𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗥𝗲𝗽𝗼𝗿𝘁𝘀 𝗗𝗿𝗶𝘃𝗲 𝗖𝗵𝗼𝗶𝗰𝗲𝘀
Updated: Oct 15, 2021
Startups begin with a vision based on innovations and dreams. But that work needs to be implemented, not just imagined.
Financial reporting shows a company’s progress and helps convert dreams into reality by focusing on which resources are necessary.
📈 𝗜𝗻𝘀𝗶𝗴𝗵𝘁 𝗶𝗻𝘁𝗼 𝘁𝗵𝗲 𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀
Financial Statements include three reports:
𝘗𝘳𝘰𝘧𝘪𝘵 & 𝘓𝘰𝘴𝘴 – Understand what is changing over time. I like to pick key indicators and test variance (changes) across all accounts.
For example, if there is a difference between periods greater than 10%, I dig into why between data and team conversations.
You may want to compare Month to Month (see changes quickly), Quarter to Quarter (see progress), or Year over Year (see cycles).
Profits are a temping measure for mature companies, but startups should focus on optimizing revenues and controlling expenses.
𝘊𝘢𝘴𝘩 𝘍𝘭𝘰𝘸 – Embrace how much cash is burning and how long you can continue to cover the bills at your current pace (𝙍𝙪𝙣𝙬𝙖𝙮).
𝟖𝟐% 𝙤𝙛 𝙨𝙢𝙖𝙡𝙡 𝙗𝙪𝙨𝙞𝙣𝙚𝙨𝙨𝙚𝙨 𝙛𝙖𝙞𝙡 𝙙𝙪𝙚 𝙩𝙤 𝙘𝙖𝙨𝙝 𝙥𝙧𝙤𝙗𝙡𝙚𝙢𝙨*
Knowing your runway will factor into a potential next fundraising, whether you need a bridge loan or an investment round.**
𝘉𝘢𝘭𝘢𝘯𝘤𝘦 𝘚𝘩𝘦𝘦𝘵 – Shows overall return on assets, return on equity, working capital ratio (a measure of liquidity), and debt-equity ratio (financial leverage) often for discussions with investors.
📈 𝗛𝗼𝘄 𝘁𝗼 𝗔𝗽𝗽𝗹𝘆 𝘁𝗵𝗮𝘁 𝗜𝗻𝘀𝗶𝗴𝗵𝘁
With financial statements in hand, grow the business strategically and operationally:
𝘎𝘢𝘵𝘩𝘦𝘳 𝘔𝘦𝘵𝘳𝘪𝘤𝘴 – Focus on your ideal clients and which expenses invest directly or indirectly in growth.
Encourage the team to view metrics as a learning tool (not punishing) to support improving the numbers.
𝘔𝘢𝘯𝘢𝘨𝘦 𝘋𝘦𝘣𝘵 – Appreciate the debt you hold, and the tradeoff of keeping versus paying down debt (e.g. interest versus having cash).
𝘈𝘭𝘪𝘨𝘯 𝘸𝘪𝘵𝘩 𝘚𝘢𝘭𝘦𝘴 – Dive into discounts, returns, and doubtful accounts (customers not expected to pay) to target ideal customers.
𝘔𝘢𝘬𝘦 “𝘍𝘳𝘦𝘦” 𝘔𝘰𝘯𝘦𝘺 – Apply any excess of cash (e.g. following a round) to earn interest (e.g. 1% on $1M is $10,000).
Consider relieving debt to remove interest payments as long as you don't need the future liquidity.
𝘖𝘱𝘦𝘳𝘢𝘵𝘪𝘰𝘯𝘴 𝘐𝘯𝘴𝘪𝘨𝘩𝘵𝘴 – Glean insights through expenses, variance analysis, and ratios such as inventory allowance to boost efficiency.
