Financial statements are vital to investors. But how do investors use financial statements? Before your meeting, learn what they want to see and why.
September 17, 2021
Regardless of your startup’s size or long-term strategy, you’ll need to review three basic financial statements on a regular basis. Those statements showcase the overall health of your company, and your accounting decisions can change the overall picture you’re presenting.
The 3 primary financial statements in accounting are the profit and loss (or income) statement, balance sheet, and cash flow statement. We’ve introduced these major financial reports in previous blogs, and we’ll link to those pieces throughout this article.
Whether you’re founding a startup or jumping on board at a promising company, these reports play a vital role in your finances—and Zeni’s expert team can help you generate the 3 financial statements with greater accuracy. Here’s what you need to know.
Each of the basic financial statements offers different information, but when considered in context, they’re valuable tools for assessing your startup’s financial health. Here’s a brief introduction to each type of report.
The first (and arguably most important) of the three basic types of financial statements is the profit and loss statement. It summarizes the revenue, cost of sales, gross margin, and operating expenses incurred in a specific period of time. It also provides a figure for net income. Accurate P&L statements are fundamental to Generally Accepted Accounting Principles (GAAP) and contain values for current assets, liabilities, and equity.
Essentially, the profit and loss statement shows how much revenue you’ve generated over a certain timeframe and how much you spent in order to generate that revenue. It shows what you do and the effects of what you’ve done. Needless to say, the P & L statement is a crucial report for businesses of all sizes, and it’s often the first statement that investors and creditors consider when making decisions.
The balance sheet, based off the basic accounting equation, includes all of the company’s assets (cash, prepaid expenses, equipment, patents, and other valuable properties) at a specific moment in time.
In other words, the balance sheet shows what you own and what you owe. It’s a static report, so it doesn’t show movements over time, but it does show how well utilized business resources are. Startups often use balance sheets to calculate debt-to-equity ratios and evaluate capital structure.
The cash flow statement shows the movement of cash in the current reporting period. It provides much more detail than an income statement, which can demonstrate whether the company’s operations are financially stable.
Most cash flow statements have three or four components:
The cash flow statement details how much capital you’re spending. If you’re using an accrual accounting method, this report offers essential info about how cash and non-cash equivalents move into (and out from) your company. However, the report is limited by the accounting period; typically, cash flow statements cover a single month.
The three major financial statements provide a snapshot of your company, but each statement has limitations—to gain a full view of the company’s financial position, you need to look at all of the statements together. Otherwise, some information will be missing.
You’ll also need to analyze your accounting to ensure all three financial statements reflect the true state of your operations. All major accounting tools can generate the three primary financial statements automatically, but without expert guidance, your startup might make mistakes.
For example, an expense might be misclassified as cost of goods sold (COGS). That classification lowers gross margin—and your company’s board will expect to see good gross margins. Classifying an expense as COGS might be technically acceptable, but a different classification could more accurately reflect the business’s financial health.
To put it another way: The question “can I use this classification?” is entirely different from the question: “should I use this classification?” Expert guidance ensures the reports are reflective of the company’s operations.
When generating the three basic financial statements, accounting software can be limited. While bookkeeping tools are often efficient, they can’t guide your business towards smart accounting decisions. To ensure your financial statements show your business’s actual operations, you’ll need to take a more proactive approach. An experienced finance team can help you structure your bookkeeping—and your business—in a way that makes sense and gives you an accurate picture into your organization’s financial condition.
Zeni’s approach combines human expertise with AI-driven technologies. Our teams help you set up your financial framework, providing expert assistance to structure your startup for long-term growth. From there, Zeni’s artificial intelligence tools ensure efficient reporting, and ongoing oversight from seasoned financial experts keeps your accounting on track.