APRIL 2025 – Investing in a business without an FD?

Author Jason Soars

Investing in a business without an FD?

It’s a risky business.

Often in my career as a Fractional Finance Director, I have been asked to help businesses that have been trying to arrange funding for some time and have been failing. It doesn’t ever surprise me.

Investors look for two things, a business story they believe in and a management team they can trust. A good FD will help tell the story and go a long way to building that trust.

Once they find the first two things Investors then spend a lot of time looking at the numbers, here a good FD frequently makes the difference between a successful deal and a failed transaction.

Let’s look at why in a bit more detail from an investor’s perspective.

 

Pre-Investment Risks

• Is the Financial Position Correct?

It is essential that the current Financial Position is correctly stated. If it isn’t the historic trading isn’t, and usually that is the basis for the forecasts that support the investment case.

Frequently I arrive at new clients to discover issues, stock valuation, provisions not to mention correctly calculating items like hire purchase repayment.

The first thing I do is review the balance sheet and make sure it is correctly stated. It is the cornerstone on which everything else is based.

• Are the Trading Forecasts Accurate?

For me a good forecast takes the current run rate of the business and then maps out the action that are planned to get to trading performance.

Usually when I arrive at a client this hasn’t been done, they have a forecast showing an improvement in trading performance, but only a vague idea where this will come from.

I always help business prepare a clear bridge between run rate and the forecast, this ensures that they are achievable and brings clarity to the organisation.

I also look at a couple of other scenarios to see how  risky the plan i.e. what if sales are slightly lower or grow slightly slower.

This gives the investor’s confidence.

• Is the Cashflow Forecast Reliable?

Cash is king. Investors need to know that the business can repay its debt or will have sufficient cash to not just survive but invest in growth.

So one the trading forecast is solid the Cashflow forecast needs to be assessed.

I find that teams without a quality FD find this particularly difficult. It is essential that it is not prepared too simplistically as with cash flow the devil is often in the details.

There are no end of complications: are there mid-month peak requirements? when does the repayment basis for corporation tax and VAT change?

An experienced FD can take account of these and can also judge how much headroom a business needs.

Investors like to know that the business has some room to manoeuvre.

• Provision of Information, Due Diligence and Reforecasting

Wouldn’t it be lovely if you sent in the investment deck and the financial forecasts and the money just got transferred.

Of course life doesn’t work like that, there will be multiple reforecasts, requests for additional information, questions on the underlying assumptions and often a formal due diligence review.

With a quality finance director this can be a smooth process, without one?

Investors can expend a lot of effort in agreeing a deal, they like to feel at the start that the effort required won’t be disproportional.

Post-Investment Risks

• Will Post-Investment Management Information Be Reliable?

Every lender I have ever worked with has required the provision of ongoing management information.

Depending on the lender and the time of investment the quantity of information can vary.

The lenders then use this information to assess their ongoing risk.

But how reliable is the information they receive if there isn’t a quality FD reviewing it?

Are those decisions about risk levels correct, can the lender take action early enough, will they even realise that there are issues?

• Responding to Challenges

Hopefully everything goes well post deal, the business thrives, lives comfortably within it’s headroom and every does well.

Sadly not always and in particular not all the time.

In my experience most businesses at some point hit an issue, lose a major customer, get hit with a large unexpected price increase.

The ability to calmly cope with these challenges, to liaise with the investor and steady the ship is a core competency of any good FD.

We tend to be calm in a crisis. We communicate well with investors, this can make all the difference

• Cash Flow Management

Ok so there is a crisis as described above, well job one is to stabilise the cashflow.

Cash is king, businesses die from lack of cash.

Again a good FD knows how to manage cash, I have lots of experience in this area.

If you are good at this you can buy a business the time it needs to recover, you can also calm everything done, you manage cash and let the business manage other issues.

The investor have someone they trust that they can talk to, so they don’t feel they have to take radical actions to protect their position.

• Higher Risk of Financial Mismanagement and Fraud

An experienced FD establishes strong financial controls, reducing the risk of mismanagement or fraud. Without this oversight, businesses are more exposed to:

• Poor financial governance
• Inefficient tax and compliance management
• Potential fraud due to lack of checks and balances

I have arrived at businesses where this hasn’t been the case, nothing panics an investor like the word fraud, believe me.

• Strategic Financial Planning

I have worked with a lot of small businesses, probably over 100,

I have seen what works and what doesn’t what is achievable and what isn’t.

I can help advise management teams on their ongoing Strategy, in particular, can they actually afford it.

All good FDs can.

Finally

Investing in a Fractional Finance Director makes the chances of getting funding significantly higher, the process massively smoother and the post investment relationship far stronger.

Do you really want to do something as important for your business without an expert on your team?