Numbers Investors Look for in a Business – Use of Funds
Once you have decided if you need investors for your business, it is important to show them what they will get for their capital. In addition to the Exit Strategy and a Sensitivity Analysis (both will be covered in a separate post), there are three major indicators you should prepare: a pie-chart about your fund allocation, the burn rate and the break-even point.
Use of Funds
Naturally, investors want to know the use of their capital. But apart from that, it is also important for you yourself to calculate how much money you actually need. I have discussed this in my previous post “Do I Need an Investor to Start a Business” in more detail.
Prepare a pie-chart for your investors displaying the use of capital in percent from the total investment, e.g. product development, salaries, marketing, etc. Try to be as specific as possible.
Burn Rate and Runway
The burn rate is the rate at which money from investors is being spent. It also helps calculating the so-called “runway”, i.e. the time how long you can go with the investment before “refuelling” (e.g. raising another round of capital or when you become profitable).
Let’s take a simple example: your investor gives you USD 1,000,000. In your first month, you budget and spend USD 100,000. Therefore, your burn rate is USD 100,000. In an ideal and linear scenario, if you spent USD 100,000 per month, you could survive 10 months from this 1,000,000 investment. (USD 1,000,000/USD 100,000). Therefore, you would have 9 more months (because you have burned one month already).
However, our world is not linear or ideal. You have USD 900,000 left. If you spend USD 200,000 in the next month, you have a runway of 4.5 months remaining. (USD 900,000/USD 200,000). Therefore, you will always need to adjust your runway for your monthly burnrate.
(Note: debt is excluded for simplicity as start-ups only have debt in rare cases.)
Break-Even Point
The break-even point is were your revenues and costs are equal, i.e. the point when your business neither makes a loss nor a profit.
If you look at your Income Statement, you prepared 5-year-projections for your company. The first month/year in which your company makes a profit, is also the year where it broke even.
This is a brief overview and example of how to calculate financial indicators for your use of funds for your business plan. There are many ways to do it and for matters of simplification, I published the methods I personally used before. Every business and product is unique. So are the financials. Hence, there is no one-size-fits-all approach and the methods have to be adapted case by case. I recommend talking to your auditor/financial advisor about the details of your case.
Read more about my tips for start-up financials, business plans and investments:
How to Write a Business Plan which Stands out
Cracking the Numbers You Need for Your Business – Financial Statements
Do I Need and Investor to Start a Business?