📈 𝗠𝗶𝘁𝗶𝗴𝗮𝘁𝗶𝗻𝗴 𝗥𝗶𝘀𝗸
You don't want all your hard work to be wiped out through unplanned or unintended circumstances.
Consider these reasons for accurate financial reporting:
𝘊𝘰𝘮𝘱𝘭𝘪𝘢𝘯𝘤𝘦 – Ensure accurate financial reporting for tax purposes, investor requirements, and due diligence on upcoming deals.***
𝘗𝘳𝘦𝘷𝘦𝘯𝘵𝘪𝘰𝘯 – Moderate factors which could be big problems (e.g. anticipate future labor costs or supply chain limitations).
𝘍𝘳𝘢𝘶𝘥 – Prevent potential fraud by installing the proper controls (e.g. more than one person should be reviewing spend reports).
📈 𝗣𝗹𝗮𝗻𝗻𝗶𝗻𝗴 𝗳𝗼𝗿 𝗚𝗿𝗼𝘄𝘁𝗵
While financial statements show a “snapshot” during a constantly evolving landscape, forecasts strive to peer into the future.
"𝙄𝙣 𝙥𝙧𝙚𝙥𝙖𝙧𝙞𝙣𝙜 𝙛𝙤𝙧 𝙗𝙖𝙩𝙩𝙡𝙚, 𝙄 𝙝𝙖𝙫𝙚 𝙖𝙡𝙬𝙖𝙮𝙨 𝙛𝙤𝙪𝙣𝙙 𝙩𝙝𝙖𝙩 𝙥𝙡𝙖𝙣𝙨 𝙖𝙧𝙚 𝙪𝙨𝙚𝙡𝙚𝙨𝙨, 𝙗𝙪𝙩 𝙥𝙡𝙖𝙣𝙣𝙞𝙣𝙜 𝙞𝙨 𝙞𝙣𝙙𝙞𝙨𝙥𝙚𝙣𝙨𝙖𝙗𝙡𝙚.” – 𝘿𝙬𝙞𝙜𝙝𝙩 𝘿. 𝙀𝙞𝙨𝙚𝙣𝙝𝙤𝙬𝙚𝙧
Financial modeling helps you consider all the options and potential problems. One approach is scenario planning.
Start with the expected forecast, then build at least two more models if you grow faster than planned and if things go much worse.
In all scenarios, anticipate cash flow and how to address inflection points with potential solutions (e.g. adjusting head count as needed).
During fast or unexpected changes, it’s tough to think objectively. By running scenarios, you can adapt better for various situations (e.g. engaging scalable resources versus hiring all open positions****).
📈 𝗙𝗶𝗻𝗮𝗹 𝗧𝗵𝗼𝘂𝗴𝗵𝘁𝘀
𝘊𝘰𝘮𝘱𝘭𝘦𝘵𝘪𝘰𝘯 – Financial models offer a valuable perspective of market analysis, competitive research, and team performance by verifying any assumptions in your business plan.
𝘊𝘰𝘭𝘭𝘢𝘣𝘰𝘳𝘢𝘵𝘪𝘰𝘯 – Like any strong relationship, the more you collaborate with others, the more you will get back. Share high-level details and projections then seek feedback to reinforce your plan.
𝘊𝘰𝘮𝘱𝘭𝘦𝘮𝘦𝘯𝘵𝘢𝘵𝘪𝘰𝘯 – As a founder, if you want to focus on product development and strategic growth, then bring in an expert to show progress and complement your strengths and motivations.
📈 Financial reporting helps you understand progress, protect your interests, and inform better decisions.
Successful entrepreneurs should gather and apply this insight early to optimize their business.
* Source: https://bit.ly/3iouryS
** Fundraising and Debt: https://www.webuildscalegrow.com/post/c8810f41
*** Compliance and Reporting: https://www.webuildscalegrow.com/post/78e17563
**** Scalable Resources: https://www.webuildscalegrow.com/post/d8297908