Tuesday 2 November 2010

Financial reporting for startups

There are really just a few key and important data points for the board of directors in terms of financial reporting.

On a simplified level investors are interested in:
- how much money you burn
- runway, which tells you how long can you sustain the current and projected  burn rate
- cash in the bank

Investors are worried that you don't run out of money before they can decide that your business is worth financing further. It's natural, they  really like to be on top of their investment. 

There are  4 spreadsheets that fully encompass your business. 

Profit and loss statement is the classical one. It's not the purpose of this blog post to explain it, if you don't know it, google it. But you need to have one ready for your investors each month. The good side of it is that it's usually prepared by your accountants, so you really don't have to bother with it too much. But you still need to understand it.

Balance Sheet is the second classical financial statement. Often it gets produced together with PL and you should  just staple them together PL and send it out. It won't get looked as much, since it doesn't reflect short term performance a lot, it's importance is in a long term.

Budget slide is one of the most important documents. It's basically a table for each month, where draw  your limits of operation. A simplified one breaks down costs into 10-20 categories and forecasts them for next 12 months. It gets looked at a lot, particularly with picky investors. More accurately, the promises and actual performance gets compared a lot. I don't want to go into details, but I was at a board meeting when investors raised an issue with one category that got over budget by 3% in one month. Makes no sense, but it happens. 

Cash flow statement is in my view one of the most useful statements in the world. It's a corporate take on a pocket economy. It shows you exactly how you spent your money, you see how much money came in and how much went out and how. They often don't get produced since an accountant needs to  put a bit of effort in and often needs the management for some explanations. But I think it's absolutely worth it. Particularly in a startup environment where cash is king. If you're not familiar with it, check out wikipedia

Finance guys will often come up with another one, the ratios. There are whole bunch of ratios out there that are standard in a financial community, however I don't believe it makes a lot of sense to use them in a startup. If you really need one, put it into KPIs, don't produce a separate statement for them.

So what to put on a deck in term of financial reporting. Here is my take:
- one spreadsheet where actual numbers against the budget are shown
- simplified cash flow statement (I think you can put everything into at most 10 categories, so you should easily get it onto one slide)
- one slide with burn rate, runway, revenue, cash balance on the bank

The Profit&Loss and Balance Sheet should also be produced and part of the deck, but only as an addendum and not as part of the main presentation.

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