What investors will look for when funding a startup company

Ultimately, every investor is different. However, when looking to invest in any startup company, there are a number of boxes you will need to check regardless of who decides to invest in you.

You need to know the market. How big is the market? How populated is the market? Is your product or idea doing the same as every other product on the market? How does your product stand out in the existing market? What sets it apart?

Having a strong business plan is essential. No one will want to back you if you do not have a solid plan for the future. Investors will want to hear numbers and forecasts. They do not want to hear you say that there are no risks involved, or hear you answer every question with certainty that no problems will arise because that is unrealistic. They will want to hear how you plan to tackle problems as they arise.

Investors will need to believe in you. You need to be sincere. Are you positive? Are you flexible? Are you realistic yet ambitious? Can you talk to people? Are you a good leader? A good listener? Do people respect you?

The team that you have on board will also be considered. Your team needs to live and breathe the product or idea just as much as you do. Do they listen to and respect you as their leader? As a collective, do they have sufficient skills and expertise?

Investors meet with numbers of founders and will get a gut feeling about you and your idea, but being able to address the above-mentioned areas should truly set you apart.

Understanding financial ratios

Financial ratios are useful tools for business owners to monitor, analyse and improve their business performance.

A financial ratio contains one or more financial figures and is expressed as a ratio, rate or percentage. Financial ratios are used to measure profitability, cash flow and liquidity, risk and return, and stock turnover and sales.

Here are some common financial ratios used in business to:

– Measure profitability
Gross profit margin is a percentage of gross profit on sales.
To work out: (Gross profit x 100) divided by sales.

Net profit margin is a percentage of net profit on sales.
Method: (Net profit before tax x 100) divided by sales.

– Monitor cash and liquidity
Working capital ratio measures the liquidity of a business (i.e. how much money is available to meet creditors’ demands).
To determine this ratio: Working capital = current assets divided by current liabilities.

Quick assets ratio measures the solvency of your business, or its ability to meet its immediate commitments.
Method: Current assets (minus stock) divided by current liabilities.

– Measure turnover and sales
Stock turnover ratio measures the number of times stock turns over.
Method: Cost of goods sold divided by (0.5 x opening + closing stock)

Material to sales ratio measures the percentage of sales dollars spent on materials.
To determine this ratio: (Direct materials x 100) divided by sales.

Tips to get out of debt faster

An overwhelming majority of people will face debt at some point in their life.

Uncontrolled debt can easily snowball and severely impact an individual’s lifestyle and financial freedom.

Fortunately, debt is manageable and is often contingent upon an individual’s motivation to get rid of debt fast. Tackling debt is often a process of managing expenses against income and formulating a plan of attack. Here are three ways to get out of debt faster:

Stick to a budget
If you are looking to get out of debt quickly, it is critical to stick to a budget. A budget can help you achieve your financial goals and ensure you do not spend more money than you earn. Budgeting is a great way to review your current expenses and see where you can realistically cut costs. It is also a good way of allocating money for an emergency fund i.e savings for a medical emergency etc.

Don’t borrow more money
Although it seems glaringly obvious, it can be tempting to continue down the borrowing spiral. Avoid getting into any further debt by holding off financing more items, signing up for credit cards etc. Instead, focus on paying off your current debts and necessary living expenses and try to eliminate any unnecessary expenses, such as TV subscriptions, daily takeaway coffee and so forth.

Make extra repayments (if possible)
Any excess cash you receive, i.e tax return, ideally should go towards making extra repayments. Making extra repayments not only shortens the length of time to pay off your debt but saves you paying more money on interest. Be sure to check with your credit provider if extra fees will be incurred for extra repayments.

Strategies to manage investment risk

Exposure to risk is a big part of investing and although individuals cannot eliminate risk completely, they can implement strategies to manage risk and achieve their financial goals.

Managing investment risk is particularly beneficial in times of increased volatility and unfavourable economic conditions as well as ensuring investors meet their long-term investment goals. Here are three ways to manage investment risk:

Asset allocation
Including different asset classes (i.e shares, cash, property) in your portfolio can help to balance risk and return based on an individual’s age, risk tolerance, goals and investment time frame. As different asset classes will perform better at different times depending on the underlying economic conditions at the time, it is important for a fund to invest in a diverse mix of assets.

