Financials You Need to Keep Your Startup Going and Growing
If you’re not a financial wizard (but you are a business owner) it can be daunting to assess all of your financial statements, keep them up-to-date and truly understand them. As experts in helping our clients manage their finances, we understand the importance of getting these right and establishing the habit of keeping them current, and we help them gain valuable insights about their business from their finances. We want to use this article to look at the three most important financial tools we use, how they’re used and how they can help you build and maintain a financially healthy business.
Cash Flow Forecast
A Cash Flow Forecast helps your small business assess how much cash you have coming in (from sales, fundraising or investors) vs. how much you have going out, and tracks it over time. It will help you understand how much runway you have before you need to raise more money, if you can afford to hire any new talent or make a big purchase like buying new equipment or leasing a new office. Assuming you have a good understanding of your cash income and your cash outflows, a Cash Flow Forecast allows you to predict and plan for the future financial state of your business. We wrote an entire blog post about Cash Flow Forecasts – check it out! Not to be confused with a Statement of Cash Flows (see below, which shows you how you spent your cash over a period of time), a Cash Flow Forecast is focused on the future, and helps you make critical business decisions in real time.
Profits & Loss Statement
Your Profits & Loss Statement, often called a P&L statement, is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period. At their most basic, P&L Statements show if your business is profitable. Profits & Loss Statements can help you answer questions about your business strategy, including if you have enough revenue to cover expenses, what your top earning revenue streams are, and, when tracked over time, areas of your business that are generating the most growth to your profits or most negatively impacting profitability.
Sometimes called a Statement of Net Worth or Statement of Financial Position, the Balance Sheet displays the company’s total assets and how those assets are financed. They are broken down into what you own (assets), what you owe (liabilities) and assets. You can use your Balance Sheet to calculate key financial ratios, like debt to equity and the “current ratio.”
Statement of Cash Flows
The Statement of Cash Flows shows the net change in cash within the company over a specific period of time, and breaks down your spending by operating activities, financing activities and investment activities. Unlike a Cash Flow Forecast, it looks back in time. Banks and investors use this statement to see how you’ve spent your cash, but we find that companies can get a deeper understanding just by running a cash-basis P&L and really focus on their future spending using a Cash Flow Forecast.
If you’re still feeling unsure about your Financial Statements, we’ve got two great ideas for you. Listen to this season of the 614Startups Podcast, where we’re talking to investors and VCs first hand. If you’re still unsure (or just want guidance for your financials), reach out to the team at Book+Street. They work with startups of all sizes to build better, smarter financials, right from the start. Schedule a free call with their team.