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Financial Models: Strategies for Effective Fundraising in 2023

Financial Models: Strategies for Effective Fundraising in 2023

Dr Thommie Burger is the Founder of JTB Consulting
Financial Models Mastering the Art of Fundraising in 2023

Any business needs a funding source to ensure consistent growth and prosperity. Startups need to raise funds to launch a new investment. Likewise, existing companies must ensure investors continue providing money to accomplish objectives. Fundraising is incredibly tough as you need to handle a lot of numbers.

No matter what kind of organisation you’re running, having robust financial models is a powerful way to plan and execute a fundraising campaign.

Financial Models Mastering the Art of Fundraising in 2023
Financial-Models-Mastering-the-Art-of-Fundraising-in-2023. New insights from JTB Consulting.

All About Financial Models and Fundraising

Fundraising involves collecting or soliciting financial support from individuals, corporations, or other organisations. Its main goal is to raise funds to hold up the business’s capital, funding, or operating expenses (OPEX). As it ensures a continuous flow of cash and resources, it helps the company achieve its goals. Whether you’re a startup or an established business, fundraising can provide the financial backing needed to achieve lasting success and growth.

A fundraising procedure will vary from business to business, just like a sales and marketing approach may. When a firm expands, there will be subtle changes in the ideas and processes that underpin the process as well as in communication, practice, and other areas.

Financial-Models-Strategies-for-Effective-Fundraising-in-2023. Get more free advice and insights here.

Why Do You Need Funding for a Startup Business?

For businesses, fundraising serves as an avenue to achieve different goals. Besides initial funding, the most common reasons why businesses may need to raise funds are:

  1. Asset purchase: It can be a building, equipment, land, technology, etc.:
  2. Debt Reconstruction: At some point, a business may encounter financial turmoil. Fundraising can help reduce the debt burden to survive.
  3. Expansion: To increase facility capacity, infrastructure, marketing, production, etc.
    Smooth Operation. Funds are needed to address immediate financial needs and maintain the business operation.
  4. Starting a Business: A strategy to develop new concepts.

In addition, raising funds allows companies to build relationships with stakeholders, such as investors, donors, and community members. Through this interaction, they can better understand the needs of these individuals and tailor their activities to meet their expectations. Ultimately, business fundraising goals are interconnected; each objective contributes to the company’s overall success.

Moreover, fundraising supports the growth and sustainability of businesses, helping them provide better products and services to clients and/or customers.

Types of Funding Sources for Businesses

Funding is the lifeblood of any business, and there are various ways to obtain it. From traditional bank loans to venture capital investments, entrepreneurs have a range of funding sources to choose from for their startup dreams. Some may prefer the stability of a traditional loan, with its predictable payment terms and interest rates. Others may be willing to take more risks in exchange for the potential rewards of equity financing.

Fundraising Ideas: Bootstrapping

Bootstrapping is the most excellent method of raising capital for those who don’t want to relinquish ownership or freedom. It can entail using your savings or getting a mortgage on your possessions. A bootstrapping startup starts a new business with little to no capital. It reinvests its first profits to achieve growth. It puts the entrepreneur in a tough spot as he has to spend every penny carefully without external funding. Yet, its reward is complete control of the business. The key to successful bootstrapping funding is a cost-effective financial plan.

Fundraising Ideas: Family, Friends, and Fools Funding (3Fs)

The most convenient way to fund a business is through the 3Fs funding sources. Many startups struggle to gain the trust of banks, investors, and lenders because they are new to the industry. With zero credibility, family, friends, or fools can be potential first investors. Most family members and friends will be willing to support an entrepreneur’s business affairs. Fools are not dumb individuals. Instead, they are reasonable enough to take the risk of investing at the early stage of a business. The only downside of getting 3Fs funding is that they may lead to ugly conflicts or disputes due to personal differences.

Fundraising Ideas: Crowdfunding

Use the power of the internet to raise the money you require if you are passionate about a cause. In recent years, crowdfunding websites like GoFundMe have become popular among businesses, inventors, and the general public.

They’re simple to set up, and if you can express your enthusiasm in the description of your fundraiser, you can win the support of individuals worldwide. Financing using a pool of interested investors can work under a debt, donation, product-based, or equity scheme. Its main advantage is attracting an audience of potential customers besides getting funds. Yet crowdfunding may be subject to capital market rulings and extensive compliance requirements.

Crowdfunding may not apply to all businesses. A crowdfunding platform business plan model can help you with the financial feasibility study if that funding source fits your company.

Fundraising Ideas: Angel Investors

In exchange for convertible debt or ownership equity, angel investors can contribute money to a startup company. Angel investors, often known as business angels, are typically wealthy private individuals more experienced with the entrepreneurial path and its common difficulties.

