Whether you’re preparing to raise funds for the first time or you’ve already secured investors, proper reporting is critical. When angel investors, venture capitalists, or private equity (PE) firms want to determine whether your company could offer a good return on their investment, they rely on various reports to evaluate your business model, assess your current state, and gauge your growth potential. Once they’re on board, they’ll expect periodic reports to keep tabs on your progress and financial health—and spot brewing problems before they become bigger issues.
So what type of reporting is important to investors? It’s a combination of financial data and non-financial metrics that, together, paint a picture of your business’s performance now and your future outlook. Developing solid, investor-ready financials and other essential reports is key to securing capital and keeping your investors informed, engaged, and confident.
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The Financial Reports Investors Expect
Financial data is at the heart of what investors need to know about your business, both before they decide to back you and ongoing.
The financials investors expect to review may vary based on your company’s stage of maturity, business model, and industry. For instance, they may look at very different financial data for a company that’s in the pre-revenue stage vs one that’s already brought products to market. Recurring revenue will be an important metric for a company with a subscription-based business model.
However, there are several standard financial measures that most investors will want to review, either before investing or after they’ve provided your business with capital. Your ability to report on those figures accurately makes a big difference in gaining and maintaining their confidence. If your capital comes from a PE or VC firm that will take an active role in the company, these financial reports also will help them identify how and where the operation could use their expertise and involvement.
At a minimum, expect to provide investors with the financial statements that form the core of financial reporting.
• The income statement (also called the P&L) reports on your revenue, expenses, gains, and losses for the current accounting period. This statement tells investors how your net revenue is translating to net income, ideally.
• The balance sheet provides a snapshot of what your company owns and owes, as reflected by your assets, liabilities, and shareholder equity.
• The cash flow statement shows how cash and cash equivalents move in and out of the business and how well you’re managing cash to cover operating expenses and pay debt.
Together with a detailed annual budget, these core financial statements give investors a sense of your business’s financial health. While statements for the current period are essential for understanding the company’s performance right now, investors also look for projected financials. If you don’t have the bandwidth or expertise to develop key financial statements and forecasts in-house, an outsourced accounting firm like Scrubbed can take on this crucial task.
Within these core financial statements lies a wealth of information that can help investors gauge how your business is doing today and the outlook for tomorrow. They’ll likely zero in on key financial data points like the following.
Investors want to see that your top-line revenue is growing, which is indicative of your ability to scale the business. They also want to see how your monthly recurring revenue (MRR) is trending, especially for SaaS and other subscription-based businesses. Expect investors to look at both your current and forecasted revenue to determine whether you’re heading in the right direction.
A ratio that compares your profit to your revenue, net profit margin tells investors how stable the company is and how effectively you’re deploying the capital they’ve provided.
At a time of incredibly high inflation, investors will be interested to see if your COGS is running at a reasonable level, whether it’s rising or remaining stable, and whether there are ways to reduce or stabilize your costs.
Investors want to be confident that you aren’t getting into debt too deep and to gauge whether your debt position is reasonable in relation to your assets.
Your ability to maintain a positive cash flow is critical to running a sustainable company. Without it, you can’t meet your current obligations and you certainly can’t invest in growing the business the way your investors expect.
In the early stages, your company is likely to spend cash faster than you generate revenue (or even before you generate any revenue). The rate at which you’re running through cash each month—your burn rate—tells investors how long you can operate before you need another infusion of capital.
Non-Financial Reports and Data That Matter to Investors
Beyond standard financial statements and reports, be prepared to deliver reports on the non-financial data investors expect to review regularly. Reports that compile data and key performance indicators (KPIs) like the following can help investors monitor your company’s performance and identify early trouble signs.
For companies that have a recurring revenue model in particular, investors want to see that the business has a high customer retention rate that translates to steady revenue growth. And since it’s much more costly to add a new customer than retain an existing one, higher retention usually means higher profitability. Investors will have greater confidence in a company with demonstrated stickiness (the ability to retain customers) vs one that is constantly churning customers. If your customer retention rate lags your industry average, that’s a red flag to investors.
The rate at which you’re adding new customers is another sign of your business’s health and a key KPI investors expect you to report on. When that rate is rising, it means your revenue will be too.
While it’s great to add a large customer, having too many eggs in one or two baskets increases your risk. If you lose a large customer, your revenue could take a big hit. Investors often ask to see a report of your revenue concentration to ensure you have a diversified customer list that protects you against a significant risk of revenue loss.
If your business offers services on a subscription basis, investors will want to see that total subscribers or users are continually increasing over time. A growing subscriber base should translate to increasing revenue—but it also demonstrates the viability of your business model and product offering
Also read: 5 Proven Tips for Better Financial Reporting
How Scrubbed Can Support Your Investor Reporting Needs
Whether you’re preparing for a fundraising round or already have investors on board, it’s essential to provide the financial statements and non-financial reports they expect to see as part of their initial due diligence and ongoing monitoring. But producing accurate, comprehensive financial statements and other investor reports takes time and expertise you may not have in-house.
As many early-stage companies have found, Scrubbed is the right partner to take on this all-important task!
The Scrubbed accounting and finance team is highly experienced in developing financial reports and non-financial data reports that instill confidence in investors—before they decide to provide your business with capital and ongoing.
Beyond our standard financial reporting services, we offer Financial Planning & Analysis and Financial Modeling services that help you forecast revenue and expenses and report on your company’s outlook based on accurate historical data and sound business assumptions.
Contact Scrubbed to learn how we can develop both financial and non-financial reports that help you secure capital and keep your investors informed!