So you landed some funding for your business. You finished writing a solid business plan and used it to apply for a small business loan, or perhaps you made a successful pitch to investors. Either way, congratulations!
Now comes, possibly the more difficult part of receiving funding, managing it.
Start with your business plan
When you built your business plan, you likely included a section that explained how you plan to use the money you requested from lenders or investors.
This probably looked like a report on “use of funds” (or “use of proceeds,” as it’s sometimes called). It’s a standard part of writing a business plan to get funding. A use of funds report is a simple statement of why you need the funding and how it will help your business.
Since there are so many ways to use funding (purchasing equipment or other assets, adding staff, expanding marketing, and so on), a use of funds report can take the form that best meets your needs. It might be a spreadsheet, a forecast, or simply a few paragraphs of text.
And now that you have that cash in hand, it’s tempting to think that your business plan has done its job, and now all you have to do is use the money. But many entrepreneurs fail because of this exact belief. They haven’t quite thought through all the ways their original plan will probably change over time, or how to manage their funding while they navigate these changes.
Revisit and revise your initial spending strategy
Consider this: When you wrote your original business plan, there were things you didn’t know. It’s true for every entrepreneur. No matter how much expertise you have in your field, there are always aspects of running a business that you won’t understand in advance.
This is completely fine because you’ll learn as you go. But that learning needs to be captured and acted on quickly, so your company can stay solvent. And this is where doing more use of funds reporting can really help you—not from a planning standpoint, but from a management standpoint.
4 steps to manage and strategically use your funds
We’ll dive into specific funding scenarios later on in this article, but for now, here are the 4-steps you should take to better manage the cash you received.
1. Compare your forecasts to actual performance
Similar to how you don’t have all the answers regarding how you’ll actually spend funding before launching your business, your other projections likely aren’t perfect. Forecasting isn’t about seeing into the future, but making educated guesses regarding financial performance, market factors, and customer interest. And when you’re a virtually new business, you’re typically basing these assumptions off competitors or industry benchmarks, not previous sales or cash flow data.
So, rather than working off of outdated assumptions, the best thing you can do is compare your forecast to how your company actually performed. Doing this on a monthly basis helps you quickly identify where real-world sales and costs deviated from your projections.
2. Adjust your forecast
The other piece of comparing your forecasts to actual performance is revising your forecasts with actual sales data. We call this adjust to actuals, and doing this practice regularly ensures that your upcoming projections are always more accurate than the last. This ensures that you won’t be surprised by dips in sales, a lack of cash, or not having enough supply to satisfy demand.
3. Review your cash runway
Part of revising forecasts based on actual performance is looking at your cash burn rate and understanding your cash runway. These metrics tell you how quickly you are using up your funding and how long you have left until it potentially runs out. You’ll want to look at your projected cash flow statement to fully understand how solvent your business is in the coming months.
4. Make a plan and set milestones to bridge that money gap
Keep in mind that, especially for startups, you’ll probably be looking at a hefty burn rate and negative cash flow in the first few months. That’s perfectly ok, but you want to be sure you have milestones in place for when you need to see your cash intake flip to positive. Otherwise, you’ll keep on burning through cash thinking it’s perfectly fine until it’s too late.
This is when you should revisit your overall business plan once again, and revise or adjust any initial milestones you have. Just like forecasts benefit from adjusting to actual results, your overall strategic plan does as well. You’ll want to consistently revisit elements of your plan over time and keep them up to date. That way it can be used as a management tool rather than just a static plan that helped you get funding.
Managing cash is easy if you revisit your reports often
Peter Gregory, chairman, and CEO of Green Energy Corp currently uses LivePlan to do strategic planning, use of funds management, and reporting. He is a vocal advocate of doing the process we just walked through early and often.
“If you spend the last 10 minutes of every day looking at your actuals and updating your forecast, then you can get your monthly reporting done in as little as 10 minutes,” says Gregory. “If you wait three months to check in with your numbers, then it’ll take more like four hours to build your report. If you wait a year to look at your numbers, you’ll spend three months coming up with a report.”
“It’s a little like cleaning the shower —if you do it often, it’s no big deal. Wait a year to do it, and you’re going to have to hire a contractor to come rip out your shower.”
Prepare for positive and negative outcomes
As Peter Gregory says, “Keep in mind that good news, as well as bad, can affect your cash flow.” A large, unplanned expense can cause you to run short of cash down the road. But a large, unplanned revenue event creates an opportunity to invest in growth. Either way, the sooner you know what’s happening, the more effectively you can react. By staying in touch with your forecast in this way, you’ll be much better able to see your future.
The cash flow statement, then, becomes a kind of crystal ball. If your forecast is up to date, then you’ll be able to see, on the bottom line, exactly when your cash will dip into the negative:
These are the months when you’ll plan to use your line of credit, and now you can see the amount you’ll be using. With this visibility, you can plan your spending effectively. Not only that, you’ll be able to see what funding you might need a year from now, and that gives you time to find it.
