Financial reporting is inevitable no matter which stage of the company you’re in – pre-seed, seed, Series A, Series B, and so on. Your financial reports are crucial for:
- Tax purposes
- Evaluating your company’s financial performance
- Forecasting cashflows
- Investor reporting
- Mitigating errors
- Informed decision-making, planning, and forecasting
- Evaluating operational performance
- Sharing shareholder equity
Many founders find financial reporting to be a daunting and tedious task. There’s just so much information you may not even know of, let alone what to make of it – especially if you can’t hire a CFO or a dedicated finance team yet. That’s okay.
Here are the nine main elements of financial reporting you need to know.
- Revenue
The first thing you need to get right is revenue recognition. This is your key to making an accurate growth forecast. It’s a complex topic and a common mistake that most startups get wrong in the first few years of operations. But it’s relatively easy once you get the hang of it. We’ve broken down the steps for you in this lesson.
Go deeper: Revenue recognition 101
Cost of Sales (COS) refers to the direct costs associated with selling and delivering your product. The more revenue you generate, the more COS you have. Your goal is to grow your revenue faster than your COS.
Go deeper: Understanding Gross Margin and Cost of Sales.
3. Gross margin
Gross margin is the amount left after deducting the Cost of Sales from the total revenue. It’s one of the critical indicators of how profitable and scalable your business is. Your goal is to increase your gross margin rate as much as you can and get to a gross margin of 80%.
Go deeper: Understanding Gross Margin and Cost of Sales.
4. Operating Expenses
Your Operating Expenses (OpEx) help you decide which area to optimize to increase your profitability. It’s broken down into three main categories that have a direct impact on your revenue growth. Use the given benchmarks as guidelines to help you allocate your resources properly.
Go deeper: The ins and outs of Operating Expenses (OpEx)
5. EBITDA
EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortization. It’s a metric that measures a company’s overall financial performance. It’s another key indicator of your company’s profitability. Investors rely on your EBITDA to determine the price they’re willing to pay for your company.
Go deeper: What is EBITDA?
6. Depreciation & Amortization
This section is all about your company’s tangible and intangible assets such as computers, cars, copyright, etc. Depreciation and Amortization are methods used to spread your assets’ costs over a specific period of time. It affects the calculation of your EBITDA.
Go deeper: What is EBITDA?
7. Interest Expense and Income
Interest expense is the cost incurred for any borrowed funds – bonds, loans, convertible debts, or credit lines. In other words, your company’s debts. It’s common for companies to fund operations using debts. Your investors will look at your interest coverage ratio to determine your ability to pay interest with your operating income.
Go deeper: What is EBITDA?
8. Taxes
This section is the most straightforward one – it’s all about the expense caused by tax rates. It also affects the calculation of your EBITDA.
Go deeper: What is EBITDA?
9. Net profit
Your net profit is the third key indicator of your company’s profitability. It’s whatever you’ve earned or lost after deducting all expenses from your total revenue. But here’s the interesting part: growing revenue doesn’t necessarily translate into more profit.
Go deeper: What’s net profit?
These are all the elements you need to know when it comes to financial reporting. Here’s a tip: We NEVER look at any metrics in isolation. All your metrics are connected.
Key takeaway:
As a SaaS CFO, I’m most interested in gross margin and EBITDA when I am analyzing profitability. These metrics give me an immediate picture of a company’s financial performance.
While net profit is essential, it’s not as relevant for startups. Startups are usually expected to grow faster and be profitable much later. Say, by the time you reach Series B.
Here’s another tip: Automate what you can automate from Day 1.
There’s a lot of tedious work involved when running a startup (we’re all in this together!). It’s crucial that you get your metrics right from the start, so you don’t have to spend time cleaning up messy and inaccurate financial data later down the road. The best way?
Build a solid (and automated) finance stack from the get-go. I’ve shared some examples here.
Happy Calqulating!
