Raising capital and securing financing are critical steps for many businesses, especially startups and small businesses looking to grow. However, a company’s financial records and bookkeeping practices can make or break their chances of getting funded. Inaccurate, messy books raise red flags for potential investors and lenders, while accurate, clean books instil confidence. That’s why proper bookkeeping is so essential when seeking outside financing.

In this comprehensive guide, we’ll explain why bookkeeping matters so much when raising capital, walk through the bookkeeping mistakes that deter investors and lenders, and share tips for creating accurate financial statements that improve your chances of securing financing. With proper accounting principles and financial transparency, your business can showcase its true value and merit investment.

Why Bookkeeping Matters for Financing

Before extending capital, investors and lenders conduct due diligence on a company’s financial health. They analyse financial statements, tax returns, bank records, sales data, and other documents to assess business fundamentals, growth potential, and risk factors. A company’s bookkeeping provides the underlying data for these materials. 

Without accurate bookkeeping, financial statements will be erroneous or incomplete, failing to present a true picture of the business. This lack of financial transparency is a huge red flag for investors and lenders. It calls into question whether the business has discipline and accountability. Additionally, inaccurate books mean key performance metrics and growth forecasts may be flawed, undermining projections.

However, with meticulous bookkeeping, a company can demonstrate financial competency and minimise uncertainty. Investors and lenders will have confidence in the accuracy of the business’s financial position and outlook. The company will be prepared with audit-ready records if more detailed review is requested. Proper bookkeeping signals the business is operationally buttoned-up and ready to scale.

Ultimately, bookkeeping accuracy and completeness provides the financial visibility required for outside parties to underwrite deals and risk. It is the bedrock for securing financing.

Bookkeeping Mistakes That Deter Financing

Many bookkeeping mistakes can thwart a company’s chances of raising capital. Here are some key errors and issues to avoid:

Incomplete Records

Missing account transactions, invoices, receipts, or other records undermine financial statement accuracy. Incomplete books signal disorganisation and increase perceived risk.

Outdated Data

Stale financial data from months or quarters ago lacks relevance. Investors want current snapshots with updated revenue and profit metrics.

Disorganised Systems

Chaotic recordkeeping makes error-checking difficult. Unstructured books also waste valuable time hunting down information.

Lack of Internal Controls

No controls, reviews, or approval procedures around bookkeeping invite mistakes or fraud. Oversight is required to ensure integrity.

Mathematical Errors

Simple math mistakes destroy credibility. Books must have precise reconciliation with no unexplained discrepancies. 

Undocumented Assumptions

Ad hoc estimates without documentation also hurt credibility. All assumptions behind valuations, accruals, deferrals, etc. should be explained and supported.

Unrealistic Forecasts 

Overly optimistic projections that lack factual basis raises suspicion. Forecasts should be grounded in past data trends.

Omitted Liabilities

Excluding real liabilities misrepresents financial health. Books must reflect all obligations, debt, and other liabilities.

Unreported Cash Flow

Under the table revenue or cash transactions hide full financial activity. All income sources should be documented. 

Non-GAAP Principles

 Deviating from General Accepted Accounting Principles (GAAP) undermines comparability. Adhere to GAAP.

By avoiding these bookkeeping pitfalls, companies retain credibility with investors and lenders reviewing their finances.

Best Practices for Fundraising-Ready Books 

Here are some tips and principles for keeping accurate, transparent books to bolster financing potential:

Record Transactions in Real Time

Enter financial transactions as they occur to prevent incomplete data. Don’t let records pile up.

Reconcile Regularly 

Perform bank reconciliations, account reconciliations, and cash-basis to accrual conversions regularly to identify any discrepancies.

Follow GAAP Standards

Adhere to GAAP revenue recognition, accruals, deferrals, depreciation, and other standards to facilitate comparisons.

Note All Assumptions

Document the rationale behind any estimates, projections, valuations, or other non-actual figures in the books.

Retain Supporting Documents

Keep copies of invoices, contracts, inventory records, purchase orders, and other supporting materials for reference.

Build Audit Trails

Utilise audit trails within accounting software to track changes. Record who entered what transactions and when.  