Diversification
Diversification aims to maximise an individual’s return by investing in different asset classes that react differently to the same event. Although it does not guarantee avoiding a loss, diversification is an important component of reaching long-term financial goals while minimising risk.

Regularly monitor investments
Be sure to regularly monitor each investment in your portfolio. This helps to ensure your investment goals are on track and remain in line with your risk profile. Keep on the lookout for warning signs that your investment might be heading downhill but don’t focus too much on short-term volatility for long-term investments. It is best to revisit your investment plan with your adviser at least once a year.

Improving your accounts receivable

Freeing up working capital can help businesses fund growth, reduce debt levels and lower costs. One way to improve working capital is by managing your accounts receivable.

Many businesses fall into the trap of poor accounts receivable management – from extending credit to customers to ignoring payment terms to guarantee a new sale, these types of behaviour can quickly bring your cash flow to a halt.

Here are a few ways to improve your accounts receivable process:

• Create a clear customer credit approval policy

Assign credit limits, payment terms, discounts and return policies to specific customers. Introduce a system to determine a new customer’s creditworthiness, such as background and credit history checks.

Determine situations where credit can be issued and circumstances where credit should be rejected. It is critical to review your credit approval process from time to time, as a customer’s financial situation may change warranting a reviewal of their credit terms.

• Establish a billing/invoicing process

Generating timely invoices is a major part of collecting account receivables on time. To ensure billing and invoicing is consistent and sent promptly, consider using an automated system. Sending electronic invoices can also fast track the process as they reduce delivery time.

• Streamline the collection process

Prioritise collections by establishing a concise collections process for all staff members to follow. Ensure staff have the skills to collect owing amounts (especially from uncooperative customers) and understand the collections system. To ensure accurate collection of receivables all team members should be informed of any discounts that need to be applied, when payment plans can be negotiated and the overall process i.e. mail or electronic invoices etc.

Fixed vs variable loans

When choosing between a home loan with a fixed rate of interest and a home loan with a variable rate of interest, it is important to take both your personal and financial circumstances into consideration.

While both options offer certain advantages and disadvantages, individuals should consider what they will gain and lose through either option.

Fixed-rate home loans are often set for a certain period of time. They remain at the same rate over this period, regardless of whether the interest rate rises or falls. This can be both a good and a bad thing; if the interest rate rises, you will be paying less than the variable rate. However if the interest rate falls, then you will be repaying more than the variable rate.

With a fixed-rate home loan, you cannot make extra loan repayments and you may have to pay a ‘break fee’ if you change your loan or pay it off within the set period.

On the other hand, a home loan with a variable rate of interest can offer more flexibility as it allows individuals to make additional repayments over the course of the loan.

A variable rate home loan can also be more beneficial, especially since it allows individuals to take advantage of falling interest rates. However, if interest rates go up, the loan repayments may also increase. This can make it harder to budget for the future since you can’t know how the interest rates will move.

Taking out a chattel mortgage

Taking out a chattel mortgage to finance the purchase of a business vehicle is an attractive option for small business owners from a tax-saving perspective.

A chattel mortgage is a mortgage on a movable item of property i.e. motor vehicles. A finance company lends money to a business to purchase a car, which the business then pays back through regular repayments.

Among the many business car finance options available, a chattel mortgage can provide significant financial advantages for companies, partnerships and sole traders looking to buy a vehicle to be used primarily (50 per cent or more) for their business. The interest rates for chattel mortgages are also generally quite low, as the finance is secured against the purchased vehicle.

While the business takes ownership of the vehicle at the time of purchase, the finance company takes out a mortgage over the vehicle to provide security for the loan.

Chattel mortgages are a viable vehicle financing option for certain businesses, as they can claim any GST paid on the purchased motor vehicle in their business activity statement (BAS). Business owners can also claim depreciation and interest charges on their BAS.

Other benefits include flexible contract terms ranging from 12 months to five years, fixed interest rates and fixed monthly repayments.

