Investors need financial statements to assess many factors regarding a startup’s financial position, profitability, and potential for future growth. As a founder, you’ll need to have these financial statements in order from even the earliest stages of your business.
While properly managing your financial statements and deeply understanding how to speak to investors about the numbers within is important throughout the entire life of a startup, it is especially critical between the seed and Series B stages. This is typically a time of high growth and uncertainty, a time to seek guidance, and a time when you may be looking to raise additional capital.
Recording financial information accurately and consistently is the key to unlocking investor interest and working with existing investors to make smart business decisions. Read on to learn more specifically how investors leverage financial statements pre and post-investment.
How Do Investors Use Financial Statements?
To simply explain all the uses of financial statements to investors – financial statements offer one of the best snapshots of your company’s financial standing. What investors look for in these statements pre and post-investment differs from industry to industry. The current stage of your startup also plays a role.
Financial statements provide all the information needed to understand where your company stands in revenue, expenses, cash flow, runway, debt level and so much more. The most common use of financial reports is for investors to help you make important decisions by analyzing trends, making cash flow projections, and comparing your numbers to direct competitors, or assessing interest in investing.
When Do Investors Need Financial Statements From Startups?
Startups move fast, with many different components working all at once. While founders should track specific KPIs and revenue consistently, investors don’t need consecutive updates.
There are two common situations where investors need to see your financial statements – funding pitches and board meetings.
When seeking funding, possible investors need to gauge a company’s ability to continue forward and grow. Good cash management is a big green flag, but investors need to see the data. Without a company’s financials, you’re asking investors to believe in your words alone. Inspiring pitches rely on business narrative, but financial viability comes from records.
Investors become board members post-investment. Monthly or quarterly board meetings are the place to update everyone on the company’s position and growth potential. Your board is expecting to see numbers to back up any plans like expansion, fundraising, or budget adjustments.
3 Main Startup-Related Uses Of Financial Statements To Investors
All businesses use financial statements. Startups, however, are on a different playing field in contrast to large corporations. Without a long history of financial data to rely on for future earnings, startups need to utilize what they have on hand.
1. Analysis of profitability and financial health: This maps back to fundraising and meeting with investors, which we discussed earlier. Profitability is a prevalent factor for investors looking into startup ventures. Founders show profitability through their finances with a balanced net profit vs. expenses.
2. Analysis of company management: There are plenty of reasons a startup can fail, but the most significant recurring factor is running out of money. The mismanagement of funds in a startup often leads to a sudden nosedive in cash flow.
3. Analysis of competitors: Investors want to see how you stack up compared to competitors in your industry. If your startup struggles to keep up, an investor might want to wait to throw their hat in until after you are more on a level playing field.
What Do Investors Look For In Financial Statements?
Of all the things company financial statements reveal to an investor, there are four main factors investors consider: revenue, profitability, debt level, and cash flow.
Revenue
Found on the income statement, the top line (revenue before expense deduction) shows how much money your startup brings in during a set period. Income statements offer a direct comparison of expenses vs. net profit too. Overall, your top line is a priority metric.
Profitability
Investors gauge profitability through net income and expense comparisons. Net income is the total amount of money a company pulls in after deducting all expenses, known as the bottom line. A balance between net income and expenses is a key indicator of good company management and a positive sign to investors.
Debt Level
Companies start with debt; it’s just a fact of business. Loans and lines of credit aren’t a problem, but investors need to see you can meet those payment obligations without suffering.
Cash Flow
The business world is full of ups and downs. High cash outflow and low or stagnate cash inflow indicates you probably don’t have a substantial cushion in case a problem arises. Or, as your debts increase, your company won’t be able to afford payments.
What Financial Statements Do Investors Want To See?
We’ve talked a lot about the information investors want on your financial statements. Now we’ll cover which reports you need to give investors. This isn’t a limited list. You can show investors what data you feel is important, but take this list as a starting point.
Balance Sheet
Balance sheets are a snapshot of your startup’s finances that compare what you own (assets) to what you owe (liabilities). Investors use ratios to assess the information on the balance sheet to determine debt to income.
