The Four Prerequisites for a Financing Presentation

“It takes money to make money,” the old saying goes. For small and mid-sized businesses, making more money usually requires growth — and growth requires business capital. To obtain the capital needed to finance business growth, owners typically make a financing presentation to lenders or investors.

Your financing presentation will make the lender’s or investor’s job easier by anticipating and providing the information they will need to make a decision before they ask for it. It will also demonstrate business acumen and show that you are well-prepared for the initial meeting.

There are four main prerequisites for a financing presentation:

1. Cash Flow Analysis
This will analyze your company’s liquidity by tracking cash inflows and outflows across the enterprise to determine your ability to generate cash to cover operating expenses and reinvest in growth. It will reveal how much actual cash, not profit, is available to service the debt you’re seeking. The analysis includes cash generated from core business operations (e.g., net income), investing activities (e.g., selling long-term assets) and financing activities (e.g., cash related to debt, equity and dividend payments). Based on your analysis, cash flow will be either positive or negative.

To perform a cash flow analysis, start by gathering and compiling data from your financial statements (income statement, cash flow statement and balance sheet) for a specific period, such as a month or quarter. Next, classify activities by categorizing transactions as operating, investing or financing. Now add operating, investing and financing cash flows to determine your net cash flow. Compare these results over different time periods to look for cash flow and liquidity trends.

2. Multi-Year Restatements
Based on the cash flow analysis, multi-year financial restatements may be required to revise previously issued financial statements and correct errors due to accounting mistakes, fraud, misrepresentation or misapplication of generally accepted accounting principles (GAAP). Restatements are required when it’s determined that a previous statement contains material inaccuracies. There are two main types of financial restatements:

Reissuance (Big R): Requires amending and refiling prior financial statements

Revision (Little R): Corrects errors in current period financial statements

In an analysis of restatements performed between 2013-2022 conducted by the Center for Audit Quality, the misapplication of reporting rules for accruals, reserves and estimates was the most common cause of restatements. This was followed by financing activities and revenue-related accounting errors. Fraud only accounted for three percent of restatements during this time.

3. Financial Forecasting
Updated financial forecasting may also be required as a result of your cash flow analysis. This involves analyzing current industry trends, market data and key economic indicators to estimate future revenue, cash flow and profits. An updated forecast will help ensure that you present the most current, accurate and relevant financial information to lenders and investors.

There are several different financial forecasting techniques you can use. These include straight-line forecasting, which projects future revenue based on a stable business growth rate, and moving average forecasting, which averages data over specific periods to smooth out fluctuations. Also, scenario analysis forecasting predicts various potential future outcomes based on different business scenarios.

To create an updated financial forecast, start by collecting historical financial data and defining key assumptions, such as future growth rates and market trends. Then choose between quantitative or qualitative methods and create best-case, worst-case and base-case scenarios. Plan to update your forecasts regularly based on actual financial performance and current market conditions.

4. Financial Modeling
With a cash flow analysis, financial restatements and updated financial forecasts in hand, you can now prepare a current and accurate financial model. This is a dynamic, spreadsheet-based representation of your business’ financial performance that combines historical data with assumptions to help lenders and investors make informed decisions about financing your business.

To create a financial model, start by gathering historical data and identifying key drivers. Then you can build your model using the balance sheet, cash flow statement and income statement (or P&L). Microsoft Excel is commonly used for financial modeling and supplemented with specialized software for more complex simulations.

Note that your financial model will only be as accurate as the assumptions and data used in creating it. The model’s effectiveness will depend on the user’s technical spreadsheet skills, financial and accounting knowledge, and understanding of your business.

Pulling It All Together
In addition to these prerequisites, you may also want to include business and personal tax returns, accounts receivable agings, current accounting and bookkeeping records, and a record of state and federal tax payments in your financing presentation. In addition, be prepared to explain to lenders and investors why you need financing, how you will use the money to sustain or grow your business, how and when you will repay the money (if it’s a loan) and what kind of collateral you can pledge to support the loan.

Concluding Thoughts
Growing a small to mid-sized business usually requires a cash infusion, either from a lender (such as a bank) or investors. To obtain this cash, you’ll probably need to make a financing presentation to lenders or investors. There are four main prerequisites for a financing presentation: a cash flow analysis, multi-year restatements, financial forecasting and financial modeling. An outsourced CFO services provider can help you prepare your financing presentation so it provides all the information a lender or investor needs to make an informed financing decision quickly and efficiently.

Click here to read more articles from CFO Edge about drafting a financing presentation:
https://www.cfoedge.com/blog/category/financing-advisory/financing-presentations/

Arthur F. Rothberg, Managing Director, CFO Edge, LLC