A startup’s financial operations are critical to its success. But without a streamlined workflow, it can be easy for mistakes to occur—and some errors may have serious consequences. For example, high-street fashion retailer Ted Baker lost PS58m in 2020 due to an accounting error. Startups must get their financial statements right, which include the income statement, cash flow statement, and balance sheet. The actual Interesting Info about Bookkeeping for Startups.
An income statement shows a business’s profits and losses over time by comparing revenue earned to expenses incurred. It’s a key metric for investors, lenders, and the startup’s leadership team to understand its financial performance.
Startups should project their P&L forecasts for the next 12 months as part of their business plan to show prospective investors their projected returns. Getting the numbers right is critical because investors will evaluate the startup’s projections to determine whether or not they are a good fit for their portfolio.
To prepare an accurate income statement, a startup must use accrual accounting. This method of recording revenues and expenses recognizes when a transaction occurs—even if the company hasn’t received payment yet. The alternative, cash accounting, only records transactions when a cash payment is made. This can lead to significant errors, including recognizing revenue too early and underestimating costs.
The other crucial metric in the income statement is gross margin, which reveals how much of the total revenue is left after paying for all operating expenses. A startup can improve its gross margin by lowering its product or service costs, reducing unnecessary expenditures, or increasing sales volumes.
Another important metric for a startup is its customer retention rate, which is the percentage of paying customers that retain their subscriptions over a specific time window. This metric helps founders evaluate their customers’ satisfaction and identify any issues that could be contributing to customer churn.
Startups also need to generate a cash flow statement, which lists a startup’s cash inflows and outflows for a specific period. This allows startups to assess their runway and predict when to raise capital or seek a loan to keep running.
Lastly, a startup needs to prepare a balance sheet showing the company’s assets, liabilities, and equity at a given time. This report is essential to share with stakeholders because it communicates the startup’s ability to pay off its debt and invest in future growth.
Investors, lenders, and the startup’s leadership team will also want a detailed break-even analysis. This graph compares total costs against earnings for each product a startup sells and indicates when it will break even. The break-even expectation will differ between different types of products, so startups should carefully research industry and competitor cost percentages when preparing this document. With Founderpath’s cloud-based solutions, startups can easily organize all three primary financial statements to inform their stakeholders of their business operations.