A Startup Guide to Finessing Financials

For an investor to take a startup seriously, it’s vital for a founder to have their financial statements at the ready. Many early-stage businesses don’t have an operating history or any source of revenue yet, which can make creating an income statement or statement of cash flows rather difficult.

Worry not: investors will still expect financial statements. However, they will be what’s called pro-forma.

These pro-forma statements are a fancy way of describing projections. As the business doesn’t have any real source of income, founders are expected to create projections for the next one, three and five years. These projections will explain to investors important elements such as how much revenue the company intends to bring in, how their expenses will grow and how their margins will change as they expand.

There are three important financial statements investors will expect to see from any bright-eyed business person: 

  • The Income Statement: The income statement shows how much revenue a founder will accomplish in a certain time frame, as well as their expenses. This financial statement will be highly scrutinised by potential investors as it will usually be the first statement they look at. It will also tell them when a budding business is expected to turn a profit, which is (of course) never to be underestimated.
  • The Balance Sheet: The balance sheet describes a company’s assets and liabilities. Things like any intellectual property or technology a company owns can be listed here, as well as any debt or short-term liabilities investors should be aware of.
  • Statement of Cash Flows: This financial statement sheds light on the flow of cash in and out of a business, breaking down your cash flow into operations, financing, and investing activities. The statement of cash flows will show investors a high-level overview of the influx/outflow of money for various purposes.

Financial statements are one of the most important things a founder will bring when presenting their business to potential investors. As well as being assessed with a fine-toothed comb, they will provide a metaphorical looking glass into the future of the business.

For this reason, entrepreneurs should come prepared with realistic projections and an arsenal of information to defend their assumed growth rate, alongside other important financial metrics.

Creating an income statement may be difficult, but it’s sure to be worth the hours of sweat and tears when the right partner comes along.

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