The worst moment to discover that you’re running out of cash is the moment when you’re actually running out of cash.
How to report your use of funding
If you built your business plan in LivePlan, then you’re halfway to your use of funds report already. You can easily update your forecast, and see a visual comparison between your forecast and actual performance in the Dashboard tab. You can even generate reports for your investors or management team at any time.
You’ll need to do this reporting no matter what kind of funding you’ve taken on—a loan, line of credit, or angel investment. Let’s look at the specifics of the use of funds reporting for all three kinds of funding.
Do keep in mind that the reporting we will be walking through is based on how you do it in LivePlan. But the processes and methodology still apply even if you don’t currently use this planning tool.
Use of funds reporting if you’ve received a loan
When a bank loans you money, you aren’t required to formally report back to them on how you’ve used it. But you’ll want to maintain a personal record of what expenditures you’ve made with the funds, and how soon your funds might run out.
If you’re using accounting software like QuickBooks or Xero, this record will happen as part of your accounting, but if you are not yet using accounting software, you’ll want to keep an accurate record of your spending.
If you took on a loan of a specific amount, earmarked for a specific set of purchases, obviously that’s a simple picture. The money comes in, and you spend it on what your business plan said you were going to spend it on. And then you make sure that these expenditures are represented in your forecast.
The LivePlan Schedule tab can be very helpful in planning this kind of spending. Major business expenditures, such as buying equipment, often have important deadlines tied to them. It’s also possible that the loan you’ve received has deadlines attached to it as well. You can create milestones with due dates in LivePlan for these deadlines, which helps you and your team stay on track.
Use of funds reporting if you’ve received a line of credit
Another common type of lending small businesses use is a line of credit—a revolving loan that you can draw on and pay back as needed. When you’re managing a line of credit, LivePlan can not only help you track your use of funds, but it also helps you predict exactly when you’ll need to use that line of credit to bridge future gaps in your cash flow.
It all begins with your business plan forecast. When you take on a line of credit, you’ll first enter it in your forecast. Then you’ll make monthly predictions about your spending, entering them as dollar values in each month.
As the months’ progress, check in on these values and make sure they represent your actual spending picture. Doing these regular checks will keep your cash flow forecast up to date, giving you a more accurate picture of what your cash will look like in upcoming months. A good entrepreneur regularly updates her forecast, so it reflects any unexpected expenses (or earnings) month to month.
When you were pitching to investors, it’s likely you showed them your early use of funds report, so they could understand how you were planning to spend the money. Now that you have an investor, you’ll need to submit a use of funds report to them regularly.
The frequency and level of detail in your reports will usually be dictated by the investment contract you’ve signed, but it’s good to plan on reporting to your investors monthly. (Or if you like, you can always send your investors an invitation to your LivePlan account, so they can check on the data whenever they want to.)
The process for preparing these reports is the same as the process we recommend above for managing a loan or line of credit.
- Check your forecast against your actual performance
- Update the forecast
- Look for future cash flow problems, and make a plan to solve them
The only difference is, in this case, you’ll need to make a presentation of your findings to the investor. Most investors will want to see a set of projected financial statements—profit and loss, balance sheet, and cash flow. You can print these from the Forecast tab in LivePlan.
Investors want to see how you react to the unexpected
Your investor will also want to see how you’re reacting to the unexpected events that pop up as your company operates.
“Investors want to know how their money is being used now, and how it will be used it in the future,” says Gregory. “That future picture can shift over time, so it’s important to be able to explain what that means to the investor. Investors are used to seeing companies change. They just want to know that you’re on top of it, and what the next 12 months to three years look like. That way they can either plan to invest more or not lose more.”
Not only that, an entrepreneur who keeps up on her forecast has more value for investors. “An investor would much rather see your forecast evolve into a target you can hit,” says Gregory. “It doesn’t help anyone if you stick to your original forecast goals and don’t meet them. Investors want to know that you can use this month’s numbers to plan a realistic future. That gives them more confidence, so they’re more likely to stay with you.”
Funding is cyclical
Many new entrepreneurs think that their initial funding is all they’ll need and that the business will be funding itself by the time that borrowed or invested cash is spent.
In reality, however, a business will likely need to seek funding more than once in its lifetime. According to a 2017 Federal Reserve survey of small businesses, over 60 percent needed additional funding to either grow or resolve business challenges.
There could be a temporary dip in your market or an unforeseen pandemic, and you’ll need bridge cash. Or there may be times when you’re ready to grow the company in a new direction, and you’ll need an infusion of cash to ramp up.
This is why good use of funds reporting is so important. The more you can show that you’ve used your funding well to make a positive impact on your company, the more attractive your business will look to lenders and investors in the future.
Editors’ note: This article was originally published in 2019 and updated for 2020.