So you are considering crowdfunding to raise your capital? While this is important, what is even more important is knowing how your decision is going to affect your financial statements.
Financial statements are important because these are the documents you would provide to the bank if you need a loan. You would also provide financial statements if for example you are in the process of negotiating merger with another company.
Your financial statements will tell the story of your business and therefore it is important to know what story they are going to tell.
Crowdfunding in South Africa is taking off. While Jumpstarter crowdfunding can raise large sums of money for your idea, the key is correctly managing the crowdfunds that successful Jumpstarter Project Creators have received. Jumpstarter is a rewards based crowdfunding platform.
Crowdfunding brings exciting dimension into your financial statements. We will provide a basic example of how it will look on your balance sheet below:
1. HOW WILL REWARDS BASED CROWDFUNDING REFLECT ON MY FINANCIAL STATEMENTS?
Rewards based crowdfunding creates a small obligation on the part of the owner.
The balance sheet will look as follows:
- Assets
Cash and cash equivalents xxx
(Increase in cash from the contributions received from crowdfunders) - Equity
Share capital xxx
(Increase in equity from the contributions received from crowdfunders) - Liabilities
Crowdfunding liability xxx
(Creation of a liability to the value of the reward that was promised from crowdfunders)
Just a quick refresher, rewards based crowdfunding happens when you offer an investor a reward for contributing to your business idea. As a result, your financial statements need to show that you owe a portion to the investors as a reward for their investment.
Also note that although there is an increase in equity, the crowdfunding investors do not hold those equity shares. The shares are owned entirely by the owner. This means that all profits are attributable to the owner or set of owners.
Crowdfunders are entitled to the reward that they signed up for when contributing to the business idea. This is reflected in the liability section of the balance sheet.
2. WHAT WILL EQUITY BASED CROWDFUNDING LOOK LIKE ON MY FINANCIAL STATEMENTS?
Equity based crowdfunding creates a capital contribution from the investors.
The balance sheet will look as follows:
- Assets
Cash and cash equivalents xxx
(Increase in cash from the contributions received from crowdfunders) - Equity
Share capital xxx
(Increase in equity from the contributions received from crowdfunders)
Equity based crowdfunding is where investors buy a share in the company that they are contributing to.
There is a subsequent increase in cash and an increase in equity. The cash comes from the contributions received. The increased equity contains the shares of the initial owner and the new crowdfunders.
Crowdfunding investors will enjoy the benefits of share ownership. This includes dividend receipt and share appreciation.
Conclusion
Be sure to understand how funding can impact your financial statements. Financial statements tell the story of your business, and you need to know what story it is going to tell.
You now know the impact of rewards based crowdfunding and equity based crowdfunding on your balance sheet.