Securing Funding or Exploring M&A: The Key Role of…

When your business is at a crossroads—considering external funding, a merger and acquisition (M&A), or simply looking for the right financial backing to fuel growth—the foundation of your success hinges on one critical element: cash flow.

If you’re an MSME (Micro, Small, and Medium Enterprise) owner, this scenario might sound familiar. You’ve successfully scaled your business so far, but now you’re looking to expand, bring in investors, or even acquire a new business. Investors and stakeholders alike are keen to assess the financial health of your company. This means that before stepping into any funding or M&A opportunities, you need to ensure that your financials are in top shape. Here’s how cash flow management can make or break your chances of securing funding or making a successful acquisition.

The Business Case: Seeking External Funding or Engaging in M&A

Let’s walk through a scenario to better understand the situation.

You run a growing business, and you’ve been approached by potential investors interested in funding your expansion. These investors want to ensure that your business is not only profitable but also financially stable and capable of sustaining growth. On top of that, you’re also considering the possibility of acquiring a competitor or merging with another business to expand your market reach. But no matter what direction you’re going in, there’s one thing that investors, lenders, and stakeholders will focus on: your business’s financial health, particularly its cash flow.

In this context, what exactly do you need to show your investors or potential M&A partners?

1. Cash Flow Projections: Show Me the Money

For investors or financial institutions, cash flow projections are the cornerstone of your financial story. When considering funding or acquisitions, investors want to know that your business can generate sufficient cash to cover:

• Operating expenses
• Debt repayments
• Investment in growth opportunities

The ability to show predictable, sustainable cash flow indicates that your business is not only profitable but also capable of managing the financial demands of growth. This is especially critical if you are looking to scale or expand operations through external funding or M&A.

What You Need:

• Clear cash inflows and outflows projections for the next 12 months or more.
• Breakdown of how you expect cash to flow in and out of your business. For instance, if you’re launching a new product line, your projections should show how that will impact cash flow.
• Clear evidence that you will have enough liquidity to meet both immediate and future financial obligations.

Tip: If you’re uncertain about forecasting cash flow, this is where a cash flow management tool (like the MSME Cashflow Toolkit launching soon) can help streamline the process and provide accurate projections.

2. Receivables Management: Timely Payments Equal Healthy Cash Flow

Another key factor for investors is accounts receivable management. If your customers are frequently late with payments, it directly affects your business’s cash flow, making it harder to meet obligations and fund future growth. Lenders and investors are looking for evidence that you have a well-organized and proactive strategy for managing receivables.

What You Need:

• A detailed aging report that shows how long customers typically take to pay their invoices.
• Evidence of a strategic collections process to ensure timely payments, including follow-ups, payment terms, and penalties for late payments.
• A plan to reduce DSO (Days Sales Outstanding) and improve cash flow.

Tip: Implementing automated invoicing and payment reminders can drastically improve your collections process and show investors that you’re in control of your receivables.

3. Budget vs Actuals: Are You Staying on Track?

Your budget vs. actuals report is an essential tool for illustrating to investors that you can manage business finances effectively. If your business has consistently overshot its budget or veered off-course, it raises concerns about your ability to forecast, allocate resources, and stick to a financial plan.

What You Need:

• A clear and realistic budget for the upcoming year, comparing it with actual performance.
• Detailed reasons for any significant variances between your budget and actual results.
• A plan for corrective actions if the budget isn’t being followed or if certain costs are higher than anticipated.

Tip: Be transparent with investors about past deviations from your budget and what you’ve learned from those experiences. This shows adaptability and foresight.

4. Forecasting: Predicting Future Success

In addition to past financial performance, investors want to understand how well you can forecast future performance. If you’re looking to scale or acquire a business, forecasting is key to demonstrating that you’ve accounted for potential risks, market changes, and other factors that could impact cash flow.

What You Need:

• 3–5 year financial forecast with realistic assumptions about revenue growth, cost increases, and market conditions.
• A risk assessment outlining the potential financial risks and how you plan to mitigate them.
• Plans for managing any unforeseen cash flow disruptions (e.g., customer defaults, unexpected costs).

Tip: Providing scenario-based forecasts (best case, worst case, expected case) helps investors understand how you plan to navigate uncertainty while staying profitable.

5. Profitability and Liquidity: The Heart of Financial Stability

Finally, investors will scrutinize your profitability and liquidity to ensure that your business can handle both day-to-day operations and unexpected expenses. A healthy balance sheet and income statement will show that your business is generating profit and has enough liquid assets to cover any short-term financial needs.

What You Need:

• Profit & Loss (P&L) statement showing consistent revenue and profit margins.
• Balance sheet illustrating a strong financial position, with manageable debt levels and healthy equity.
• Liquidity ratios that demonstrate your ability to meet short-term financial obligations.

Tip: If your liquidity is low, consider a line of credit or other short-term financing options to boost cash reserves.

Conclusion: Preparing for Growth or M&A with Strong Financials

When preparing for funding or a potential M&A, cash flow management is the backbone of your financial strategy. By focusing on accurate cash flow projections, managing receivables, keeping track of budget vs actuals, and preparing solid financial forecasts, you demonstrate to investors that your business is ready for the next step—whether it’s expansion, funding, or acquisition.

At the end of the day, investors want to see that you have control over your finances and a clear path to sustainable growth.

Is your business ready for funding or growth?

If you’re unsure, consider outsourcing your bookkeeping to streamline your cash flow management and financial reporting. By working with an experienced outsourced team, you’ll ensure that your financials are clear, accurate, and investor-ready.

Stay tuned for the MSME Cashflow Toolkit, launching soon!

This toolkit is designed to help MSMEs like yours manage cash flow efficiently and increase your chances of securing funding or making successful acquisitions.