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Use of Proceeds Statement

A short document that summarizes how a company will spend funds raised from investors

What is the Use of Proceeds Statement?

The use of proceeds statement is a short document that summarizes how a company that aims to secure additional capital is going to spend the funds. In other words, the document provides the readers with a snapshot of what aspects of the business the company will spend money on.

 

Use of Proceeds Statement

 

The use of proceeds statement is commonly included in some other documents such as business plans and prospectus (a document that provides details about initial public offerings). Note that the use of proceeds statement generally takes only a small part of these comprehensive documents (no longer than 1-2 pages).

The statement is frequently prepared by startups and early-stage entrepreneurs in order to provide the investors with an overview of how the acquired funds will be spent. However, more mature companies also prepare use of proceeds statements. The common scenario is when a company is preparing for an IPO or debt issuance.

 

Summary

  • The use of proceeds is a short summary that discloses how a company is planning to spend the capital obtained from investors.
  • The use of proceeds is commonly included in the business plan or prospectus.
  • Two forms of the use of proceeds are a written summary and a graph (chart).

How to Create the Use of Proceeds Statement?

The use of proceeds can be generally presented in two main formats: as a written summary or as a chart. In both ways, the key rule is to keep it simple! Unlike a financial model that includes many assumptions and variables, the use of proceeds is a snapshot of the allocation of capital obtained from the investors.

 

1. Written summary

The use of proceeds can be reported as a written summary. In the written summary, the company’s management lists the areas of the business that require financing and how much money will be invested in each area. The statement starts with the amount of net proceeds.

In real life, the amount of net proceeds is lower than the amount of total proceeds due to the expenses associated with the issuance of shares or debt instruments. Then, the author can list the areas of expected expenditures with the amounts of money allocated for the expenditures. Note that the figures presented in the use of proceeds statement are generally rounded off to the nearest thousand or million. (A written example of the statement can be found above).

 

2. Graph or chart

Alternatively, the use of proceeds can be represented in the form of graphs or charts. The graph format is particularly suitable for the presentations shown to the investors. Generally, a pie chart and a donut chart are the primary options for a graphical representation of the use of proceeds, but other types of charts may also be used if appropriate.

 

Use of Proceeds Statement - Graph

 

Importance of the Use of Proceeds Statement

In some cases, the use of proceeds statement can significantly affect a company’s ability to raise capital successfully. A properly created statement with a reasonable allocation of money can be an indicator to investors that their investments in the company will be beneficial to them. Conversely, if a company fails to prepare the statement with a justifiable explanation of the allocation of funds, the investors may not be interested in contributing capital.

 

Related Readings

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Analysis of Financial Statements
  • Capital Raising Process
  • Debt Issuance Fees
  • Private Equity vs Venture Capital, Angel/Seed Investors

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