Business that have established a position where they can demonstrate their capability and potential, may approach angel investors and venture capital funds to provide capital to help commercialise and grow the business.
These investors look for a high return to compensate for their high level of risk and will typically look to make three to 10 times their money over a five to seven year period.
Angel investors are often a group of individuals that have come together to provide more moderate levels of cash, but a wealth of in-kind support through business skills, experience, knowledge and connections.
They typically invest at the seed or early stage of a start-up. In return, they are happier with more moderate returns on investment. In Australia there are a number of organised angel investment groups.
On the other hand venture capital funds are larger organised investment vehicles that generally invest more significant amounts at later stages of business.
The typical venture capital investment occurs after the seed funding round, where funding growth can generate a higher return through an eventual exit, such as an IPO or trade sale of the company.
Approaching angel investors or venture capital funds requires a compelling business and investment proposition designed to grab their attention.
These types of investors are regularly looking at a large number of investment opportunities and only invest in those that have the potential for substantial growth and returns. The two key factors they look at are the size of the opportunity and the quality of management.
The source most typically overlooked, is the cash tied up within the business. As an accountant, I often find “lazy cash” or cash that is caught up at various stages of a business’ cash to cash cycle. This cash can be unlocked through small changes and measures, such as those designed to improve the efficiency of the business.
The cash to cash cycle is the path cash follows, from the time it is invested by the business in purchasing raw goods or paying wages, to the time it’s returned to the business by a paid up sale. Each cycle should cover the business’ costs and owner’s drawings.
Delays to the cycle result in the need for external funding to pay the business’ short-term financial obligations. Conversely, a short cycle frequently repeated, results in greater income and less need for external funds.
Business owners need to understand how this cycle relates to their business and use it to manage cashflow.
Improvements in the cycle can be made by reviewing customer credit policies, ensuring bills are promptly issued with clear payment terms, debtors are managed and followed up, productivity processes run efficiently, inventory levels are maintained to suit sales requirements and supplier terms are favorable to the business.
Each of these funding sources should be considered and incorporated into your funding plan, which should also be realistic, with contingencies built in, just in case all doesn’t go exactly as expected.
The benefit of a funding plan is that you’ll maximise your dollar and ensure the business has more cash on hand to fund its needs for longer.
This in turn provides a greater chance of success, higher profitability and increased value built within the business and your investment as its owner.
Marc Peskett is a director of MPR Group a Melbourne based business that provides capital raising, grants advisory and finance lending services as well as business advisory, tax, outsourced accounting, and wealth management to fast growing small to medium enterprises. Information about grants can be obtained by visiting www.grantsforbusiness.com.au. MPR Group is a member of the Proactive Accountants Network. You can follow Marc on Twitter @mpeskett
