Monthly financial reports do more than provide critical information that helps you steer your startup. They are also documents that investors can look at to assess a company’s financial health.
Financial reports show how the company is doing month-over-month and year-over-year, allowing for comparison against its industry peers.
Potential investors and those that have already invested are interested in the information provided by these reports, which can help them decide whether to invest. Here’s what investors will focus on as they sift through your business’s monthly reports:
For some investors, the top line is one of the most critical metrics in a monthly financial report. They’re also an excellent place to start when evaluating a company’s performance.
A monthly sales report is an opportunity to determine what customers buy and why. Sales growth is a positive sign, but it might be time to rethink your marketing or customer acquisition strategies if you’ve hit a plateau.
Monthly sales can be volatile, so comparing verse previous years or against expectations is often helpful.
While sales are important, revenue is only half of building a successful company. Businesses also spend money on employee wages, equipment purchases, and marketing campaigns.
Cash flow shows how much money the company makes (and keeps) each month and distills overall company performance. It’s a crucial indicator for investors because it indicates how much money a company has available for investment in its core business and can help predict future growth.
In other words, a company with good operational cash flow can continue running without seeking external investment.
Investors will likely need to see a robust plan before investing in a company with negative cash flow. While negative cash and a high burn rate can be acceptable under specific strategies, running out of money can spell the company’s end.
Customer Acquisition Cost and Customer Churn Rate
How much does it cost to “buy” a new customer? And how long will they stay? Customer acquisition cost (CAC) and customer churn rate are crucial metrics that investors look at when evaluating a company.
CAC is the total cost of acquiring new customers, including:
- Support expenses
The first metric helps a business compare the amount spent on acquiring new customers with the amount earned from each customer.
It typically costs less to keep a customer than to attract a new one. Churn rates tell investors how many customers cancel service with a provider before they renew their subscriptions.
Although it’s normal to lose a small portion of your customers regularly, churn rate helps investors determine whether a company is managing its customer experience in a way that helps grow the business.
Besides the Profit and Loss statement (P&L), investors will be interested in a company’s balance sheet. How much debt is on the books? What is the company’s ratio of debt to equity?
Debt can be tricky. It’s a powerful lever when used well, but it can be dangerous if abused. Some investors might fear debt and the risks added by too much of it. One obvious risk is that debt holders receive their money before equity holders can claim what’s left if the business goes under.
Further, in a cash-strapped business, debt payments can deplete your cash and make it difficult to meet payroll and other expenses during slow times.
The quick ratio–current assets (excluding inventory) divided by current liabilities—is one of the most common debt metrics. A quick ratio of one indicates that you can meet your obligations exactly, and a quick ratio greater than one indicates more flexibility.
One of the things you should show your investor is proof that your company is profitable. The most common metric for this is net profit, which is the amount your company has left over after paying all its expenses, including taxes.
The term “net profit” also refers to the company’s bottom line, net income, or net earnings. Companies often strive to improve this figure by increasing revenue or cutting costs.
The break-even point is an essential feature of monthly financial reports, and it measures the point at which your level of sales equals the cost of goods sold and covers your fixed expenses.
The break-even point is crucial because it helps investors determine how resilient your business is. Knowing your break-even point allows you to start looking at ways to improve your business to reach profitability sooner rather than later.
The amount of money you and the other founders put into the business is their level of personal investment. Investors use this metric to assess how much money is at stake for the business owner.
The idea is that the founders will do all they can to protect their investment, making it more likely that they will work hard to protect the investors’ interests. Conversely, a business owner with little personal equity in the business may have difficulty convincing a potential investor that they are worthy of investment.
Preparing for Investors?
Monthly financial reports are an essential part of the business development process. They help investors understand your company’s long-term economic health and trajectory and give them a sense of how well your company is doing in revenue, cash flow, and other essential metrics.
Monthly financial reports also aid founders in making critical decisions and managing business growth.
Whether for internal use or to prepare for investors, implementing clear and thorough monthly reports on your own can take time and effort. A partner like Founder’s can help you ensure it’s done right. Contact our startup accounting experts and make sure you can handle anything an investor might like to know.