Startups need to have a streamlined workflow when it comes to managing their financial reports accurately. Keeping an accurate financial record is not only crucial for tax purposes, but it’s also important for fundraising activities and managing the cash flows of a startup.
However, financial record-keeping can seem a bit too overwhelming when starting a new business, and most startups might not have enough time to get their finances on the right track and in the right hands.
In that scenario, working with an accountant can help startups get their finances straight. Let’s discuss how financial reports impact companies and how working with accountants for startups can help.
What Is Financial Reporting?
Financial reporting means developing well-structured financial statements that provide insights into financial information, company cash flows, and business performance over time.
Accrual financial reporting is essential to help manage, organize, and understand a startup’s finances. It’s a standard practice that conveys specific financial data to potential investors and gives insights into the health of the business.
It involves two main activities:
- Preparing standard financial statements that include profits, losses, cash flows, balance sheets, etc.
- Creating other financial documents that show the business’s position financially. These documents can include stock reports, shareholders’ annual reports, footnotes to financial reports, etc.
Types of Financial Statements
A financial report shows a company’s financial details and business activities. Statements are written records that need to be audited for accuracy by the government or independent accountants.
Let’s take a look at the key types of financial statements, the significance of each statement, and the value they provide:
● Income Statement
An income statement is a profit or loss document that comprehensively describes a startup’s revenue, profits, and expenses.
It provides insights into the net revenue over time and into how much the business earned or lost in a given time.
● Statement of Retained Earnings
The retained earnings statement is a significant financial record that exhibits the number of earnings a business has retained within the company since its establishment.
It sheds light on the company’s financial status and the proprietor’s approach to expanding and reinvesting in their enterprise.
● Balance Sheet
A balance sheet is like a financial statement, but it reports the startup’s assets, liabilities, and shareholder equity for a given point in time.
It’s an important document that helps evaluate the company’s capital structure, which is how it finances its operations and growth.
● Cash Flow Statement
Cash flow is the amount of cash coming in and going out of the business; it gives investors an idea of how the business operates.
It also shows how a startup pays off debt and funds like current expenses and future investments.
Why Should a Startup Care About Financial Reporting?
Financial reports are the backbone of a business. It’s important to have a laser focus on the growth of the revenue of a startup because the future of the company relies on it. Without it, the company will cease to exist.
However, there’s also a need to spend money to make money. That’s a given, but it’s important to understand the finances so you can expect a return on investment on every penny a startup makes.
Many startup owners assume they’ll always get funds, which is a dangerous assumption. Let’s see why startups should care about financial reports:
● To Scale
Knowing when to scale plays a crucial role in business success. But investing in growth too early or too late can financially place a startup in the wrong position. It’s easy to spend business finances without planning properly.
So, businesses have to keep track of business finances if they want to scale in the future.
● To Evaluate a Startup’s Financial Performance
Any potential investor will look at a startup’s financial performance before deciding to invest. Investors need financial performance metrics to determine how much they can pay for a startup and to what extent they want to be involved.
So, providing insightful financial reports not only gives a deeper understanding of finances but also helps make informed decisions for the business. It is also an effective management decision-making tool for potential investors.
● To Mitigate Errors
Keeping numbers aligned means there’s no need to worry about errors. Metrics help accurately determine the numbers and navigate through the business.
If a business is not getting close to any milestone or can’t find the right time to invest in scaling, it’s always the best option.
● To Forecast Cash Flows
Cash reserves are the roots of any business’s success. The goal is to keep cash flows on a more positive side.
Nonetheless, it’s important to understand that it takes time to stabilize income and build the proper foundation for monthly recurring revenue (MVR).
● To Perform a Tax Liability Evaluation
Financial statements help provide information in two ways to ensure startups can accurately understand tax liabilities and make timely decisions:
- The balance sheet in a company’s financial reports lists all its startup’s liabilities, assets, equity holdings, and net worth at a specific time.
- Financial reports help divide all the different expenses and depict how much money was spent on each expense. This helps to calculate a startup’s tax liability accurately.
These are just some of the reasons why the startup should care for accurate financial reporting. To keep up with the reports, working closely with accountants is essential to ensure accurate financial reporting.
Keeping up with the rising demands of a startup can be overwhelming. Business owners are responsible for so many things, and neglecting any aspect of the company can lead to stunted growth.
Moreover, when it comes to managing finances, there’s too much to cover, and the whole process becomes frustrating. Working with accountants to streamline financial reports can help startups take the burden off an owner’s shoulders and work on scalability and growth.