Corporate Law

“What are you doing with my money?”  No, it’s not your mom or dad asking or your friend you lost a bet to on a college football game – it’s your potential investor and they’re asking one of the most fundamental questions in a capital raise.  Why?  Because you forgot to answer it ahead of time!  You’re not alone, though, too often a sources and uses statement is overlooked.  Many entrepreneurs simply rely on the financials, general statements in the text of the business plan or investment document, or, worse yet, conversations they may have had last week at dinner.  I’m not discounting any one of those methods; they each have their proper place in the capital raise; however, a good sources and uses statement goes a long way in establishing credibility and instilling confidence in the investment.

So what does a sources and uses statement look like and what does it tell an investor?  In its simplest form a sources and uses statement may look like this in a $500,000 capital raise:

Sources:			Uses:
Capital Raise	$500,000		Sales personnel (x5)	$250,000
			Marketing/Promotion	$100,000
			IP Development/Enhancement	$100,000
			Equipment	$50,000
Total:	$500,000		Total:	$500,000

Here the investor sees their money being spent in advancing the company.  We’re hiring in our sales force (more sales), we’re marketing and promoting (brand/product awareness) and we’re adding to our intellectual property (creating product/market protection).  Now in contrast, consider this:

Sources:			Uses:
Capital Raise	$500,000		Executive Salaries (x2)	$300,000
			Loans/Credit Cards	$100,000
			IP Prototype	$100,000
Total:	$500,000		Total:	$500,000

Here the investor sees their money being spent in covering two generous, executive compensation packages, most likely the executives’ personal debts or investments in the company, intellectual property that may or may not work, and travel ling expenses that are probably questionable at the very least.  Generally speaking, an investment opportunity like this typically finds its way to the recycling bin.

A sources and uses statement is a tool, a tool for the investor to quickly and efficiently see where their money is going, to determine consistency among the numbers, to assess the investment spend, and to help determine what stage the company truly finds itself (risk).  It’s also a tool for the entrepreneur to quickly and efficiently educate the investor about the company and the investment, to establish credibility in the numbers, and to raise confidence with the investor that their money is being spent wisely and is in good hands.  It’s an opportunity to sell yourself and the investment!

An investor wants to know their money is advancing the company, not bailing out the owners or financing an idea or dream.  The last thing an entrepreneur wants in a capital raise is to have the investor ask such a basic question, because the last thing the entrepreneur may hear is ………….“No thank you.”