Income Statement
This report (also known as the ) shows the company’s financial performance through revenue, expenses, and net profit –or top line and bottom line. Expenses include operating and non-operating costs incurred by the company. Operating costs can grow with the company or remain stagnant depending on the industry.
Cash Flow Statement
As simple as it sounds, cash flow statements record the amount of money coming in and going out. This report indicates whether or not a company can pay off debts and continue funding operating expenses as time goes on.
Investors Need To See Accurate Financial Statements
When speaking to an investor, you should have confidence in the numbers you’re providing. Inconsistent or incorrect statements are misleading, look bad on you as the founder, and can ruin investment possibilities immediately.
Many founders do their bookkeeping when starting out, but as you scale your company, your time becomes stretched in several directions. Eventually, you need someone to take over to ensure everything you’re handing to investors is accurate while you use your talent on other parts of the business.
That’s where we can help.
At Zeni, we provide financial statements daily through a customizable client dashboard available on any smart device. We update all your accounts throughout the day, so no matter what time you look, you see up-to-date insights into your company’s finances. You won’t be stuck scrambling to close your books if an investment opportunity presents itself.
Let us do the heavy lifting. Schedule a free demo today.
Check out these resources for an in-depth look at financial statements
5 Top Accounts Payable Best Practices For Your Startup
What Is Depreciation And What Does It Mean For Startups?
Cash Flow Forecasting: What It Is And How To Use It
Greetings, financial aficionados and startup enthusiasts! As someone deeply immersed in the world of financial statements and startup dynamics, let me shed some light on the concepts discussed in the article you provided.
Investors, the financial maestros of the startup realm, rely heavily on financial statements to assess a company's fiscal health and potential for growth. Now, let's delve into the key concepts highlighted in the article:
Importance of Financial Statements for Startups
Investors seek a comprehensive view of a startup's financial standing, especially during the critical seed to Series B stages. These stages, marked by high growth and uncertainty, necessitate accurate financial data for informed decision-making.
Uses of Financial Statements
Financial statements act as a snapshot, providing crucial insights into revenue, expenses, cash flow, runway, and debt levels. Investors leverage these statements to analyze trends, make cash flow projections, and assess a startup's position relative to competitors.
When Investors Need Financial Statements
Funding pitches and board meetings are the pivotal moments when investors crave a glimpse into a startup's financial playbook. Funding pitches require substantiated data to instill confidence, while board meetings demand regular updates to support strategic plans and decisions.
Startup-Related Uses of Financial Statements
- Analysis of Profitability and Financial Health: Investors scrutinize a startup's profitability, looking for a balanced net profit vs. expenses to gauge financial viability.
- Analysis of Company Management: Mismanagement of funds is a common pitfall for startups, making it crucial for investors to assess how well a company handles its finances.
- Analysis of Competitors: Investors want to see how a startup compares to competitors in the industry, influencing their decision to invest.
Factors Investors Look For in Financial Statements
Investors focus on four main factors:
- Revenue: The top line on the income statement reveals how much money the startup generates.
- Profitability: Investors gauge profitability through net income and expense comparisons.
- Debt Level: Investors want assurance that a startup can meet payment obligations without undue strain.
- Cash Flow: Cash flow statements indicate a company's ability to pay off debts and sustain operational expenses.
Financial Statements Investors Want to See
- Balance Sheet: A snapshot comparing assets to liabilities.
- Income Statement: Details financial performance, including revenue, expenses, and net profit.
- Cash Flow Statement: Records money inflow and outflow.
The Importance of Accuracy
Confidence in the numbers is paramount when dealing with investors. Inaccurate or inconsistent statements can mar your reputation and jeopardize investment opportunities.
In conclusion, accurate financial statements are the bedrock of successful investor engagements. If you find yourself overwhelmed, consider enlisting the support of financial experts like Zeni to ensure precision and timeliness in your financial reporting.
Happy investing and may your balance sheets always be in the black!