Automate Where Possible

Automated data syncing and transaction entries minimise errors. Make adoption of accounting technology a priority.

Follow Approval Workflows

Enforce controls requiring authorization of non-routine journal entries. No one person should have unilateral control.

Hire External Accountants

Engage qualified accountants to review internal reporting, perform reconciliations, and prepare financial statements.

Maintain Current Books

Continuously update records each period. Don’t let reporting lag. Have the most recent data available.

Forecast Conservatively

Keep growth projections realistic and modest to establish credibility. Avoid hockey stick graphs.

The Impact of Clean Books on Financing Terms

Beyond just securing financing, a company’s bookkeeping can also influence the specific terms it receives from investors and lenders:

Improved Valuations

Accurate financials allow investors to properly value the business, potentially increasing valuation.

Lower Equity Stakes

With less risk premiums, founders may be able to retain greater equity ownership in their company.

Higher Leverage Ratios

Lenders may approve higher debt financing relative to equity if the company looks financially lower-risk.

Lower Interest Rates

Interest charged on debt instruments may decrease as perceived risk declines.

Reduced Collateral Needed

Less collateral may be required for loans if financials demonstrate the company’s reliability.

Longer Grace Periods

Investors and lenders may extend grace periods on payments due given the company’s financial strength. 

Fewer Covenants

With less cause for concern, financing deals may include fewer restrictive financial and operational covenants.

While certainly not guaranteed, meticulous bookkeeping practices maximise the potential for securing financing with favourable terms.

Bookkeeping Tips for Specific Financing Sources

Bookkeeping needs can vary slightly depending on the specific type of financing being sought. Here are some tips tailored to different capital sources:

Venture Capital Investment

Highlight revenue growth, low burn rates, and path to profitability. Keep impeccable records of sales pipelines.

Angel Investment

Focus on demonstrating product-market fit. Keep organised customer and product usage data.

Bank Loans 

Stress current profitability, collateral, and ability to repay. Maintain updated asset records like accounts receivable.

Business Credit Cards

Card issuers want to see consistent revenue streams. Carefully track sales invoices and collections.

Equipment Leasing

Lessors will scrutinise maintenance logs and depreciation schedules. Detail equipment lifespans. 

Accounts Receivable Financing

Lenders will analyse customer payment history. Track invoice due dates and collections.

Purchase Order Financing

Accurate manufacturing and inventory records are critical. Extensive document order fulfilment.

Crowdfunding 

Financial transparency and regular campaign updates are expected. Budget carefully.

Signs It’s Time to Improve Your Accounting 

If any of the following apply to your business, it may be time to level up your accounting practices:

– Bookkeeping process is entirely manual

– Financial statements take weeks to prepare

– Records are incomplete or contain many errors  

– No system for document retention and organisation

– Accounting software is outdated or limited in capabilities

– Profitability metrics are unclear

– High auditor fees due to poor internal controls

– Have been denied financing in the past

Addressing these warning signs through accounting technology, added personnel, improved processes, and/or external support can help get your books investor-ready.

Services for Accurate Finance Tracking

If creating pristine financial records feels daunting, many services are available to help, including:

– Accounting firms – Hire a reputable firm to handle your bookkeeping, conduct audits, prepare financial statements, and improve processes.

– Bookkeeping software – User friendly accounting systems like QuickBooks streamline recording and reporting finances.

– Document management tools – Solutions like Box or Dropbox provide secure digital storage and file sharing capabilities.

– Expense management apps – Apps like Expensify automate expense tracking, receipt capture, and report creation.

– Accounting marketplaces – Online marketplaces like AccountingDepartment.com connect you with specialised accountants on demand.

Conclusion

A company’s bookkeeping provides the foundation for securing the growth capital every business needs at some point.Investors and lenders place immense weight on the accuracy, transparency, and completeness of financial records. Meticulous accounting and financial controls demonstrate operational maturity and lower perceived risk. With clean books, companies inspire confidence in potential financing partners while also securing better terms for their capital. Equipped with proper know-how, the right tools, and possible outside support, any organisation can implement fundraising-ready accounting practices. The returns from improved access to capital will be well worth the effort.