3 underestimated tasks to boost your start-up's value

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  1. The overlooked details in unlocking a start-up’s value
  2. Clean up your Director’s Loan
  3. Perfect the art of revenue recognition
  4. Button up your compliance
  5. A quick reminder…

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You’ve launched a promising product or service, established a dedicated customer base, and the momentum is clearly in your favour. What’s next on the horizon? Growth. Of course. If you’re aiming to attract further investment, broaden your customer base, or even tap into new markets, it’s easy to focus on the big-picture tasks to build your start-up’s value: like finding your product-market fit, building a great team, and driving sales.

The overlooked details in unlocking a start-up’s value

However, the devil, as they say, is in the details often overlooked. In this article, we’ll explore three simple yet powerful administrative tasks. The tasks hold the key to elevating your start-up’s value by mitigating the perception of risk. 

It might seem surprising, but many deals sail through the term sheet stage only to encounter an unexpected challenge during DD. But guess what? By getting your financials in order beforehand, you’re not just sidestepping potential hurdles and roadblocks – you’re also giving potential investors even more reason to believe in you and your venture.

Anticipating background checks from potential investors? Progressing into the due diligence (DD) stage? Our guidance ensures you’re well-prepared every step of the way

Interested in diving deeper? Schedule a call with the Standard Ledger team to unlock further insights.

Let’s delve into the three key areas we think you should give a little TLC: 

  1. Clean up your directors loan.
  2. Perfect the art of revenue recognition. 
  3. Button up your compliance: from Companies House matters to taxes and potential tax liabilities. 

1) Clean Up Your Director’s Loan

In the exciting journey of growing a start-up, it’s not uncommon for founders to have a few misconceptions regarding the role of a Director’s Loan. Understanding its mechanics, tax implications, and potential influence on your start-up’s value is crucial. And here’s the kicker: the current state of your Director’s Loan might just tip the scales when you’re in pursuit of your next round of fundraising. Let’s shed light on some essential aspects. 

At its core, a Director’s Loan records the finances a founder either injects into their start-up, or borrows from it. For a more comprehensive exploration of the role of a Director’s Loan, take a look at this article.

As fundraising season approaches, potential investors have a clear vision: they want their investments to propel the company forward. They’re on the lookout for opportunities that promise: 

✔️   A horizon of growth, diversification, product refinement and pioneering R&D.

❌   However, they’re not too enthusiastic about resolving any outstanding personal financial obligations the founder might have.

What’s more, the mere existence of a Director’s Loan can sometimes act as a beacon for scrutiny. Lenders might interpret it as a reflection of the founder’s financial capabilities, leading them to question their ability to steer the start-up’s fiscal responsibilities.

Why does it matter?

Let’s explore why this all holds such weight when it comes to your start-up’s value.

  • Tax Implications: It’s a common misconception that a Director’s Loan account sails smoothly under the tax radar. In reality, they’re not immune to taxation. Many founders unintentionally entangle themselves in tax liabilities, leading to complications during financial DD. 
  • Financial Stewardship: When a Director’s Loan becomes more than just an occasional feature, it could be perceived as a red flag. Investors often interpret continuous reliance on such loans as a sign of weak financial governance. This perception, in turn, might diminish the start-up’s allure, making it seem riskier and less attractive for investments. 

Ultimately, it’s undeniable that Directors Loans can be a very useful tool, especially during the initial phases in times of difficult cash flow. However, it’s imperative to remember that they’re best viewed as a lifeboat, not a cruise ship – something to lean on momentarily and cautiously, rather than a permanent financial strategy.  

2) Perfect the Art of Revenue Recognition

When it comes to understanding the nuances of your profit & loss statement, there’s a question you should ask yourself: Are you accurately pinpointing every penny of revenue and expense? Here’s a little nugget of wisdom: Not all cash inflows are recognised as income, and not all cash outflows count as expenses right away.

