Accounting and finance are skills that every founder should hone. While you don’t need to be an expert, you should be comfortable with different financial statements and be able to answer questions from current and potential investors. Check out our quick breakdown of startup financials below:
What are startup financials?
Startup financials are the vitals behind how a company operates. Financials are the metrics and data that drive the different financial statements for a startup — income statement, balance sheet, cash flow, changes in equity, etc.
As we wrote in our post, Building A Startup Financial Model That Works, “The goal of a financial model is not to be exactly right with every projection. The more important focus is to show that you, as a founding or executive team, have a handle on the things that will directly impact the success or failure of your business and a cogent plan for executing successfully.”
Why are startup financials important for pitch decks?
An investor’s job is to generate returns for their investors (AKA limited partners or LPs). In order to invest in the best companies, investors need to leverage data and their own insights to fund companies they believe have the opportunity to generate returns for their investors.
Related Resource: How To Build a Pitch Deck, Step by Step
Part of this process involves collecting financials and data. Different investors might look for different things when it comes to a company’s financials and metrics — inevitably, an investor will need to take a look under the hood to see how a company operates.
Learn more about the financials that VCs look for in a pitch deck below:
Essential startup financials to include in pitch decks
As we previously mentioned, different investors will look for different metrics and data when it comes to a pitch deck. In order to best help you prepare the metrics and data you need, we laid out the following common metrics that VCs might look for in a pitch deck below (as always, we recommend sharing what you believe is best for your business):
Related Resource: Tips for Creating an Investor Pitch Deck
Gross revenue
Gross revenue is the sum of all money generated by a company. This is important for a pitch deck because investors will want to understand how much revenue a business is generating. For companies that are pre-revenue, make sure you are targeting investors that invest in pre-revenue companies.
Cost of goods sold
As put by the team at Investopedia, “Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the goods. It excludes indirect expenses, such as distribution costs and sales force costs.”
Gross profit
As put by the team at Investopedia, “Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services.” This is important because investors want to understand how your business efficiently turns revenue into profit.
Operating expenses
Operating expenses are exactly what they sound like — the expenses a business incurs from normally operating. Operating expenses help investors understand how and where your business is spending money.
Net income
As put by the team at Investopedia, “Net income (NI), also called net earnings, is calculated as sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses.” Net income truly reflects the profitability of a company as it takes into account all of the expenses a business will face.
Related Resource: 18 Pitch Deck Examples for Any Startup
Understanding forecasting vs accounting
Over the course of building a startup, founders will inevitably have to understand different basic accounting, forecasting, and budgeting principles. Learn more about forecasting vs. accounting for your startup below:
Related Resource: 7 Essential Business Startup Resources
Financial forecasting
A financial forecast and financial model is a tool that founders can use to tell their startup’s story. As we wrote in our post, Building A Startup Financial Model That Works, “The goal of a financial model is not to be exactly right with every projection. The more important focus is to show that you, as a founding or executive team, have a handle on the things that will directly impact the success or failure of your business and a cogent plan for executing successfully.”
Accounting
Basic accounting is a skill that every founder should be familiar with. Accounting is a realistic look at the financial performance of your business. It’s critical to have a grasp on all elements of your company’s books to ensure your company can grow and scale in an effective way and avoid costly financial errors down the line.
Related Resource: A User-Friendly Guide to Startup Accounting
Financial statements: your startup’s report cards
Having a grasp on your financials is a surefire way to clearly articulate your needs for capital and how you plan to spend any additional funding. Learn more about common financial statements for startups below:
Related Resource: 4 Types of Financial Statements Founders Need to Understand
Income statement
As put by the team at Harvard Business School, “An income statement is one of the most common, and critical, of the financial statements you’re likely to encounter.
Also known as profit and loss (P&L) statements, income statements summarize all income and expenses over a given period, including the cumulative impact of revenue, gain, expense, and loss transactions. Income statements are often shared as quarterly and annual reports, showing financial trends and comparisons over time.”
Balance sheet
As put by the team at ProjectionHub, “A startup balance sheet or projected balance sheet is a financial statement highlighting a business startup’s assets, liabilities, and owner’s equity. In other words, a balance sheet shows what a business owns, the amount that it owes, and the amount that the business owner may claim.”
Statement of cash flows
As put by the team at Accountancy Cloud, “A cash flow statement, or CFS, is a financial statement that accurately summarizes the total amount of cash that goes into and eventually leaves a startup business. Cash flow statements are designed to accurately measure if a startup is managing its cash wisely.”
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Related resource: What is Internal Rate of Return (IRR) in Venture Capital
