Question

how do you think a potential investor would view a startup company's financial statements? What would the investor be looking for? Give examples.

Answer 1

When you first start a business, access to financial resources helps keep your business moving. This access usually comes in the form of a loan or credit line by a financial entity, whether it's a state or local government funding a micro-loan, a commercial bank or a private investment group. These creditors will review your financial statements looking for your business' ability to repay the funds in a timely fashion. With a start-up, however, financial statements provide only part of the picture.

The biggest determinant of your startup’s value are the market forces of the industry & sector in which it plays, which include the balance (or imbalance) between demand and supply of money, the recency and size of recent exits, the willingness for an investor to pay a premium to get into a deal, and the level of desperation of the entrepreneur looking for money.

investor is looking for some key factors such as -

Financial Ratios

Creditors also analyze your financial statements and projections. This information is then fed into financial ratios. These ratios include reviewing your business' ability to be profitable, the profit your business generates per item sold, how quickly the business can convert assets to cash, how long it takes to get a product made and how long it takes customers to pay.

Quick Ratio: This measures Target’s ability to meet its obligations without selling off inventory; the higher the result, the better. It is expressed as current assets minus inventories, divided by current liabilitiesCurrent Ratio: This is another test of short-term liquidity, determined by dividing current assets by current liabilities.Debt-to-Equity Ratio: In brief, divide total debt by total equity. .

Competitive Advantage

It is unlikely that your idea or startup is altogether unique. Even if it is, it may not necessarily be a good thing. Having competitors validates the possibilities underlying your venture.

An investor puts his/her money thinking 5-10 years down the line. For them to make profit on their investment, your product has to last that long. As your market segment matures, consolidation is inevitable and only the very best will survive in the end. Convince your investor of the same and he would happily part with his money for your venture.
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Loan Terms

To minimize risk, creditors often restrict certain aspects of the loan when it is funded. These restrictions include a requirement to maintain accurate and complete records and provide financial statements; limits on how much debt your company can acquire; restrictions on payouts to owners or other investors; limiting further capital expenditures; and a requirement to meet performance standards for specific financial ratios.

Loan Reasons and Support

The creditor will evaluate your business's ability to meet its obligations. This isn't simply a review of whether the debt can be paid in a timely fashion. It's also a question of the viability of your business. You must convince a creditor that you have a sound business plan and a large enough customer base to earn a decent profit. Be prepared to answer a variety of questions about the loan, including why you need the money, what you plan to do with it, and what, if any, other loans you have on the books.

Basic Information for Creditors

Financial statements are designed to show the fiscal health of your company. For a start-up, however, it's difficult to show an income statement or a statement of cash flow because the business might not have created a product or service for sale. As a result, creditors for start-ups typically require information beyond the usual financial statements. This information may include your professional background, where you've lived, your educational background, your credit history, your personal bank documents and your criminal background, if applicable. Much of this information can be found in your resume. In addition, the creditor will want to look at your business plan, including sales and profit projections. If you have begun selling a product, you will need to include your business credit report, income tax statements and bank statements. You might also be asked to provide legal documents pertaining to the business, such as commercial leases, business licenses, franchise agreements and contracts with another company.