In case you missed it: Part 1 – Part 2 – Part 3 – Part 4

Payback

Payback is the third reason for a company to spend money after COGS and Operations. I don’t mean payback as in sending some goon out to break a bunch of kneecaps. Payback is what I’m calling the money you use to pay back lenders and investors who gave you cash to get the business going. If it’s a loan, the payments are usually figured as overhead, because you have to pay them every month. If investors contributed the funds, payback is usually figured as a dividend, or share of profits or maybe return on investment. It’s not usually figured all in one place, after COGS and Operations. And that accounting methodology has made it harder than it should be for entrepreneurs to raise financing. Let me explain.

Entrepreneurs tend to focus on potential (size of the market) and cash flow (making it through the month paying all the bills). Investors and lenders know that after paying all the bills there has to be something left over to pay back their investment and make a profit on it. Sure they want to see potential, but they also want to know how long it will take before there’s enought money to pay them back without hurting the operations. And they want to see that the risks of them never getting paid back have been minimized. So if you want to raise funds, be prepared to show how you’ll pay back your investors from cash flow, and when. Thinking about it as a separate category makes this easier to show.

Tech bubbles happen when investors too, forget about this and figure they’ll get paid back by selling the company to GOOGLE for $25million. But I digress.

I suggest that when you do cash flow projections you separate all the people you’ll pay into groups. Put the payments for COGs in one group, the payments for operations in the second group and the payements to payback in the third. This should show you and investors how much cash will be available to return their contribution, and when.

Takeaways:

• Use a separate category to show how you’ll have money to pay back your loans and investors without hurting the cash you need for COGS or Operations.