They invest for personal reasons, like the excitement of being part of innovative ideas, witnessing entrepreneurial journeys, or targeting abnormal returns in exchange for higher-risk investments. The drawback is that the ticket sizes could be small, and it might take numerous angel investors to provide the needed money.

Fundraising Ideas: Startup Grants for Small Businesses

Startup grants for small businesses don’t need to be paid back. They are usually available from endowment funds, governments, or non-profit organisations. Grants are easier to obtain and have different criteria from traditional banks and lenders. However, they are limited to specific and very strict compliance requirements.

Fundraising Ideas: Venture Capitalists

Like angel investors, venture capitalists (VC) fund emerging businesses and startups with significant development potential, yet, they often offer finance that frequently has greater rates of return. Typically, a VC invests as a General Partner for 7 to 10 years. However, it is essential to note that the scheme may require an exit event where the VC can sell the company to realise a financial return.

Fundraising Ideas: Private Equity

Investment partnerships that acquire and run businesses before selling them are private equity (PE) firms. They manage investment funds from accredited and institutional investors. A private equity firm typically engages in buyouts to overhaul a company and sell them. Depending on the abilities and goals of the private equity firm, an acquisition may increase a company’s competitiveness or burden it with unmanageable debt. It is also essential to note that investing in a private equity firm takes significant financial due diligence.

Fundraising Ideas: Bank Financing

Banks provide capital to businesses, consumers, and investors through debts, loans, or financing arrangements. Such a funding source allows companies to purchase products and resources to achieve their goals. Yet bank financing can be challenging because of the standard criteria they follow. These may include:

  • A solid business plan and financial plan
  • Collateral as security to the loan
  • Guarantees or guarantors
  • Track record of stable cash flows and profits.

Whether you’re looking to bootstrap your business with your savings or secure a loan through a government program, the key is understanding your options and choosing the funding strategy that makes the most sense for your unique situation. Ultimately, the correct type of funding can be the difference between success and failure for your business.

Creating a Solid Fundraising Plan

Financial-Models-Mastering-the-Art-of-Fundraising-in-2023. Get more free insights from JTB Consulting.

Creating a fundraising plan is essential for any business because it helps ensure the company has the necessary resources to achieve its goals and objectives. With a solid funding plan, a business may obtain the capital required to start and grow, or it may be able to sustain its operations over time.

A fundraising plan outlines how you are going to raise funds. It is ideally a written document that will guide you with your fundraising strategies. It doesn’t have to be elaborate or too long. A simple fundraising model calculates the funding required and returns each investor can expect. At the very least, a fundraising plan should answer these three questions:

  1. How much capital will you raise?
  2. How will you go about raising funds?
  3. When are you raising capital?

Step 1 – Identify Your Resources

Are you operating your business without a funding plan? Sitting for a few days or weeks and materialising it is worth your time. Ideally, you must revise or rewrite your fundraising plan yearly. The management or development team should write the fundraising plan and execute it. Other companies can seek help from a custom financial modelling professional.

The first step is identifying what you currently have to help you with your fundraising plan. Identifying your resources is essential, as these will help you determine your financial needs and funding options. Here are some steps to identify your resources:

Start by creating a comprehensive list of all your tangible and intangible assets, including brand recognition, cash in the bank, equipment, intellectual property, product inventory, physical properties, etc.

Then you must identify your revenue streams and operating expenses to assess your creditworthiness. Most banks, investors, lenders, and other funding institutions may require you to present the following financial statements:

  • Income Statement: An annual income statement shows the company’s revenues and expenses during a specific period, usually a month or a year. It helps investors understand the profitability of the business.
  • Balance Sheet: The balance sheet shows the company’s assets, liabilities, and equity at a specific point in time. It helps lenders evaluate the financial health and liquidity of the business.
  • Cash Flow Statement: A cash flow projection template shows the company’s inflows and outflows of cash during a specific period, usually a month or a year. It helps investors understand the company’s ability to generate and manage cash flow.
  • Financial Ratios: Lenders may also calculate various financial ratios to evaluate the company’s performance and creditworthiness, such as the debt-to-equity ratio, the current ratio, and the return on investment.

These financial statements will help you make accurate and informed decisions on how much your company needs and can pay for funding capital projects. They can also increase the chances of securing the financing you need to grow and succeed.

Step 2 – Define Your Fundraising Strategies

The next step is determining how, when, and who will raise the total amount. You must go into detail here and define a goal for each strategy. There is plenty of ways to raise funds. The key is determining what will give the most value to your investment. Knowledge of the different types of funding sources can help.

