What Do Investors Want to See in Financial Statements?
Financial statements are a snapshot of your organization’s financial health.
If you want to raise funds, sell your business, or obtain a business valuation, you need your financial statements to be in order.
More specifically, the idea is to be able to show your numbers in a way that makes people feel confident about your business and its ability to grow.
At the heart of everything, investors just want a story that they can believe in. They’ll value your business based on the future expected cash flow.
In this blog post, we’ll go over what investors want to see in financial statements—and what you, as a business owner, can do to present your numbers under the best light.
Without further ado, let’s get to it.
1. Net profit
What it is:
The bottom-line. Your net profit is your total revenue minus all expenses and costs incurred by your business.
Why it matters to investors:
Businesses are made to be profitable—and the more profitable the business, the more potential for a positive return for investors.
How to fix it:
If your business isn’t yet profitable, you’ll have to convince investors that you have a strong plan to make it so within a specific timeframe.
You’ll need a solid forecast of your projected revenue and expenses.
Want to set this up with a professional CFO? Book a call with us.
2. Proper structure and categorization
Investors want financial statements in a commonly used format for easier analysis and comparability.
They also want to know that items are correctly tagged in cost of sales vs. operating expenses, and correctly bucketed. For example:
Office supplies = expense item
Office equipment = an asset (typically)
It’s also worth mentioning Common Size. Investors want to see, at a glance, what each line item looks like as a % of total revenue or total assets.
3. Growth
What it is:
Growth, in the context of SaaS and eLearning, can pertain to many things:
Customer base growth
Revenue growth
Earnings growth
In all cases, this refers to the rate at which your company grows over time.
Why it matters to investors:
Healthy growth is an indicator that the market responds well to your product or services.
For example, a SaaS business that manages to acquire new users and retain its existing customer base for several months on end will have a positive growth.
How to fix it:
You’ll achieve positive growth by offering an excellent product to the right market at the right time. Easier said than done!
When it comes to investors, it’s about proving that your growth is indeed headed the right way by showing them:
How long customers stay with you (lifetime value);
How many customers your currently have and project to have by [timeframe];
How fast your customers churn (more on this below!).
4. Margins
What is is:
Margins are the difference between the price of a good (or a service) and the amount of money required to produce it, expressed in percent.
There are a lot of different margins:
Gross profit (revenue minus cost of sales)
EBITDA (earnings before interest, taxes, depreciation and amortization);
Net profit margin.
Why it matters to investors:
Investors want to understand how much of your revenue is going to variable costs.
Variable costs are expenses that vary depending on how much you sell. A lot of the time, business owners will have all their costs bucketed in the same category, which makes it difficult for investors to gauge how exactly costs will grow alongside revenue.
How to fix it:
Demonstrate that your product or service scales well. In other words, you want to be able to show investors that more people using your product or service does not mean costs that increase linearly.
5. Revenue recognition
What it is:
Revenue recognition determines the accounting period when revenue is recognized. For example, if you close a $12,000 enterprise yearly deal in January, but close no deals in February:
On a sales-basis, you’ll have earned $12,000 in January and $0 in February
On an accrual basis, you’ll have earned $1000 in January and $1000 in February (and all months that follow).
Why it matters to investors:
It’s important for investors to understand how your revenue is recognized, especially for subscription-based businesses.
Think of it this way: in the example above, if you recognize all revenue the month the enterprise deal is closed, it might look like your business is doing great in January but poorly in February.
Bookings, A.K.A. a won, signed, or committed sale where the purchase order has been received and approved, are worth mentioning here. Investors want to see how your bookings compare to your recognized revenue.
How to fix it:
From a SaaS accounting perspective, yearly deals can only be recognized when the obligations are satisfied. Ensure this reflects on your financial statements.
6. Debt load
Investors want to understand how much debt a company has compared to its ability to pay back/support that debt with cash flow and equity.
Debt can be a helpful tool—but only if used well. The appropriate amount of debt varies from business to business.
7. Cash flow
What it is:
Cash flow is the net amount of cash your organization receives or gives out, A.K.A. the amount of money flowing in and out of your business.
Why it matters to investors:
Cash flow helps investors understand where the money comes from, and where it goes. Is the business financially healthy? How is the revenue being spent?
If the company has a long-term debt obligation, for example, cash flow will indicate the possibility of repayment.
How to fix it:
Keep an eye on your transactions and ensure you have a plausible explanation as to how they help the business move forward.
8. Customer acquisition cost
What it is:
Customer acquisition cost is how much you need to spend to acquire a new customer.
Why it matters to investors:
While you might make good margins by selling your product for much lower than it costs to produce it, that number means very little if your acquisition cost goes through the roof—A.K.A., your product is hard to sell.
How to fix it:
Investors want to make sure that customer acquisition costs remain lower than their LTV (life time value).
For example, if it costs you $400 to get a new customer to sign up for your SaaS, but that customer ends up spending $2500 on your tool—you’re good to go.
Alternatively, demonstrate your ability to lower customer acquisition costs through a solid sales or marketing plan.
A good LTV/CAC (lifetime value/cost of acquisition) ratio demonstrates how much total revenue you generate for every dollar spent on sales and marketing to acquire a customer.
9. Accounts receivable and accounts payable turnover ratios
These show how quickly your customers pay you and how quickly you pay your vendors.
The quicker you receive payment and the slower you take to pay vendors (within reason relative to their payment terms), the better your business’s cash flow.
10. Churn rate
What it is:
Churn rate is the number of customers who stop doing business with you expressed as percent of total customers.
Why it matters to investors:
Churn rate unveils a lot of information about your business:
How long on average customers stay with you
How many of your customers downgrade to a lower cost package and when
What leads people to stop doing business with you
If churn rate is increasing or decreasing, indicating better market-fit over time
How to fix it:
Investigate churn from the get-go through good customer experience practices.
Document the reasons why people are no longer interested in your product and what you intend to do to reduce churn.
Wrapping up…
As you can see, presenting your numbers in a light that is attractive to investors is no small feat.
As a business owner, your goal is to provide as much information about your revenue, expenses, profitability, and debt as possible—as well as reasonable plans of action for any areas where your numbers are weaker.
Most importantly, you have to prove your growth potential. Any indication of your ability to grow is a step in the right way for investors.
Do you need help getting your financial statements in order? Give us a call.
We’ll:
Set up your financial statements in the format that investors want to see
Categorize your books correctly
Help you put together rolling forecasts
…and more!
Keep this checklist at hand for a complete overview of what numbers matter to investors—at any time.
