Monthly financial reports are a founder’s essential tool for making data-driven decisions. They help you track your business’s progress, see where your money is going, and identify potential problems before they become major crises.
Growing your startup requires understanding its financial progress and health.
This transparency is especially essential if you manage multiple products or startups and want to know how each one performs. Regular access to financial information helps you identify trends, make better decisions, and grow your business.
What should founders look for in their monthly financial statements?
The balance sheet, income statement, and cash flow statement are the basic monthly financial reports for every founder to get a read on how the company is doing. These show not only the business’s revenue and expenditures but also give the business a complete financial picture.
The balance sheet shows your assets — like cash in the bank and equipment — against liabilities — i.e., debt held by others and payables to suppliers. The difference between these two numbers is your owner equity.
The income statement summarizes the company’s revenues and expenses during a period (typically a month, quarter, or year). It shows how much money was brought in through sales and what it cost to deliver on those sales. The net result is the profit or loss for that period.
A cash flow statement shows how cash flows into, through, and out of business each period, whether from sales or payments made by customers (receivables) or to suppliers (payables). The report shows whether your company is generating enough cash to meet its ongoing operating needs. It can also help you predict future cash shortages or surpluses and adjust your spending accordingly.
Your balance sheet is a snapshot of your business’s financial health at a given time. When you know what to look for, it can be a valuable tool for evaluating the health of your business.
The key figures in the balance sheet include some financial ratios such as:
The current ratio shows how fast a company could pay off its short-term debts by liquidating its current (short-term) assets like inventory, receivables, and cash.
Inventory can be difficult to liquidate quickly, so the quick ratio strips out inventory from the current ratio calculation. This ratio provides a more accurate picture of how quickly a firm could pay off its obligations in a pinch.
The debt-to-equity ratio compares how much money a company owes with how much it has in shareholders’ equity. This ratio indicates how much leverage a company has – that is, how much debt it has taken out compared with its overall value.
Gross profit margin, operating profit margin, and net profit margin are critical indicators showing how well your business is doing.
Gross margin measures how much money remains after subtracting the cost of goods sold from total revenue.
Operating margin takes this step further by adding other costs like overhead expenses and depreciation.
The net profit margin subtracts all expenses from revenue to show what’s left over after paying everyone who works there and taxes.
The primary function of a company’s cash flow statement is to show how available cash compares with outstanding debt. This information can help you better understand whether or not your business has enough money to cover its expenses in the coming periods.
There are several vital components to focus on when reviewing your cash flow statement.
Current Liability Coverage Ratio measures the availability of existing assets to pay off current liabilities: the higher this ratio, the better position your company has.
You should also look for the Operating Cash Flow Ratio. In addition to monitoring how much money comes in during a given time, it also shows owners much cash their business generates from operations. This number indicates how well your company manages costs and if you’re spending less than you earn.
Finally comes the Cash Flow Coverage Ratio, which shows how many times over you could cover all current liabilities with cash on hand.
As a busy founder, you may not have time to read through every single line of your monthly financial statements. Knowing exactly what to look for in your financial reporting helps you quickly see if there are any issues or opportunities.
Curious about whether you’re getting enough value out of your financial statements or if you’re leaving something on the table?
Contact the startup finance experts at Founder’s today to learn how you can get more from your financial statements.
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