Defining your funding strategies involves identifying your financial goals, understanding your funding options, and developing a plan to achieve those goals. Here are some steps you can take to define your funding strategies:

  • Determine what you want to achieve, such as raising capital to start a business, financing a new project, or expanding an existing operation.
  • Understand your funding options based on their pros and cons and suitability for your business needs.
  • Outline your funding needs and sources.
  • Set the timeline for raising the necessary funds and identify who’s in charge.
  • The key to defining your funding strategies is to be strategic, flexible, and proactive in identifying and pursuing funding opportunities that align with your financial goals and business needs.

Step 3 – Put Your Fundraising Plan in a Financial Model

Many organisations stumble here. They typically assess their existing resources and define their fundraising strategies but need a project management template to track their implementation. It’s like putting your fundraising plan on the calendar.

See how JTB Consulting can help you with your Financial Model requirements.

A financial model can help you track and implement your funding plan by providing a structure to organise your thoughts and ideas. It can help you identify the information you’ll need to track and report back on as you implement your plan. A fundraising plan feels much more doable when you map out the work over time. Set deadlines – think of them as mileposts where you can gauge your success.

Use whatever tool works best for you. For example, you can contact JTB Consulting to prepare and design a bespoke fundraising model that you can use to raise funds and monitor your actual costs against the model forecasts.

Step 4 – Confidently Implement Your Fundraising Plan

Be prepared to pitch your business ideas to potential investors and lenders. Confidently reach out to them and showcase your business potential using your feasibility study and financial analysis. Implementation does not stop with execution. You should carefully monitor and adjust your fundraising plan as needed.

Creating an accountability system while implementing your fundraising plan can lead to success. Hold regular check-ins to share information and unblock challenges. Once you do succeed, let everyone on the team celebrate the victory. If you fall short, take it as a time to assess what needs improvement in your approach.

No matter where you’re in your fundraising journey, having an organised funding plan is integral for increasing the likelihood of achieving financing. A solid business funding plan that outlines the apparent purpose of the venture and details on how to use the capital is essential for success. In addition, such a plan can make all the difference when presenting to investors and help distinguish your proposal from others.

Creating a funding strategy should be seen as something other than a one-time task; entrepreneurs should develop multiple plans with different focus areas to cover their bases and capitalise on any opportunity to make their pitch most captivating to investors. Although this process requires significant effort, the return can be substantial.

Something Extra: Business Valuations – Should you do it Internally or Hire an Expert?

A business valuation is a necessary process that helps shareholders and management determine the worth of a company. It involves assessing various financial and non-financial factors to determine the value of a business. But often, the question arises: should you do the business valuation internally or hire an expert? So let’s take a look.

Motivation for Business Valuation

The motivation for doing a business valuation can vary depending on the circumstances. For example, a business valuation may be necessary when seeking investment, selling the company, or creating a strategic plan. The purpose of the business valuation and whether it will be used for management purposes or by external users should also be considered before deciding whether to do it internally or hire an expert.

Complexity and Size of the Business being Valued

The complexity and size of the business being valued can also impact the decision of whether to do the valuation internally or hire an expert. For example, a small business with straightforward financials can handle the valuation internally using essential tools and software. However, larger and more complex companies may require the expertise of a professional with experience in complex valuation models.

Who is the Business Valuation for?

The need to hire an expert business valuer may depend on who the business valuation is for. If the valuation is for internal purposes, such as assessing the performance of the business or making strategic decisions, it may be feasible to do it internally. However, hiring an expert business valuer may be necessary if the valuation is for external purposes, such as selling the business, seeking investment, or settling legal disputes. This is because external parties may require an unbiased and independent assessment of the business’s value, which a professional can only provide with the necessary skills and expertise.

Responsibility and Regulatory Requirements of a Business Valuation

Who will carry the responsibility for the business valuation? Depending on the situation, the responsibility for a business valuation may fall on the company’s financial team or an external expert. Additionally, regulatory requirements may require a professional and independent valuation expert.

Time and Capacity available In-House to Conduct the Business Valuation

The time and capacity that are available in-house should always be considered. For example, hiring an expert to perform the valuation may be more efficient if the company’s financial team is already stretched thin. However, if sufficient time and capacity are available, doing the valuation internally may be more cost-effective.

Financial Skills and Business Valuation Expertise Required

The financial skills and expertise required for a business valuation are as essential as the capacity and time available in-house. While some basic financial skills may be sufficient for a reasonably straightforward business valuation, more complex valuations may require the expertise of a professional.

Deciding whether to do a business valuation internally or hire an expert requires careful consideration of several factors. Ultimately, the decision will depend on the business valuation’s circumstances, including its purpose, complexity, size, and regulatory requirements. In any case, it’s essential to ensure that the business valuation is carried out accurately, efficiently and fit for purpose to provide a fair and accurate assessment of the company’s worth.

Various Factors Influence Business Value.

