Financial statements are vital to investors. But how do investors use financial statements? Before your meeting, learn what they want to see and why.
November 4, 2022
There are three financial statements founders should familiarize themselves with: the balance sheet, income statement, and cash flow statement. Together these essential documents provide an all-encompassing picture of a startup’s financial management proficiency and health.
This article will focus solely on helping you better understand one of these key reports – income statements. Without the income statement, you can’t understand how much profit your start is making and what activities fuel financial wins and losses.
So, let’s dive in!
The income statement, also known as the profit or loss statement (P&L), houses important revenue, expense, and profit information. Founders must familiarize themselves with each section and the meaning of the financial data portrayed to understand their startup’s current standing and growth potential.
With this understanding, founders can then:
Research shows that 20% of startups fail in the first year, and money mismanagement is one of the most significant contributors to that statistic. Your startup can’t move forward successfully if you’re taking shots in the dark with your money. Income statements are one of the core financial reports contributing to accurate insight all founders need to make favorable business decisions.
As mentioned above, current and potential investors look at income statements to determine financial health. If they see financial troubles ahead, they can help you make smart decisions to alter the company’s course. Potential future investors look at financial health to determine if they want to invest.
Taking your first look at an income statement can be a little confusing. There’s a lot of information on there! To make it easier, here are the three main components you should familiarize yourself with: revenue, expenses, and profit.
Each element contains subcategories of information related to the money the company has brought in (revenue), money spent on needed services or goods (expenses), and the total amount of money brought in after deducting expenses (profit). Within the three categories, a categorized list of line items details the source of the expense or profit.
Let’s break down the categories a little further.
The income statement lists operating and non-operating revenue or income (if applicable to the business). Operating income consists of revenue made through daily operations, like sales. Non-operating revenue derives from different pathways, like rental interest on a business property.
Total revenue, or gross profit, is listed at the top line of the balance sheet–often referred to as ‘the top line.’
The expenses a business incurs cover all departments. Administrative expenses and cost of goods sold (COGS) fall under the expenses category; however, just like revenue, there are operating and non-operating costs.
Non-operating expenses can include: COGS, investment payments, or inventory purchases. In short, anything unrelated to the daily operations of the company.
Operating expenses can include: payroll, marketing, rent, or equipment.
Depending on what your business needs to operate, you may see more detailed expense line items on your income statement, like a specific subscription cost or a recurring rent payment.
Profit is the last line on your income statement, hence the nickname ‘bottom line.’ Also known as net profit, your bottom line is the aggregate revenue your business generates during a specific period after deducting all expenses.
A separate but equally crucial total profit number is earnings before interest and income taxes (EBIT). EBIT shows a company’s operational efficiency without deductions from the capital structure.
Income statements have a wealth of information for founders and investors to use in various ways. That’s why it's considered one of the three most important financial statements business owners need to track and understand. The benefits supplied from the recorded information on the statement, if used correctly, help keep your startup on the path to success. The following are ways we most often see founders leveraging their income statements.
When you’re looking at your statement, you’ll see expenses and losses listed in detail, line by line. You can quickly determine if your costs overshadow your net profit by comparing the bottom line to your top line. Your expenses need reorganizing if there’s a drastic difference from the top to bottom amounts.
You can now look into non-negotiable costs to operate your business and trim the fat on excess spending.
The market ebbs and flows naturally, which affects revenue from time to time. If you notice your bottom line dropping each period, your runway is likely shortening faster than anticipated. You can either take a deep dive into budgeting, financial forecasting, or preparing for another fundraising round.
Keep in mind if you’re just getting started, due to a lack of historical data, the startup budget framework is less structured in the early stages. Flexibility is essential, but you want to ensure your budget decisions are data-based if a change is needed.
On the other hand, if you’re seeing substantial growth in your bottom line, you can create a structured plan to allocate funds toward expansion. Pull your investors and financial advisors into the planning stages; their expertise makes a big difference.
Board meetings are where you want to fill in everyone not involved in the day-to-day business and have meaningful discussions about the state of your startup. This includes relaying all financial information, relevant hiring updates, and anything pertinent to the company’s future. The best investors will asses income statements with ease and give sage advice on problem areas.
Traditional bookkeeping methods mean waiting days, even weeks after a transaction closes, for financial reports to reflect updates. But good business decisions and fast-moving founders require up-to-date data to make timely business decisions that could cost or earn your startup thousands of dollars.
So at Zeni, our AI-powered dashboard reflects a daily close to ensure you have the right information when you need it. You can even export reports and instantly share information with investors or give your board direct access to your dashboard – no more spreadsheets flying back and forth; investors see reports, like your income statement, in real-time.
Schedule a 1-1 consultation with us; we’d love to learn more about your startup and show you how Zeni can work for your business.