Business

Things to Watch Out for in a Financial Statement

Before investing in a company, they will look for the key performance indicators in its financial statements. These key metrics are what investors often scrutinize to make informed decisions on the company’s health and growth expectations.

The financial statements of a business are similar to a financial progress report that shows how well your company is doing in terms of numbers.

1. Net Profit

Financial statements will indicate a company’s net profit, which is the money left over after all expenses have been paid. “Are you generating income?” is a common first question that investors ask, but it isn’t the only one that they seek in order to put their investment down.

Net profits often tell the entire story, but solely relying on those numbers can often be misleading. That’s why you should look at the other performance metrics as well. If a company currently is in a slump but is projected to grow due to some future market shifts, it is wiser to invest in it even though its bottom line wouldn’t encourage it.

2. Sales

You may be providing the best service or product, but the big question is, are people willing to pay for it? Investors will often gauge whether a company is investment-worthy by looking at their quarterly and sales. That tells them if people find the product valuable. Your sales growth is also an important aspect that investors will be interested in, and that tells them whether the market sentiment has faded about the product.

3. Cash flow

Cash is king in business. That’s one of the top-most rules of business school. In any business degree program, like the online MBA program, future business minds are taught to make five-year business plans, and for good reason.

However, if your employees are threatening to walk out on you due to non-payment of dues, business plans can do little to save you from doom. Cash in the bank gives the investors reassurance that they need in your business. It also lets them know that you can weather any storm and withstand calamitous market circumstances. Further, having the capital stashed away can also be great for pursuing R&D and other ventures that you would like your company going toward.

The cash left over from paying expenses for each period is an indication ofsustainability in operations. If your business is sustainable, and you have cash lying around, investors need not worry about you folding.

4. Customer Churn Rates

Your churn rate goes hand in glove with your acquisition cost. Can you retain customersonce you get them through the funnel?

If you have a stable, repeat business, a low churn rate could perhaps compensate for the high acquisition costs, which often indicates low risk to the investors.

5. Margins

If you’re not making money, sales will be meaningless. Investors are also interested in seeing your profit margins, both overall and for each product. They’ll also compare the profit margins to industry averages and other investment opportunities.

Investors benefit from higher margins because they get a better return. If your margins are low, you’ll need to show that you have a plan in place to improve. Proving how the economy of scale will lower costs as you grow is probably the answer for early-stage businesses.

6. Acquisition Cost

The cost of acquiring a new customer is referred to as customer acquisition cost. It’s calculated by multiplying your marketing budget by the number of customers you’ve acquired. For a small business, this can be a significant amount of money.

This amount could be blended & reduced by repeat as well as referred customers, who are probably easier to acquire, for established businesses.

Since a product can be profitable in terms of cheap materialand labor costs may not be as profitable in terms of sales, the acquisition cost is a critical factor.

Super-niche products or services are usually hamstrung by these issues because the word-of-mouth marketing is ineffective here and the promotional competition is fierce.

7. Debt

Investors are afraid of debt for two reasons: One,they get whatever money is left after the debt holders have collected theirs, and, second, debt payments deplete funds.

Having a large debt payment can make it difficult to satisfy payroll as well as other expenses in slow times. They could also indicate that you have less cash on hand to deal with a sudden rise in orders or an urgent equipment replacement.

The quick debt ratio is one of the most widely accepted debt measures. A quick ratio of 1 implies that you can precisely meet your obligations, but a quick ratio greater than 1 indicates that you have more flexibility.

8. Personal Investment

You owe sweat equity for work you’ve done to get your business up and running, but several investors would like to see that you’ve also put money into it.

Investors believe that if you have money on the line, you’ll go to great lengths to protect it. Investors may worry that if you are not at risk of bankruptcy, you’ll treat them like a blank checkbook & blow through cash without putting enough effort to protect their investments.

9. Break-even Point

Investors are willing to accept short-term losses in exchange for financial gains as well as a return on their investmentslater. The break-even point tells what is required to get to the profit. The break-even point is a sales target that will cover your expenditures and bring you to profitability.

Other assumptions, like economies of scale, better production efficiency, or lower marketing costs, can be used if you can describe them in a way that investors understand.

10. Account Receivable Turnover

The amount of time it takes you to obtain money from customers is measured by your accounts receivables turnover. This conveys two important messages to investors.

First and foremost, are you ready to go to any length to ensure that you are paid? Countless new business owners are hesitant to ask for money, and as a result, they are never paid.

An investor seeking profit doesn’t like to work with somebody who can’t track down payments from customers.

Second, how long have your customers been with you? Slow turnover coupled with a high percentage of write-offs might indicate that most of your customers aren’t running profitable businesses. This increases the risk in your business model, and investors will demand a higher return to compensate.

Conclusion

If you’re looking for investors, you’ll need to persuade them by providing them with your business’s financial statements and reports. Investors have the right to assess the financial health of your company. Rather than scrambling for figures & ratios at the last minute, get your accounting and financial team in order and be ready to answer any and every investor question.

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