A business valuation is a process of determining the worth of a business entity, which is vital in mergers and acquisitions, partnerships, and strategic decision-making. As a business owner or director, building a high business valuation is crucial for the long-term success of your enterprise. A higher business value is not a random event or a stroke of luck but the result of sustainable business successes over time and a solid outlook for the future.

This position is not achieved in a vacuum; it results from hard work, intelligent decisions, and efficient business functions over time. Therefore, let’s explore the various business functions that can significantly impact a business’s valuation in the medium to long term and refer to each function as the critical component in the valuation calculation.

  1. Financial Management:
    • Financial management is the primary business function that directly influences a company’s valuation. Effective financial management practices such as maintaining accurate financial records, forecasting cash flow, and managing expenses help to build investor confidence, attract more capital investment, and ultimately increase business valuation. It lowers the risk profile in the business and provides and establishes a manner to monitor results against budgets. This reduces the risk-adjusted cost of capital (also known as WACC in a DCF valuation).
  1. Sales and Marketing:
    • An efficient sales and marketing strategy helps increase revenue and brand visibility, thereby increasing business valuation. In addition, a well-executed sales and marketing plan will help a business to penetrate new markets, build a loyal customer base, and ultimately increase profitability and cash flows.
  1. Operational Efficiency:
    • Operational efficiency is executing business operations efficiently while minimising waste and maximising productivity. Optimising business processes, eliminating inefficiencies, and automating tasks lower costs and increase revenue. This results in enhanced cash inflows. If this operation efficiency is entrenched in the business operations, the long-term business value (a.k.a. terminal value in a DCF calculation) will increase substantially.
  1. Innovation and Research and Development (R&D):
    • Innovation and R&D are essential functions in building sustainable competitive advantage. By investing in innovation and R&D, a business can create new products, improve existing ones, and ultimately increase its market share, revenue, and long-term growth prospects.
  1. Human Resources:
    • The Human Resources function is essential in building a solid team and retaining talented employees. By creating a positive work culture, providing training and development opportunities, and offering competitive compensation packages, a business can attract and retain the best talent, leading to increased productivity and the ability to realise the business’ vision and goals. This increases the probability of achieving forecasts, thereby building investor confidence and lowering the risk-adjusted cost of capital (WACC).
  1. Customer Satisfaction:
    • A business’s success depends on its ability to satisfy its customers. A company can build a loyal customer base and increase sales by providing excellent customer service, addressing customer complaints promptly, and continuously improving products or services. This creates a sustainable competitive advantage, expanding a business’s long-term growth expectation.
  1. Supply Chain Management:
    • Supply chain management involves managing the flow of goods and services from suppliers to customers. An optimised supply chain process improves efficiency, reduces costs, increases customer satisfaction and significantly reduces the cash tied up in working capital. This has a significant favourable influence on the cash flows generated, especially for growing businesses.
  1. Risk Management:
    • Every business face risks, and effective risk management practices can mitigate those risks, thereby reducing the potential negative impact on business valuation. By identifying and assessing potential risks, creating contingency plans, and implementing risk mitigation strategies, a business increases investor confidence and lowers the risk-adjusted cost of capital (WACC).

What Is the CAGR Formula Excel Function?

The compound annual growth rate (CAGR) is a formula that calculates an investment’s growth over one or more years with compounding values. Professionals usually use this formula to determine an appropriate rate of return (RoR) for an investment to reach its ending balance. Understanding the CAGR formula can help you analyse investments and identify their expected returns.

The CAGR formula Excel function is a formula that can help you calculate the expected balance of an investment after compound values. It can also assist you in comparing past investment performances with other assets in a similar industry. Therefore, understanding the CAGR formula before reviewing how to create it in Excel can be beneficial. Below, you can find the typical formula for calculating the compounding annual growth rate of investments:

CAGR = (Ending value/Beginning value)^(1/Number of periods) – 1) x 100

Example: An investment banker wants to determine the compound annual growth rate for an investment of five years. The initial investment was worth R5,000; after five years, the investment was worth R10,000. The investment banker utilises the CAGR formula to determine the compounded annual growth rate.

  • Ending value = R10,000
  • Beginning value = R5,000
  • Number of periods = 5
  • Formula = (R10,000/R5,000)^(1/5) -1) x 100
  • The compound annual growth rate of the investment is 14.86%.

Established in 2006, we have successfully written hundreds of bankable and world-class Business Plans for clients across 25 countries. As South Africa’s Leading Business Plan Company, we are confident that we would be able to assist you too. Kindly note that we also offer “Investor Pitch Decks”, “Excel-based Financial Models”, and “Proposal/Tender Writing Services” in addition to our Custom Business Plan Writing Service. Please visit our Services page for more information.

We look forward to being of service to you. Please feel free to contact our Founder, Dr Thommie Burger, on +27 79 300 8984 should you have any questions. He is also available via email and LinkedIn.

JTB – Your Business Planning Partner.

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