How Do Investors Use Financial Statements?
As a startup, securing capital can be challenging. Not because you don't have a viable business, but because investors might not see the business venture as a profitable option for them. Statistics have shown that nearly 60% of the startups in the UK fail within the first three years. Investors often look at the company financial report of a startup to ensure that it’s a profitable investment for them to make.
A financial statement allows investors to analyse key financial data such as profits, losses, and expenses. This, in turn, helps them determine whether a startup would be a feasible investment option. However, most startups lack the financial expertise required to create a company financial report. And so they hinder their own ability to secure capital.
It's time to take control. Read on to learn all about what investors are looking for in your financial reports.
What is a financial statement?
A financial statement is basically a written document that shows all business activities and the overall financial performance of a company. Financial statements generally include the following:
Cash flow statements that show debt repayments, operational costs, and more.
An income statement that shows revenue, expense, and earnings per share (EPS).
Balance sheets that list a company’s assets, liabilities, and shareholder equity.
A common misconception about financial statements is that they’re often used by government agencies for auditing and tax purposes. This is why some startups undermine the importance of financial statements to investors. But a company financial report is one of the most important documents investors look at. So let's get it right!
When do investors need financial statements?
Most investors will look at your financial statement in two scenarios.
1. when you're trying to secure capital for scalability and growth, and the other is board meetings.
2. When you approach investors for funding, they measure your company’s ability of operational continuity, growth, and revenue generation.
Financial statements allow all investors to examine a startup’s cash flow and determine all three factors. Once an investor becomes a board member, they are expected to see financial statements during quarterly and yearly board meetings. This helps them determine if your startup is on a sustainable path for growth and dictates further investment decisions.
How do investors use financial statements?
Investors look at company financial statements as a snapshot of performance at any given time. They use these statements to understand the current financial standpoint of a startup. In addition, data contained within these statements also helps investors create cash flow projections, measure revenue generation potential, and conduct competitive analysis.
Altogether, these factors help an investor decide whether a startup is worth their money. One of the best investors of the current age, Warren Buffet, said,
“When I take a look at a company's annual report, if I don't understand it, they don't want me to understand it.”
There are tons of financial statement examples online. However, you need to ensure that your financial statement is truly yours, and provide all the relevant details for that investor to look for.
Wishing that you could read an investor’s mind?
Top 7 ways investors use financial statements
Figuring out which financial statement is important to investors can be challenging without adequate knowledge of the green flags investors look for. Those who want to invest in your startup might use the company financial report to:
1. Check sales
Most startups have innovative products that address the customer’s pain points. However, the real question for investors is whether or not your startup is getting sales. A major importance of financial statements to investors is that they help them determine if customers are willing to buy what your business offers.
2. Identify break even point
The breakeven point is a specific sales target that allows you to cover their expenses and maintain profitability. Investors often look at the break even point mentioned in the financial report to determine their return on investment (ROI). In addition, it also helps them determine when they are likely to receive the ROI.
3. Calculate customer acquisition costs
Acquisition costs allow investors to determine how much your startup has to spend to get one customer. These costs can be calculated by dividing your marketing spend by the number of new customers it acquires. Investors calculate these costs to determine if your business can be scaled while maintaining profit margins.
4. Determine churn rate
A churn rate is the rate at which customers choose to leave a product or service. This rate is another major importance of financial statements to investors. The churn rate helps them determine whether your startup can retain customers or not. Low-churn rates indicate competent customer retention and are a major green flag for investors.
5. See net profit
You might be able to sell your products or services, but selling them at a profitable margin is what really matters to investors. Financial statements allow investors to see all the income and expenses of a company. This, in turn, helps them determine their ability to generate profits and grow at a sustainable rate.
6. Analyse cash flow
A cash flow statement is a document that shows a company’s ability to manage its income and expenses. Investors look at cash flow statements to see if a startup is able to fulfil its financial obligation efficiently. This helps them determine if the startup can manage its finances during uncertain times.
7. Look for personal investment
Another critical importance of financial statements to investors is that it helps them determine if one or more members of your business has personal equity in the company. The personal monetary investment shows investors that founding members believe in their own ability to make the business a success.
Determining which financial statement is important to investors can be challenging without the knowledge of how an investor uses them. When developing financial statements you need to make sure these statements show the current financial standpoint of your company.
Furthermore, these statements should provide investors with all the details required to make a decision. At Accountancy Cloud we're dedicated to helping startups take care of all their accountancy and taxation needs. Contact us now and get expert advice on how you can prepare financial reports that help you secure capital.
#1 finance partner for tech & eCommerce startups
- 100% online
- Full finance stack for all your accounting needs
- 9/10 customers recommend us
Educational content just for startups. As a member, you’ll get unlimited access to an extensive range of guides, blogs and advice to help you run and grow your business.