What is Financial Statement Analysis?

Startups track a lot of data as they begin to grow. From revenues to key performance indicators, net promoter scores and churn rate, these are all important factors to a decision-maker. As a founder or executive in a startup, one of the most useful and regular data points will come from financial statement analysis.

A financial statement analysis is more than understanding your profit and loss lines. Taking a deep look into your monthly collections, disbursements, and income statements can help you realize if your business strategies are working, identify potential risk areas, drive strengths, and enable your team to pivot more effectively. If your finance and accounting team isn’t regularly going through your finances, building a strong and comprehensive practice of financial statement analysis is an essential first step.

Financial Statement Analysis 101

The purpose of a financial statement analysis is to peel back the layers on a business and understand:

  • How a company generates revenues
  • What direct and indirect costs are required to generate those revenues
  • How and what cash is utilized to perform the above

These reports are vital for a variety of stakeholders, from board members to your accountants, but critical for the management team.

A thorough analysis can help you identify several key factors which can help you identify where and how you are growing. First, a strong analysis can help you identify trends in the business, such cash flow cycles, accounts receivable growth, and gross margin deterioration or expansion. Each of these factors can help a team decide if your current business plan is working, what can be improved, and potential opportunities.

As an early-stage company, there a number of important questions that a proper financial statement analysis will need to address:

  • What are the levers we can control to impact cash flow?
  • Are we building up receivables and not collecting on revenues?
  • Do we see operating expenses growing at a rate that exceeds revenue growth or user traction?
  • Do we have any kind of growing liabilities that we need to keep a careful eye on? Consider, for example, debt, payables, operational liabilities, guarantees, etc.
  • Can we use our cash more effectively or efficiently? Are there marketing channels where we saw better overall financial performance?

Why Does My Team Need Financial Statement Analysis?

In addition to getting the best possible insight into your spending habits and how they are determining the startup’s current trajectory, these reports are often crucial to starting discussions with investors, creditors, and ultimately the U.S. Securities and Exchange Commission.

When approaching a bank or investor for direct investment, venture debt, or other forms of financing, one of the first things they will likely ask for are your financials. This is almost always followed by an extensive discussion around different transactions and elements within your financial statements and customer operations data. Having a strong understanding of your core statements and being able to speak to your financials is crucial, as these documents and others will determine how likely an investment will materialize into a positive return.

Potential investors will also want to read the financial statement analysis to understand your operations, and if your company is a smart investment. Investors are looking to get a return through either selling their equity or taking investments public, seeing how your company moves money will either make or break their funding offer.

If your company does go public, the financial statement analysis will ultimately end up at the SEC. Investigators use these reports to determine if your company is conforming to both generally accepted accounting practices and rule compliance. In early stages, however, a financial statement analysis is more a matter of good housekeeping and smart accounting practices. It’s worth bearing in mind though, that these sorts of analyses can help you prepare for future financial endeavors.

Getting the Right Data from Financial Statement Analysis

Although it may sound like a difficult process, a good financial statement can be worth its weight in gold. A good financial statement analysis can help identify potential problems before they arise and create a foundation for future accounting success. Depending on your startup’s long-term goals, these practices can also be essential to future growth. Creating positive reports regularly, combined with adjusting spending to drive your trajectory upward, will help your team grow when it comes time to seek mentors, investors, and even credit.

Your team doesn’t need to work alone in producing analyses. airCFO works with founders daily to help them understand their cash flow, and how to ultimately improve it. Reach out today and let us help you provide a financial statement analysis that keeps your startup moving forward.

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