How do investors use financial statements? An inside look

Editor's Note — This article is written by Swapnil Shinde, Co-founder and Chief Executive Officer of Zeni, and General Partner at Twin Ventures. He is a three-time entrepreneur with two successful exits, as well as an advisor and investor in more than 40 early-stage startups. In this piece, Swapnil reveals his insights and expert advice on fundraising, drawn from his unique experience on both sides of the table.

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Investors need financial statements to assess many factors regarding a company’s financial position, profitability, and potential for future growth. As a founder, you’ll need to have these financial statements in order from even the earliest stages of your business. 

While properly managing your financial statements and deeply understanding how to speak to investors about the numbers within is important throughout the entire life of a startup, it is especially critical between the seed and Series B stages. 

This is typically a time of high growth and uncertainty, a time to seek guidance, and a time when you may be looking to raise additional capital.   

Recording financial information accurately and consistently is the key to unlocking investor interest and working with existing investors to make smart business decisions. 

Read on to learn more specifically how investors leverage financial statements pre and post-investment.

How do investors use financial statements?

To simply explain all the uses of financial reporting to investors – financial statements offer one of the best snapshots of your company’s financial standing, allowing them to make an informed investment decision. 

What investors look for in these statements pre and post-investment differs from industry to industry. The current stage of your startup also plays a role.  

Financial statement analysis can provide all the information needed to understand where your company stands in revenue, expenses, cash flow, company assets, debt level and so much more. 

The most common use of financial reports is for investors to help you make important decisions by analyzing trends, making cash flow projections, and comparing your numbers to direct competitors, or assessing interest in investing. 

When do investors need financial statements from startups?

Startups move fast, with many different components working all at once. While founders should track specific KPIs and revenue consistently, investors don’t need consecutive updates. 

There are two common situations where investors need to see your financial statements – funding pitches and board meetings.

When seeking funding, possible investors need to gauge a company’s ability to continue forward and grow. Good cash management is a big green flag, but their financial analysts need to see the data. 

Without a company’s financials, you’re asking investors to believe in your words alone. Inspiring pitches rely on business narrative, but financial viability comes from records. 

‍Investors become board members post-investment. Monthly or quarterly board meetings are the place to update everyone on the company’s financial condition and growth potential. 

Your board is expecting to see numbers to back up any plans like expansion, fundraising, or budget adjustments. 

3 main startup-related uses of financial statements to investors

All businesses use financial statements. Startups, however, are on a different playing field in contrast to large corporations. Without a long history of financial data to rely on for future earnings, startups need to utilize what they have on hand.

1. Analysis company’s financial health and profitability: 

This maps back to fundraising and meeting with investors, which we discussed earlier. Profitability is a prevalent factor for investors looking into startup ventures. Founders show profitability through their finances with a balanced net profit vs. expenses. 

2. Analysis of company management : 

There are plenty of reasons a startup can fail, but the most significant recurring factor is running out of money. The mismanagement of funds in a startup often leads to a sudden nosedive in operating cash flow.

3. Analysis of competitors: 

Investors want to see how you stack up compared to competitors in your industry. If financial analysis shows your startup struggles to keep up, an investor might want to wait to throw their hat in until after you are more on a level playing field.

What do investors look for in financial statements?

Of all the things company financial statements reveal to a potential investor, there are four main factors investors consider: revenue, profitability, debt level, and cash flow. 

Revenue

Found on the income statement, the top line (revenue before expense deduction) shows how much money your startup brings in during a set period. Income statements offer a direct comparison of expenses vs. net profit too. Overall, your top line is a priority metric.

Profitability

Investors gauge profitability through net income and expense comparisons. Net income is the total amount of money a company pulls in after deducting all expenses, known as the bottom line.

It’s often discussed as a percentage of your gross revenue, referred to as the net profit margin. 

A balance between net income and expenses is a key indicator of good company management and a positive sign to investors. 

Debt Level

Whether from friends and family or a financial institution, companies start with debt; it’s just a fact of business. Loans and lines of credit aren’t a problem, but a potential investor needs to see you can meet those payment obligations without suffering. 

‍Cash Flow

The business world is full of ups and downs. High cash outflow and low or stagnate cash inflow indicates you probably don’t have a substantial cushion of cash and cash equivalents in case a problem arises. Or, as your debts increase, your company won’t be able to afford payments, which threatens your financial stability.

What financial statements do investors want to see?

We’ve talked a lot about the information investors want on your financial statements. Now we’ll cover which reports you need to give investors. This isn’t a limited list. You can show investors what data you feel is important, but take this list as a starting point.

Balance sheet

Balance sheets are a snapshot of your startup’s finances that compare what you own (assets) to what you owe (liabilities) plus shareholder equity. Investors use financial ratios to analyze the information on the balance sheet.

For example, liquidity ratios help them gauge your ability to pay off your current liabilities with your current assets.

Income statement

This financial report (also known as the profit & loss statement) shows the company’s financial performance through revenue, expenses, and net profit –or top line and bottom line. 

Expenses include operating and non-operating costs incurred by the company. Operating costs can grow with the company or remain stagnant depending on the industry.

Investors use the income statement to calculate profitability ratios and assess your company’s ability to turn a profit.

Cash flow statement 

As simple as it sounds, cash flow statements record the amount of money coming in and going out from financing activities, investing activities, and operating activities.

This financial document indicates whether or not a company can pay off debts and continue funding operating expenses as time goes on.

Investors need to see accurate financial statements

When speaking to an investor, you should have confidence in the numbers you’re providing. Inconsistent or incorrect statements are misleading, look bad on you as the founder, and can prevent investment decisions from going your way immediately.  

Many founders do their own bookkeeping and financial accounting when starting out, but as you scale your company, your time becomes stretched in several directions. Eventually, you need someone to take over to ensure everything you’re handing to investors is accurate while you use your talent on other parts of the business.

That’s where we can help.

At Zeni, we provide each financial statement daily through a customizable client dashboard available on any smart device. We update all your account throughout the day, so no matter what time you look, you see up-to-date insights into your company’s finances. You won’t be stuck scrambling to close your books if an investment opportunity presents itself.

Let us do the heavy lifting. Schedule a free demo today.

Check out these resources for an in-depth look at financial statements

‍5 Top Accounts Payable Best Practices For Your Startup

What Is Depreciation And What Does It Mean For Startups?‍

‍Cash Flow Forecasting: What It Is And How To Use It