Unable to explain your overheads to investors?
So many founders talk about how they tripped up on the overheads questions when pitching… But it doesn’t need to be like that anymore.
In FundingHero’s section 4 of the Financial Model Canvas – We look at Overheads!
(By the way, incase you didn’t know… The financial Model Canvas is FREE on our Freemium)
A company has to pay overhead on a continuous basis, no matter how much money it makes. In other words, Expenses are occurred by all businesses, regardless of its success.
Overhead costs, can sometimes be referred to by investors as “overhead expenses” or “operating expenses,” which all mean the same thing and are costs associated with running a business that are not directly related to the creation or production of a product or service.
Overhead costs include all costs on a company’s income statement that are not tied directly to manufacturing, selling, or providing a service. Overhead expenses appear on a company’s income statement and have a direct impact on the overall profitability of the business. That is the reason why investors want to look at these numbers carefully.
To calculate net income, also known as the bottom line, the company must account for overhead expenses. Net income is calculated by deducting all production-related and overhead expenses from net revenue, also known as the top line.
So what about overheads and what do I need to explain to investors?
Your objective is to explain the key types, there nature and how they scale.
In the early days of a business, your overheads are going to be the primary area driving your core burn rate.
What are some examples of typical business overheads?
The overhead costs of a company are determined by the nature of the business. The expenses of a service provider will differ from those of a brick-and-mortar retail store or a cafe. Examples include the following:
- Rent for your commercial property
- Utilities at the office/commercial building
- Salaries
- Office equipment such as telephones, computers, tablets
- Software subscriptions and internet connection
- Stationery and office supplies
The different types of overheads that you can talk about
Overhead expenses come in three types: They can be fixed, indicating they are the same sum every month. They can be variable overheads, suggesting they vary depending on the level of operation in the business. Overhead expenses may also be semi-variable, which means that the company undertakes some portion of the expense regardless of the level of business activity.
We all know this right:
Overheads unfortunately aren’t directly linked to revenue and you need to invest in them before you get the benefit of revenue coming in.
What does that mean to investors?
Your overhead base will be an area of integration for investors in due diligence, and it’s also the core area of justification within your raise amount, so having a clear way to summarise and present your overheads is really important.
This information will aid investor conversations, pitches and any challenging due diligence questions.
In your financial commentary and use of funds, you should typically highlight the following items that are most important to investors:
– Salaries
– Marketing
– Technical Development (for Tech companies)
These 3 buckets are what dictate;
1. The scale and scope of your operation from the number of hires needed
2. Does the speed of growth forecast match with the level of marketing activity
3. What level of technical spend is required to get to decent revenue traction.
Investors will evaluate the following factors based on your overall business strategy:
– How flexible your cost base is (fixed costs v variable to manage burn rates).
– How much overhead burn is needed to hit your milestones and profitability; or
– If very high growth then to justify the losses, what is the desired level of customer traction to keep on investing for growth.
– How much risk is there in this opportunity when balancing this all up?
Being able to hold a meaningful conversation with an investor on how your overhead base generally scales over time, how you can control it and what return on investment you expect to gain will show them you understand the impacts of a scaling company, and how your revenue, profit and cash will be impacted.
This demonstrates that their money will be invested in a founder and company with strong commercial and financial acumen.
Access your own FREE financial model canvas using our explore package
FundingHero are trying to level the playing field for founder fundraising. We want to raise the bar of people’s knowledge and create stronger founders for their whole entrepreneurial career and not fall at their first fundraising hurdle.
Want your very own FREE financial model canvas? Sign up here: app.fundinghero.co.uk/registration
– You’ll get the free online version (Free pitch deck and financial model canvases)
– Read them both in conjunction with the detailed explainer guides
