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  • Writer's pictureBenjamin

๐—™๐—ถ๐—ป๐—ฎ๐—ป๐—ฐ๐—ถ๐—ฎ๐—น ๐—ฅ๐—ฒ๐—ฝ๐—ผ๐—ฟ๐˜๐˜€ ๐——๐—ฟ๐—ถ๐˜ƒ๐—ฒ ๐—–๐—ต๐—ผ๐—ถ๐—ฐ๐—ฒ๐˜€

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 companyโ€™s progress and helps convert dreams into reality by focusing on which resources are necessary.

๐Ÿ“ˆ ๐—œ๐—ป๐˜€๐—ถ๐—ด๐—ต๐˜ ๐—ถ๐—ป๐˜๐—ผ ๐˜๐—ต๐—ฒ ๐—•๐˜‚๐˜€๐—ถ๐—ป๐—ฒ๐˜€๐˜€

Financial Statements include three reports:

๐˜—๐˜ณ๐˜ฐ๐˜ง๐˜ช๐˜ต & ๐˜“๐˜ฐ๐˜ด๐˜ด โ€“ 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.

๐˜Š๐˜ข๐˜ด๐˜ฉ ๐˜๐˜ญ๐˜ฐ๐˜ธ โ€“ Embrace how much cash is burning and how long you can continue to cover the bills at your current pace (๐™๐™ช๐™ฃ๐™ฌ๐™–๐™ฎ).

๐Ÿ–๐Ÿ% ๐™ค๐™› ๐™จ๐™ข๐™–๐™ก๐™ก ๐™—๐™ช๐™จ๐™ž๐™ฃ๐™š๐™จ๐™จ๐™š๐™จ ๐™›๐™–๐™ž๐™ก ๐™™๐™ช๐™š ๐™ฉ๐™ค ๐™˜๐™–๐™จ๐™ ๐™ฅ๐™ง๐™ค๐™—๐™ก๐™š๐™ข๐™จ*

Knowing your runway will factor into a potential next fundraising, whether you need a bridge loan or an investment round.**

๐˜‰๐˜ข๐˜ญ๐˜ข๐˜ฏ๐˜ค๐˜ฆ ๐˜š๐˜ฉ๐˜ฆ๐˜ฆ๐˜ต โ€“ 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.

๐Ÿ“ˆ ๐—›๐—ผ๐˜„ ๐˜๐—ผ ๐—”๐—ฝ๐—ฝ๐—น๐˜† ๐˜๐—ต๐—ฎ๐˜ ๐—œ๐—ป๐˜€๐—ถ๐—ด๐—ต๐˜

With financial statements in hand, grow the business strategically and operationally:

๐˜Ž๐˜ข๐˜ต๐˜ฉ๐˜ฆ๐˜ณ ๐˜”๐˜ฆ๐˜ต๐˜ณ๐˜ช๐˜ค๐˜ด โ€“ 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.

๐˜”๐˜ข๐˜ฏ๐˜ข๐˜จ๐˜ฆ ๐˜‹๐˜ฆ๐˜ฃ๐˜ต โ€“ Appreciate the debt you hold, and the tradeoff of keeping versus paying down debt (e.g. interest versus having cash).

๐˜ˆ๐˜ญ๐˜ช๐˜จ๐˜ฏ ๐˜ธ๐˜ช๐˜ต๐˜ฉ ๐˜š๐˜ข๐˜ญ๐˜ฆ๐˜ด โ€“ Dive into discounts, returns, and doubtful accounts (customers not expected to pay) to target ideal customers.

๐˜”๐˜ข๐˜ฌ๐˜ฆ โ€œ๐˜๐˜ณ๐˜ฆ๐˜ฆโ€ ๐˜”๐˜ฐ๐˜ฏ๐˜ฆ๐˜บ โ€“ 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.

๐˜–๐˜ฑ๐˜ฆ๐˜ณ๐˜ข๐˜ต๐˜ช๐˜ฐ๐˜ฏ๐˜ด ๐˜๐˜ฏ๐˜ด๐˜ช๐˜จ๐˜ฉ๐˜ต๐˜ด โ€“ Glean insights through expenses, variance analysis, and ratios such as inventory allowance to boost efficiency.

