Data is the new oil − driving business transformation that will enable your company to gain a competitive edge and stay at the forefront of digital disruption.
Ask any entrepreneur what they think is required to succeed and you will likely get ‘funding, funding, funding!’ as a response. Albeit true for some businesses, it is often a case of throwing money at a problem and expecting a miracle. It is more important to ensure that a business receives the ‘right’ type of funding that is supported by a ‘good’ business model (compiled from good data).
More often than not, funding is not the core challenge. In the past few years, we have seen many cases where start-ups have secured millions in funding and proceed to go belly-up. This can often be linked back to one prominent issue − a lack of ‘good data’ that feeds into the strategic decision-making process.
Funders such as banks, private equity firms and venture capitalists typically evaluate whether the three ‘good’ factors are present in a business when advancing funding:
Good idea Does this business solve a problem that people are willing to pay for? Would customers understand the value that the service/product provides to them and would they be willing to pay for it?
Good people Does this business have a strong team that can be trusted? Does the team have the capability to deliver on the business promise to clients? Can they pioneer new ways of doing things that will guarantee the competitiveness of the business?
Good returns Does this business generate a good return on investment? Will the company be able to generate enough profit to stay afloat?
The ability of an entrepreneur to confidently articulate the financial standing of their entity goes a long way.
Most entrepreneurs struggle with communicating the returns their business will generate, supported by good data. Maintaining and improving the data in a business can provide the confidence a funder needs to move to action. This begs the question – what constitutes good data?
We propose starting with three core sets of data to enable better decision-making and provide confidence to potential funders:
Good customer data A business that doesn’t have a detailed understanding of customer needs is shooting in the dark. Understanding the needs that a business meets for its customers assists in developing a solid value proposition and an appropriate pricing model. This data can then be used to tailor the marketing effort that will speak directly to the target audience. Simple customer analysis can help business owners build rapport with their customers. Funders need this data!
Good profitability data Businesses must generate adequate returns to cover costs and provide an income for business owners. This includes understanding the break-even point (income received equals costs paid), profit margin and relative profitability of different product lines and services. Simple profitability analysis can help guide business owners on where to focus their efforts. Doing a profitability analysis will also allow the business owner to determine areas of improvement as well as opportunities for expansion. Funders need this data as well!
Good cash flow forecasting Regular updates to cash flow forecasts, based on changing business conditions, are critical for businesses. This includes understanding if and when a business is likely to run out of cash, or when you will have sufficient cash flow to fund growth. Simple cash flow analysis can help business owners decide on the type of funding that makes sense. Funders need this data the most as it helps them understand how and when the business will pay back the funding.
Finally, it is important to understand what a ‘good’ return on investment will be for a potential funder. The definition of a ‘good’ return varies across funders based on the type of funding advanced and their hurdle rate. For a bank advancing credit, a return above the prime interest rate might be considered a ‘good’ return. However, a venture capitalist investing equity in a growing business will likely consider +25% return on investment a ‘good’ return. It is important for business owners to understand what return a business can generate before deciding which form of funding is best for the business.
Having the right data available empowers an entrepreneur to make educated business decisions.
AUTHOR | Malusi Cwele CA(SA) is a director at Outsourced Finance