Revenue recognition might appear daunting, but it doesn’t have to be! Let’s break it down using an analogy that’s both refreshing and simple: lemonade economics.

At its core, revenue recognition is about acknowledging income when it’s genuinely earned. This means aligning the cost of sales seamlessly with the recognised revenue. 

Picture these citrussy scenarios 🍋

Lemonade stand on the street

Scenario 1:

Imagine a simple lemonade stand on a sunny street corner. You prepare a zesty cup of lemonade, and an eager passerby stops and requests to buy it. Even though their interest is piqued and they have placed an order, we can’t yet recognise that income. Only once they take that first sip and pass over the cash is the deal sealed.

Order made, lemonade relished, and payment received – a straightforward transaction showcasing a promising trend for future earnings.

Scenario 2:

Word spreads fast, and the neighbouring coffee shop catches your lemonade buzz. They propose a deal: 100 cups delivered over the span of the next month. They’ll call in an order each morning, and you’re to deliver the same day. They pay a deposit now, and will settle the remaining amounts after each week of trading. 

So, when do we recognise the revenue? It’s vital to note the revenue at the point when it’s earned. In this scenario, as we fulfil each daily order to the coffee shop, the equivalent revenue for that day’s supply of lemonade gets recorded. But what about the discrepancy between the cash received upfront and the revenue that’s been acknowledged? This is where the magic of the balance sheet comes into play.

The balance sheet plays a vital role in tracking obligations, like your commitment to provide 100 cups of lemonade in the coming days. This commitment shapes up as a liability on the balance sheet. If you don’t deliver that delicious lemonade, then this should be refunded.  

Why does it matter?

Engaging in financial DD is pivotal as you gear up to secure additional investments for your company’s growth. This means you’ll need to prove the validity of your key financial indicators which showcase your start-up’s value. For example, your turnover (total sales before subtracting costs), gross margin (% profit after deducting production costs – higher is usually better!) and EBITDA (a snapshot of a company’s profitability; a favourite among investors) – as per your claims.

The phase your start-up is in plays a role in how this is perceived. For instance, if you’re in the early stages aiming for a seed round, investors may show leniency. They may provide a grace period to rectify issues, or even offer assistance in addressing them. However, the larger your start-up grows, the more difficult these challenges are to resolve. It’s at these moments you might find yourself thinking, “I wish I had recognised the correct revenue from the beginning!”

3) Button Up Your Compliance 

When operating a company in the UK, adhering to rules and regulations is a must. You need to stay on the correct side of both HMRC (who collect various taxes from Corporation Tax to VAT, CGT, SDLT and more) and Companies House (the official register of companies in England, Wales, Scotland & Northern Ireland). 

It’s also important to note that lots of information is available about your business on Companies House. From details on Directors and Shareholders to share allocations, addresses, year-end dates, annual accounts, warranties and more, keep in mind that potential investors often scrutinise your start-up’s records and your history as a director in other companies.

Investors tend to be wary of:

🚩 Delays in filing confirmation statements.

🚩 Outstanding accounts.

🚩 Inconsistencies in statements of capital (i.e. who owns which shares): If the capital table you provided them with doesn’t match Companies House, that’s a definite red flag!

A quick reminder…

If your administrative and financial upkeep doesn’t quite match the proactive image you portray in pitch and sales meetings, savvy investors (and even potential clients) will take note, and it could impact the perception of your start-up’s value. Ensure that your obligations to HMRC are settled as and when they are due, and that you avoid incurring penalties for late payments. Investors won’t appreciate their funds being used to clear overdue Corporate Tax bills from the previous year. 

Remember, in the world of start-ups, perception is as important as reality when it comes to your start-up’s value. Following these three key strategies puts you on the path to winning the confidence of investors, whilst also setting the stage for sustainable growth and success. 

Feeling a twinge of uncertainty or need a touch more clarity? We’re always here to lend a hand, so feel free to reach out to us. 

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