December 5, 2013 | 4-minute read (723 words)
Hopefully this won’t come as a surprise to you...accurate financials are essential. Yep, they are. Credible startup financials are an invaluable tool for evaluating your company’s financial health and for business planning. They’re also crucial when you’re seeking funding.
Creating credible financials is a detailed process, but if you follow these steps, you’ll be on your way to creating accurate financials that will satisfy even the most calculating investors.
GAAP financial statements. GAAP refers to generally accepted accounting principals. This is the standard way of creating financial statements in a format that is customary and consistent. Your GAAP-compliant financial statements should consist of three standard types of statements: cash flow, profit/loss statement, and your balance sheet. Being GAAP compliant reassures potential investors that your financials are accurate and reliable. The consistency of GAAP statements means that they are comparable which means that an investor can make informed decisions and trust that your forecasts are reliably predictive.
Historical financials. Your financial statements should cover the last three years of operation, if you’ve been around that long. If you haven’t been in operation for three years, provide detailed financial statements for all the years your company has been in existence.
3-year financial plan. You’ll need to forecast into the future for projecting future financial statements. Going beyond three years is a ridiculous exercise since there’s no way to make accurate predictions that far out. A three-year plan gives you a comprehensive financial picture that can serve as the road-map for your business. Three years is enough to give you the leverage of an accurate baseline valuation, and prepares you to reforecast in the future.
Contact Early Growth Financial Services for help with financial planning.
Bottom-up and top-down projections. Bottom-up projections provide a more realistic view of your potential growth. Top-down projections provide an inflated view. For comprehensive forecasting, it makes sense to supply both. That way you can both cast a rosy glow on your projections as well as provide a grounded perspective. With a bottom-up projection, you project revenue growth over the next one to three years then calculate the spending necessary to hit your milestones. With a top-down projection, you start at the top with market size, and work your way down to calculate your total potential revenue based on potential market size for your segment. For more details, read my previous post Bottom-Up vs Top-Down Forecasting: Realistic Financial Planning.
Stick to the high-level. So as not to overwhelm potential investors, you don’t need to include every line item. You can summarize the non-essential categories and only highlight the important expenses and assets.
Understand your burn rate. Investors want to know that you have a clear understanding of your burn rate—and know your break-even point. Knowing your financials gives you the insight you need to monitor your burn rate. For information about how to reduce your burn rate, read my previous article on How to Reduce Your Startup Business Burn Rate.
Work the numbers. Sometimes your numbers won’t quite add up. Don’t be tempted to fudge a figure just to make the numbers reconcile. This won’t get by eagle-eyed investors and other stakeholders—and will not reflect well on you when you get caught.
Because preparing your financials isn’t always straight-forward, it makes sense to work with a financial professional who can deliver GAAP compliant financial statements. Financials are not something you want to just throw together. Keeping your financials in order is key to making workable business plans and to setting up your startup for success.
What's your process for pulling together your startup financials? Tell us about it in comments below or contact Early Growth Financial Services to create your GAAP compliance financial statements, help with financial forecasting, and more.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with accounting, finance, tax, valuation, and corporate governance services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.