing the latest tech on hand, such as accounting software to automate processes and gain real-time insights will improve the accuracy of your financial function, allowing you to make better management decisions.

  10. Call the experts: If you are finding it difficult to handle your financial obligations while also running your business, consider consulting with a financial advisor or an outsourced team like OCFO, which specializes in assisting entrepreneurs post-investment.

Nobody can prepare for every eventuality, but with strategic planning and a team of financial experts at your side, you will be better equipped to weather the occasional financial storm.

  1. Financial Planning: Create a detailed financial plan that outlines your goals, revenue projections, expenses, and cash flow requirements. This plan should cover short-term and long-term financial objectives, allowing you to track progress and make informed decisions. Call in the experts here if this is not something that you’ve tackled before.

  2. Cash Flow Management: Effective cash flow management is essential for maintaining financial stability and riding out any dry spells. Monitor your cash flow and projected cash flow closely, to make sure that you can cover running costs and expenses.  Invoicing promptly and following up on payments, negotiating favorable payment terms with suppliers and managing inventory levels efficiently are some time-honoured strategies for improving cash flow.

  3. Control Costs: Review your expenses regularly and identify areas where you can reduce costs without compromising the quality of your products or services. Look for opportunities to streamline operations, negotiate better deals with vendors such as buying in bulk, and eliminate unnecessary ‘nice to have’ expenses.

  4. Diversify Revenue Streams: Relying heavily on a single source of revenue can be risky. What if it dries up?  Explore opportunities to diversify your income streams, expand your product or service offerings, target new customer segments, or enter new markets. This diversification can help mitigate the impact of market fluctuations and reduce dependency on a single source of revenue.

  5. Reinvest Wisely: While it may be tempting to allocate your investment funds immediately, always invest strategically to support growth and financial stability. Prioritize smart investments that will generate long-term returns, such as research and development, marketing, infrastructure improvements, or talent acquisition. Carefully evaluating potential investments and aligning them with your long-term business objectives is the way forward.

  6. Build a Strong Financial Team: As your business grows, it becomes increasingly important to have a competent financial team in place. Hire experienced professionals, such as accountants and financial advisors, who can provide guidance on financial matters, ensure compliance with regulations, and assist with financial analysis and forecasting. If you aren’t ready to take on the responsibility full-time, consider using a service-on-demand company such as Outsourced CFO to assist.

  7. Monitor KPIs: Establish and monitor relevant KPIs that allow you to keep an eye on the financial health of your company. Common indicators include revenue growth, gross margin, customer acquisition cost, customer lifetime value, and return on investment. Regularly analyze these metrics with your finance team in order to identify trends, areas for improvement, and potential risks.

  8. Communication with Investors: Keeping your investors updated is one of the most important boxes to tick post-investment. Provide them with regular updates on the financial performance of your business, including any significant milestones, challenges, or changes in strategy. This proactive approach will ensure a long and productive working relationship.

  9. Plan with the Future in Mind: While investment funds can provide a boost in the short term, always consider long-term strategies as well. Look for opportunities to generate recurring revenue or enter new markets, establish customer loyalty, and build a strong brand that can weather market fluctuations.

  10. Prepare for the Worst: The future is always uncertain, and it pays to be prepared. This includes creating an emergency fund to handle unforeseen expenses or seasonal changes in income, insurance coverage for key assets and liabilities, and regularly reassessing your business strategy to adapt to changing market conditions.

By implementing these strategies holistically, you can optimize the use of your investment funds and work towards long-term financial stability, while ensuring that your stakeholders are kept up to date and assured of a good ROI. Review and adapt your financial plans as your business evolves and market conditions change.

OCFO Post-investment Support

If you decide to work with a team of experts, such as Outsourced CFO, we can help you manage your investment and ease the process of handling greater liquidity post-investment.

Our post-investment financial services include the following:

Reporting: It is important to contact the investor soon after you have received their investment to build early momentum and gain an understanding of what type of reporting they require. This proactiveness can save you from unnecessary costs at a later stage and will help start your relationship with the investor on a positive note.

Setting and keeping a budget: Budgeting allows for financial planning and benchmarking and can give your investor peace of mind. Investors normally require that a fixed budget be set. The aim of any budget is to have a target to work towards. Actual results for each month and for the year need to be compared to the proposed budget. This is commonly known as actual vs budget. Any large discrepancies need to be investigated and explained to the investor which can help with the overall financial management of the business.

Cash flow forecasting: As a next step in the budgeting process, the investor will want to know how the budget translates into cash for the business. The cash flow forecast is a financial planning tool that shows the predicted flow of cash in and out of a project or organization each month. Forecasting will enable you to plan ahead so that you can anticipate periods of cash shortage and take corrective action ahead of time.

Key performance indicators (KPIs) and what they can tell you about the business.
The investor will also want to understand what the KPIs are for the business and how they are tracking compared to budget and historical data.

Some examples of KPIs include:

  • Gross Profit Margins (overall and per product)
  • Number of sales per product
  • Number of active customers 
  • Monthly Recurring Revenue – overall and per customer 
  • Average Cost of Service (ACS) – overall and per customer
  • Customer acquisition costs (CAC)
  • Customer Lifetime Value (LTV)

Directors’ Meetings: Your new investor might require quarterly or even monthly directors’ meetings and will expect that the financial results of the business be presented and discussed at this time.

Implementing financial checks and controls: Because you are now responsible for third-party funds, the investor will likely require you to implement certain controls within the business. A controls assessment might be expected by the investor in order to understand the level of risk inherent in the business

If you are feeling overwhelmed by all the responsibilities that go along with an injection of investment cash into your business, reach out to our team for assistance or click here to read more about our Cloud Accounting packages

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