Every success story concerning a business is twinned with financial reporting. Financial reporting equips the business with the awareness of issues regarding its health, aids in knowledgeable decisions, and attracts investors into it. Acquaintance with financial reporting basics can bring all the difference between winning in a competitive market and failing to scale for a start-up. This article will enable you to understand financial reporting essentials for your start-up.
What is Financial Reporting?
Financial reporting is the process through which a firm shows its financial situation to all the interested parties. This involves the process of preparing statements that indicate the performance and position of a given business. The financial reporting gives revenues, expenses, profits, losses, and other relevant assets, making it possible for founders, investors, and creditors to judge the general health of the firm.
Core Financial Statements for Start-ups
There are three major financial statements any start-up has to prepare. These include the following.
Income Statement (Profit & Loss Statement):
It is extremely important because it allows you to know whether the company is making profits or running in the red since it shows its bottom line: the net income (or loss). The most critical items of the income statement are as follows: Revenue All earnings realized from the sales of goods or a service.
The Cost of Goods Sold: That is the direct cost of producing goods or services.
Operating Expenses: All fixed and current expenses associated with salaries, rent, utilities, marketing etc.
Net Income (or Loss): What is left after all the expenses are deducted from revenues?
Balance Sheet:
A balance sheet is the snapshot of the company’s present financial condition at any point in time. It shows
Assets what the firm owns-for example, cash or goods, equipment.
Liabilities what the firm owes-for example, loans or accounts payable.
Ownership and Equity: Owner’s Claims after liabilities (retained earnings and capital invested).
Cash Flow Statement:
Statement of cash flows presents inflow and outflow of cash. It focuses on:
Operating Activities: Cash received or paid in the course of carrying out core business operations.
Investing activities: Cash generated from purchase and sale of property and equipment, real estate, etc.
Financing activities: Cash received from bank loans, repayment of bank loans or issuance of common stock shares etc.
Cash flow statement would become one critical determinant for a start-up as well because it would inform whether the company can generate enough cash to sustain the operations or not.
Why Financial Reporting is Critical to Start-ups
Financial reporting is one of the most important functions any start-up would need inasmuch as it serves some pronounced purposes. Those purposes include tracking the financial condition of a given business.
Periodic preparation of financial reports allows the founders to monitor the performance of a company regarding its finances. Since most of the start-ups often experience erratic cash flows, there also is a need to track net income and cash flow to restrain liquidity so not to “go out of cash.”
Investor Attraction
Good financial statements always invite investors to invest in start-ups. In other words, clear and accurate financial reports make people believe that the company is taking its money seriously and that it is reliable and trustworthy in managing those funds. That is what people want so that they can, in reality, invest their money in the company.
Decision Making:
Appropriate financial information shall help the founders take proper decisions in the right direction about budgeting, pricing, hiring and also expansion decisions regarding the start-ups. For example, if there is a probable cash deficiency in the near future as shown in the cash flow statement, then funding is required.
Legal Provisions are complied with
The fact that in some jurisdictions tax authorities or regulatory agencies or shareholders demand that the start-ups present their financials calls for proper reporting. This will ensure it’s legal compliance and not in a way that will attract some violations.
Best Practices of Financial Reporting for Start-ups
For quality and accurate financial reporting, you should observe the following practices:
a. Record your Expenditures, Payments, and Receipts
You have to account every cost and every receipt and the payment according to your best judgment. Thus, it will become easier for you to go through the accounting software at the time of no human error.
b. Utilize a Qualified Accountant or Accounting Tool
Now, use cloud-based accountancy like QuickBooks, Xerox, and Fresh Books. Then, it will become easier and also as per the book of accounting standards. And if one doesn’t know about the accounting practices, then find a professional for that and outsource.
c. Periodic Reporting:
You do not wait until the end of every year to make your financial analysis. It will become a good habit in understanding your position better if you maintain the periodic reports like monthly or quarterly statements.
d. Reviewing and Analysing Reports:
Analyse Your Reports
Try to look for some patterns of inefficiency or opportunity. The actual process of reviewing the report regularly will be how you are making active decisions that would benefit your start-up in the long term.
Conclusion
The fact is financial reporting matters to the start-ups, and more importantly to those where the start-up has been designed for growth and sustainability. The masters of simplicity of income statement, balance sheet, and cash flow report put the entrepreneurs in control of their finance, thus helping take the right data-driven decisions at the right time when for the start-up, cash is the king.