๐Ÿ“ˆ ๐— ๐—ถ๐˜๐—ถ๐—ด๐—ฎ๐˜๐—ถ๐—ป๐—ด ๐—ฅ๐—ถ๐˜€๐—ธ

You don't want all your hard work to be wiped out through unplanned or unintended circumstances.

Consider these reasons for accurate financial reporting:

๐˜Š๐˜ฐ๐˜ฎ๐˜ฑ๐˜ญ๐˜ช๐˜ข๐˜ฏ๐˜ค๐˜ฆ โ€“ Ensure accurate financial reporting for tax purposes, investor requirements, and due diligence on upcoming deals.***

๐˜—๐˜ณ๐˜ฆ๐˜ท๐˜ฆ๐˜ฏ๐˜ต๐˜ช๐˜ฐ๐˜ฏ โ€“ Moderate factors which could be big problems (e.g. anticipate future labor costs or supply chain limitations).

๐˜๐˜ณ๐˜ข๐˜ถ๐˜ฅ โ€“ Prevent potential fraud by installing the proper controls (e.g. more than one person should be reviewing spend reports).

๐Ÿ“ˆ ๐—ฃ๐—น๐—ฎ๐—ป๐—ป๐—ถ๐—ป๐—ด ๐—ณ๐—ผ๐—ฟ ๐—š๐—ฟ๐—ผ๐˜„๐˜๐—ต

While financial statements show a โ€œsnapshotโ€ during a constantly evolving landscape, forecasts strive to peer into the future.

"๐™„๐™ฃ ๐™ฅ๐™ง๐™š๐™ฅ๐™–๐™ง๐™ž๐™ฃ๐™œ ๐™›๐™ค๐™ง ๐™—๐™–๐™ฉ๐™ฉ๐™ก๐™š, ๐™„ ๐™๐™–๐™ซ๐™š ๐™–๐™ก๐™ฌ๐™–๐™ฎ๐™จ ๐™›๐™ค๐™ช๐™ฃ๐™™ ๐™ฉ๐™๐™–๐™ฉ ๐™ฅ๐™ก๐™–๐™ฃ๐™จ ๐™–๐™ง๐™š ๐™ช๐™จ๐™š๐™ก๐™š๐™จ๐™จ, ๐™—๐™ช๐™ฉ ๐™ฅ๐™ก๐™–๐™ฃ๐™ฃ๐™ž๐™ฃ๐™œ ๐™ž๐™จ ๐™ž๐™ฃ๐™™๐™ž๐™จ๐™ฅ๐™š๐™ฃ๐™จ๐™–๐™—๐™ก๐™š.โ€ โ€“ ๐˜ฟ๐™ฌ๐™ž๐™œ๐™๐™ฉ ๐˜ฟ. ๐™€๐™ž๐™จ๐™š๐™ฃ๐™๐™ค๐™ฌ๐™š๐™ง

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, itโ€™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****).

๐Ÿ“ˆ ๐—™๐—ถ๐—ป๐—ฎ๐—น ๐—ง๐—ต๐—ผ๐˜‚๐—ด๐—ต๐˜๐˜€

๐˜Š๐˜ฐ๐˜ฎ๐˜ฑ๐˜ญ๐˜ฆ๐˜ต๐˜ช๐˜ฐ๐˜ฏ โ€“ Financial models offer a valuable perspective of market analysis, competitive research, and team performance by verifying any assumptions in your business plan.

๐˜Š๐˜ฐ๐˜ญ๐˜ญ๐˜ข๐˜ฃ๐˜ฐ๐˜ณ๐˜ข๐˜ต๐˜ช๐˜ฐ๐˜ฏ โ€“ 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.

๐˜Š๐˜ฐ๐˜ฎ๐˜ฑ๐˜ญ๐˜ฆ๐˜ฎ๐˜ฆ๐˜ฏ๐˜ต๐˜ข๐˜ต๐˜ช๐˜ฐ๐˜ฏ โ€“ 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.

๐Ÿ“ˆ 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.


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