As a small investor in a rural business initiated by an NGO, I can say that the interaction that made me almost lose my confidence in the enterprise was a communication by the enterprise that included a financial statement. It was a financial statement that showed where the money came from and on what it was spent — something that would be created for a grant-giving agency, not a Profit & Loss Statement for a business.
A recent article in The Guardian on “How to attract investment to your social enterprise” highlights this as well.
Businesses must be able to answer detailed financial questions, says CAN head of social investment Richard Kennedy: “There’s nothing more unsettling from an investor’s perspective than poorly presented finances. What are the trends on revenue and cost lines? What is the relative profitability of your organisation’s business activities? Can you justify your forecasts and do they stand up to scenario testing?
When I received the “financial statement” as an investor, I had two choices. Either I spend the time going through the line items and ask followup questions to create a proper P&L and Balance Sheet, or I just don’t bother and continue to have no idea of the financial health of the business. I have to admit that I took the easier route.
But it also meant that I realized that the business was not being managed as a business: How can you run a business properly without knowing your profitability and whether it is improving or getting worse every quarter?
And that is a scary conclusion for any investor to reach.