If there’s anything that can be taken away from the FTX fiasco, let is be this: due diligence is back.
Responsible potential investors and lenders will want to clearly understand a SaaS startup’s business health and projected growth before offering any capital
For this reason, accurately preparing vital financial statements is critical for fundraising.Read on to learn how to prepare financial statements and why they’re important for fundraising. We’ll also cover how you can use an automated financial tool built for SaaS companies to prepare financial statements.
The balance sheet is a snapshot of a company’s assets, liabilities, and equity for a given moment in time. This is a useful way for investors to evaluate the health of a business as they can use it to calculate the quick ratio, debt to equity, and other financial indicators.
The key components of a balance sheet include:
The income statement (also known as the profit and loss (P&L) statement) shows how much profit or loss the company has generated over a certain period. This includes all revenue and expenses as well as other gains and losses.
One of the biggest challenges with the income statement (or earning statement) is understanding when you need to recognize certain revenue and expenses.
For example, many companies have unearned revenue, which means you’ve received payment before services have been provided. This is a common scenario when SaaS businesses offer annual subscriptions because the revenue is “earned” throughout the year but paid for upfront.
When using the accrual accounting method, unearned revenue isn’t recognized immediately even if you’ve already received the cash.
The key components of a typical income statement include the following:
The statement of cash flows (or cash flow statement) shows the money flowing in and out of the business for a certain reporting period. Cash inflow and outflows can differ from income and expenses because accrual accounting recognizes economic events when they occur rather than when cash is moved.
This means the cash flow statement acts as a bridge between the balance sheet and the income statement.
A typical cash flow statement includes the following:
When someone refers to “closing the books” in the bookkeeping world, this means transferring the balances in temporary accounts on the income statement to permanent accounts on the balance sheet. Whether you choose to handle bookkeeping yourself or rely on a bookkeeper or accountant, you’ll want to ensure you’re closing out at the end of each accounting period.
Closing the books at the end of each month is crucial for keeping accurate and well-maintained financials that potential investors and lenders can trust. With up-to-date bookkeeping, you’ll also have all your financial data in one place for calculating key metrics about your company’s financial health.
As you can see, the three primary financial statements provide an enormous amount of information about business health. Here’s why they’re important for fundraising stakeholders.
Lenders won’t offer a loan until they’re confident the business has the ability to pay its bills. While profitability on the income statement is important, banks will also look for a sufficient amount of cash inflows on the cash flow statement and adequate assets as collateral on the balance sheet.
Lenders also usually look at certain ratios like the quick ratio, debt-to-equity, debt-to-assets, and more.
Potential equity investors or shareholders need financial statements to make informed decisions about their investments. As with lenders, most equity investors will evaluate debt levels and liquidity to determine whether the company can continue to operate successfully. But equity investors will put an even greater emphasis on profitability and the potential return on equity.
Forecast+ is a financial modeling solution that helps SaaS companies forecast revenue, expenses, and bank balances. This gives you and prospective investors and lenders better visibility into the future growth potential of your company.
More specifically, Forecast+ can automatically sync with your income statement and balance sheet from bookkeeping tools like QuickBooks and Xero. It can also automatically generate a cash flow statement based on this data. Then, FlightPath can help you automate your forecasts and allow you to compare them to actual performance.
This seamless approach to preparing financial statements and forecasts is crucial for SaaS startups looking for fundraising. If you’re ready to simplify the preparation of your financial statements, schedule a demo of Forecast+ today!