When you’re looking for investments for your business, your financial statements are more than just numbers on a page. They’re a way to show investors that you’re a credible business that’s worth investing in. Investors rely on these documents to understand your business’ health, growth potential and financial standing, so you need to know how to prepare them correctly.
Why Financial Statements Matter to Investors
If you want someone to invest in your business, you need to show that your business is profitable. Otherwise, what’s the point in them investing? Financial statements give investors an insight into your business operations, including how profitable the business is, how you’re managing your resources and whether or not the business is growing sustainability. It’s also a way for investors to get an idea of your cash flow. Investors use financial statements to determine ROI, gross margins and how quickly the business is burning through cash reserves. Without financial statements, investors have no way of knowing whether your business is a good investment. They need financial statements to have trust in what the business is capable of and for reassurance that they’re not going to lose money.
What Financial Statements Do Investors Want to See?
Profit and Loss Statement This shows your business’ revenue, expenses and income over a specific period, helping investors to assess your profitability.
Balance Sheet This gives investors an insight into your business’ assets, liabilities and equity. It’s a way for them to see your financial stability and capital structure.
Cash Flow Statement This details the cash that’s going in and out of the business. Investors want to see if you’re generating enough cash to sustain operations and growth.
How to Prepare Financial Statements
Choose an Accounting Method
Before you prepare financial statements for investors, you need to choose an accounting method. You have the choice between cash accounting and accrual accounting, both of which are accepted by investors. However, accrual does have the benefit of giving investors an accurate long-term view, which could give them the confidence to invest.
Use Accounting Software or Hire an Accountant
You can prepare financial statements yourself, but most business owners use accounting software or they hire an accountant. Tools like QuickBooks and Xero can simplify the process, making it a lot easier to prepare financial statements as and when investors want them. You could take this one step further by handing over everything to a professional accountant, someone with experience in your industry and financial statements.
Get Your Financial Records Organised
Investors want to see a detailed overview of your business’ finances, so make sure everything is organised for them to look at. This includes bank statements, sales and expense receipts, payroll records, loan and lease agreements, and documents related to tax.
Prepare Each Statement
When the time comes to prepare each statement, it’s a good idea to start with the profit and loss statement, as this will help you to accurately create a cash flow statement. Then you can put together a balance sheet, showing that your assets match up with your liabilities and equity.
Check Everything and Check Again
Once you have prepared financial statements for investors, you need to check everything. This is important, as investors aren’t going to feel comfortable investing in your business if you’re making financial mistakes. Check your numbers, make sure everything adds up correctly, and ensure consistency across all statements.
Best Practices for Investor-Ready Financial Statements
Keep it Simple and Straightforward When you’re preparing financial statements for investors, it’s a good idea to keep things simple and clear. This means avoiding unnecessary jargon, using consistent formatting and making sure the statements are easy to understand.
Include Financial Comparisons It’s important to show business growth to investors, as this highlights that you’ve already achieved some level of success. Show growth over time with comparisons of previous years or quarters to give investors confidence in the likelihood of future success.
Give Context Try to imagine seeing your financial statements as an outsider, someone who has no context for the information that’s being presented. This is the case for investors. It’s important to explain unusual expenses, revenue spikes or one-off events that impacted the numbers.
Use Visuals There’s nothing stopping you from using visuals to make your financial statements easier to understand. Graphs and charts can help investors to digest key insights quickly, ensuring key information is understood and remembered.
Common Financial Statement Mistakes to Avoid
One simple oversight or error could put doubt in the mind of an investor, so don’t make these mistakes when you’re preparing financial statements.
Forgetting Cash Flow A lot of businesses look profitable on paper, but they struggle with liquidity. Cash flow is one of the key things that an investor looks for in a business, so don’t forget to include details of your incoming and outgoing funds when you’re preparing financial statements.
Overstating Revenue or Underestimating Expenses Financial statements need to be accurate, and investors want to have an accurate, clear idea of where the business stands financially. This means you need to be realistic and avoid inflating your numbers. Don’t overestimate your revenue, and don’t underestimate your expenses.
Ignoring Liabilities Investors want to see the full picture, and this includes any debts and obligations your business has. An investor won’t immediately turn you down because of liabilities, but it’s always best to be upfront and honest.
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Include Financial Comparisons It’s important to show business growth to investors, as this highlights that you’ve already achieved some level of success. Show growth over time with comparisons of previous years or quarters to give investors confidence in the likelihood of future success.
Give Context Try to imagine seeing your financial statements as an outsider, someone who has no context for the information that’s being presented. This is the case for investors. It’s important to explain unusual expenses, revenue spikes or one-off events that impacted the numbers.
Use Visuals There’s nothing stopping you from using visuals to make your financial statements easier to understand. Graphs and charts can help investors to digest key insights quickly, ensuring key information is understood and remembered.
