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Why financial reporting is important for start-up companies?

When running a startup, you probably have focused on growth and revenue. That’s completely normal. Without growth and revenue, a company will cease to exist.


But you also need to spend money to make money (R&D). Every penny spent is an investment, and you should always expect a return.


Your financial reports come in handy here – they’re more than just obligations you need to fulfill as a founder. Your financial statements are crucial for:


Knowing when to scale


Scaling is all about timing. Invest in growth too early or too late, and you’ll find yourself at the end of your cash runway sooner than expected. You’ll be surprised by how easy it is to burn through your cash reserve without proper planning.

To invest at the right time, you need to know your Customer Lifetime Value (LTV) and Customer Acquisition Costs (CAC).

It’s vital to remember that we never look at any metrics in isolation.


Evaluating your company’s financial performance


Your investors will be looking at your company’s financial performance before investing. For example, EBITDA is an essential element in a financial report.


Investors rely on this metric to determine how much they’re willing to pay for your company. The general rule of thumb is the higher your EBITDA rate, the better because it shows growth potential.


However, this metric is not as relevant to a startup that’s in the growth stage. For example, you’ll see an increase in your Marketing expenses if your company tries to launch a new product. Moreover, investors in primary stages (pre-seed, seed stages) want to see profits to be reinvested in the company. Therefore, it’s expected that your EBITDA is low or even negative.


Your investors will then look into other profitability metrics during a valuation. A low or negative EBITDA is justifiable as long as you’re hitting other KPIs.


Forecasting cashflows


As mentioned, your cash reserve is the root of your business success. Your goal is to be cashflow positive from Day 1. But it takes time to build a solid Monthly Recurring Revenue (MRR) base and stabilize your revenue and cashflow forecasting.


When reinvesting revenue into acquiring customers, it’s normal that you have higher expenses –Customer Acquisition Costs (CAC).


Therefore, it’s essential to know where your revenue streams are coming from (and when) before making your next big strategic decision.


Investor reporting


Your investors are one of the biggest stakeholders you need to communicate with. Investors want to know how you spend their money and when they can start seeing a return on investment or a possibility to sell. Your financial reports inform investors of your company’s profitability and operational performance.


For example, it’s okay for your EBITDA to be low or negative during the growth stage. After a few years, your investors will be looking for a higher EBITDA – especially if you’re looking to close another round of funding.


Informed decision-making, planning, and forecasting


There are a few types of decision making when it comes to strategic business decisions:

  • Analytical – when you have all the relevant information. Methodical and relies on information that is objective.

  • Heuristic – when you don’t have all the information but have a mix of information and experience. Generalizes based on what you know.

  • Expertise – when you can rely on your expertise and competence in an area. It works when you have enough experience and can quickly check your decisions against the correct information.

  • Random choice – when you just have to go with your gut feeling. It’s fast and straightforward, but you don’t have control over the outcomes.

Always take the analytical approach. As startup founders, it’s sometimes tempting to rely on our gut feeling instead, especially when making difficult decisions. That’s normal. Your financial report helps you overcome that so you can make informed decisions.


Evaluating operational performance


Operating Expenses (OpEx) is one of the elements in a financial report. Your OpEx helps you decide which area to optimize to increase your profitability. It’s broken down into main categories that could be directly attributable to your Revenue.

It is very important for your strategic decisions to tie Revenue with Expenses. This will give you a fair and truth view of your performance in certain areas and as a Company.


My advice: Rely on your financial analytics when it comes to making strategic business decisions. Financial reporting is more than just an obligation, is a decision-making tool.

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