Self-employed money management tips

When you are self-employed or run a home-based business, it is vital that you have a business plan that outlines your goals and financial information.

Unfortunately, statistics show that many home-based businesses often fail due to poor financial planning. Therefore, for small business owners should not only develop a financial plan, but also consider developing a method for managing their personal financial situation as well.   

Here are some things to consider including in a business’s financial plan:

Don’t underestimate expenses
There are many costs associated with running a business, so it is important not to forget to include expenses like insurance or childcare (if you have children that may need babysitting while you work) in your spending plan.

Keep accurate records
Those who are self-employed should keep copies of all receipts for tax time and ensure they complete all of their paperwork on time, particularly if they are billing customers.

Manage your income
When your income varies each month, determine your average monthly income. Then if you happen to earn more than average, you can put the extra amount into a savings fund to supplement less profitable months.

Avoid relying on credit cards
Borrowing from a credit card is rarely a good idea. Instead, if you need to use a credit card for business expenses, open an account specifically for that purpose.

Keep tabs on your taxes
To avoid surprises at tax-time, regularly review your taxes throughout the year. Don’t forget to make necessary quarterly tax payments to avoid expensive penalties.

Short-term vs long-term financing

Maintaining healthy cash flow can be challenging; between ongoing expenses and bills, poor cash flow can severely impact your customers, staff and bottom line.

Business owners need to understand the differences between short and long-term financing when developing a cash flow strategy.

There are various sources of finance available and each source of finance is useful for different situations. Choosing the right source and mix of financing options is crucial for good cash flow, so it is important to first determine your needs and then match a financing option to meet those needs.

Financing options are often classified into two categories based on time period: short-term and long-term. Below are the key differences:

Short-term financing
Short term financing (working capital financing) relates to the finance needs that arise to finance current assets – for a period of less than one year. Working capital is used in the business’ day-to-day trading operations. Short-term financing can help you to pay suppliers, increase inventory and cover expenses when you do not have sufficient cash on hand.

Depending on your business’ requirements you might consider using one of the following options:

Overdraft: extends your cash resources and protects your business’ credit rating.
Line of credit: funding when you need it, to be paid back when you have surplus cash – offering flexibility, value and control.
Business credit card: a convenient, fast payment method.

Long-term financing
Long-term financing options can help you invest in overall improvements to your business, for a period of more than 5 years. Capital expenditures, such as upgrading equipment, buying additional vehicles and renovating are funded using long-term sources of finance.

Businesses can use one of the following options:
Leasing: structuring a lease to match the useful life of the asset. This will help to preserve your cash and working capital for other uses.
Term loans (from financial institutions, government and commercial banks): allows you to accurately forecast your monthly cash flow through regular monthly payments.

Speed up customer payments

Managing debtors is often a cause of frustration for many small business owners.

Unpaid invoices can seriously disrupt cash flow. Between chasing late payments and keeping track of invoices, debt collection can be a headache.

Fortunately, there are ways to speed up your payments with a few simple adjustments to your invoicing system you can increase your chances of getting paid promptly. Here are five ways to speed up your customer payments:

Check contact details
Ensure the location and contact details are accurate and up-to-date so your invoices reach the right person. Be sure to quote any relevant customer reference number they have provided to you, or you have provided to them. Asking your customers what they require on their invoice will save time and prevent you from re-invoicing due to amendments.

Set payment terms
Set standard payment terms for when you expect to be paid after the invoice is sent out, for example, payment within 30 days. When setting your payment terms consider types of payments, credit limits and early payment incentives to encourage customers to pay early or on time.

Respond to invoice queries immediately
Great communication with your customers can make all the difference when it comes to getting paid on time. Address invoice queries immediately and keep your customers informed of any changes in billing or status on their work etc.

Provide multiple payment options
Providing customers with a range of payment options, such as online and phone payments, will increase your chances of getting paid quickly. Be sure to include step-by-step instructions on the invoice to make it simple for your customers to pay you.

Charge late fees
Late payments should be discouraged by charging a late fee to increase your customer’s urgency to pay on time. The invoice should clearly state your right to set a late fee for overdue invoices and state exactly what the fee percentage is and when it applies.