When running a startup, you probably have a laser focus on growth and revenue. That’s completely normal – especially when the future of your company relies on them. Without growth and revenue, a company will cease to exist.
But you also need to spend money to make money. Every penny spent is an investment, and you should always expect a return on investment. Many startup founders assume the money will always be there for them – especially after closing a funding round. That’s a dangerous assumption.
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). You also need to know your:
- Growth rate
- LTV to CAC ratio
- CAC payback time
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, Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is an essential element in a financial report.
Investors rely on this particular 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 and Sales (M&S) expenses when your company is growing fast or entering new markets. 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 – hello, Customer Acquisition Costs (CAC). It takes approximately one to three months before you start seeing an increase in revenue.
Therefore, it’s essential to know where your revenue streams are coming from (and when) before making your next big strategic decision.
- Investor reporting
Unless you’re bootstrapping, 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. 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. Investors can gauge your company’s potential and profitability by reviewing your financial reports.
- Tax purposes
Accurate financial reporting helps reduce your tax burden. The last thing you want is to run into legal issues with the authorities – a costly challenge, I would say.
- Mitigating errors
The great thing about data and numbers is that they don’t lie if (big IF) you do them right. Your metrics are there to help you navigate through the business.
If you’re not achieving your milestones or don’t know when to invest in scaling your business, know that you can ALWAYS rely on your metrics for those purposes.
Let’s said you scaled too soon and realized that you’d shortened your cash runway by 20%. What do you do then? Some of the possible options are:
- Reduce operating expenses (OpEx)
- Increase your cashflow with upfront payments
- Expand your Net Revenue Retention (NRR)
Rely on your financial reports to help you choose the best solution.
- 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. That’s almost a given. But a much-needed reminder. 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.
Let’s say your company has been in business for a year or two, and everything seems to be going fine. To be sure, use the SaaS rule of 40 to do a health check – Your growth rate and profit rate should add up to at least 40%.
Your growth rate is calculated using your Monthly Recurring Revenue (MRR), and your profit rate is calculated using either your gross margin, EBITDA, or net profit. It depends on which stage of growth and funding you’re in.
Assuming that your growth rate is not 10% or 30% a year, then you know it’s time to start focusing on increasing your company’s profitability.
- 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 three main categories that directly impact your revenue growth – Marketing and Sales being the largest one.
Your financial report doesn’t only help you evaluate your operational performance. It’s an area that your investors will be interested in as well. Your financial statements provide insights into the operational changes that may have caused changes in your company’s financial situation.
- Sharing shareholder equity
This is about your company’s net profit and is most relevant to equity investors. During the early stages of a startup, you’ll typically need to focus on increasing your gross margin and EBITDA first. Once operations become mature and slow down, and you’re ready to start paying dividends, then your net profitability matters a lot.
As a CEO who’s also the CFO of a tech startup, my advice is: rely on your financial analytics when it comes to making strategic business decisions.
Financial reporting is more than just an obligation. Your reports help you make better-informed decisions so you can stretch your cash runway as much as possible.
If you’re struggling with financial reporting, I’ve explained the main elements to pay attention to in your reports here.