Starting up a business is not easy. And with limited resources and budget, you need to wear several hats throughout the day. You need to manage the day-to-day operations, admin tasks, marketing your products, manage sales, and keep a tab on your finances. As a new business owner, you might not be familiar with keeping accounts of your financial statements. While hiring a professional accountant is always a great idea, it is not so difficult to do it on your own in the initial days. No matter what, remember that you need to keep your accounts clean. The key is to keep accounts of every transaction you made, not just for you to know how your business is performing, but in the long run, if you need to raise funds for the growth of your business, that’s what the investors are going to look at. So, make it a habit of keeping track of your financial records from Day 1. Maintaining proper financial records also ensures that you are compliant with statutory compliance. It enables you to create budgets, financial projections, and better investment decisions.
The key is to keep accounts of every transaction you made, not just for you to know how your business is performing, but in the long run, if you need to raise funds for the growth of your business, that’s what the investors are going to look at.
How to master creating financial statements that investors will love:
Start with a business bank account:
No matter how small your business is, always maintain a separate financial record for your business and don’t mix it with your accounts. Establishing a business bank account is a good idea that allows you to keep track of all your business transactions. So, if you’re setting up a business, have a separate bank account for your business as a rule of thumb.
Avoid cash transactions:
Cash transactions may seem to be convenient, especially for small amounts like a food bill or a travel expense for business, but it makes it challenging to keep a tab on the financial transactions of your business. When you deal with cash, you tend to forget the transaction and thus miss out on entering it in your logbook later. Instead, it is recommended to use business credit or debit cards to do any financial transaction. This way, you will have a record trail, and everything will go into your audit book. When you use cash, you could also potentially miss out on taking advantage of write-offs since there won’t be any documentation of the transaction. If there is no other way to deal with a particular transaction other than using cash, use an ATM card to withdraw money, and make a note on the receipt with the purpose of the withdrawal. That way, you will always have a record, and you can put it up in your record book. Needless to say, your future investors will love it when they see how meticulously you have recorded all the data from day 1.
Invest in good accounting software:
At the beginning of your business, you might be sceptical about making investments, but investing in good accounting software is something you would like to ponder. Accounting software can help you access your accounting information anywhere if you have an internet connection. This makes it easier to access your files if you are hiring an accountant. Additionally, accounting software comes with cloud storage, so you don’t need to maintain physical files and tons of paper. An online program will continually back up your files on the cloud as you progress. However, it is recommended that you still maintain a hard copy of all the files, just in case there is an emergency.
Have a schedule:
Managing an account is a time taking task. And you need to be regular and consistent to have your financial statements clean. Thus, it makes a lot of sense to maintain a schedule or a routine to manage your books. For example, the first hour of the morning can be an excellent time to update your accounts when your mind is fresh. Having a schedule makes it easier for you to be consistent and stay on top of things. Your future investors will acknowledge and admire this habit because they know that the amount you are fundraising would have clear spending records. Letting your expenses pile up can become challenging when you have to do year-end tax planning. Also, keep a tab on important deadlines like VAT, insurance premium payment, corporation tax, etc., because late payment can attract heavy penalties, something your future investors wouldn’t like to see on your financial statements. When you keep accounts up-to-date, you will know what you owe and what you need to pay. So, it would be easier to keep track of all your dues.
Leverage the power of data:
Keeping a tab on all your financial records is not just to impress your investors or understand your revenue. An up-to-date financial statement can give you a lot of useful insights if you’re paying close attention to it. The real advantage of maintaining an account record is much more than that. It can give you real insights into how much revenue you are making and how much you are losing, and where your business is going. Accordingly, it can help you tweak your model. And your investors will definitely acknowledge it when they invest in your company.
If you are a first-time business owner, training will help master your financial statement. In your early days, it is worth investing in training so that you can make the most of your accounting software. While most people think that the software can do everything, well, you need the knowledge to operate it to reap maximum benefits.
Ask for help:
Accounting and maintaining books is no easy job. It is not uncommon to feel overwhelmed, especially when you are managing the entire business operations on your own. Reaching out for help from professionals at early stages will always save you from later troubles.
It is essential that you keep your financial statements clean and up-to-date from the first day of your business.
Being at par with your tax obligations:
One thing that your future investors would like to see in your financial statement is your tax obligations. This is no brainer that you need to be clear on your debts if you have future plans to fundraise. No one would like to spend money on a business that has bad credits. So be sure to meet all your tax obligations and file your tax returns regularly. Avoid paying penalties for late payment fees. Keep records of all the tax returns. If you have employees on your payroll, you will need to enroll for payroll tax and remit on a monthly basis. If you are dealing in vatable goods, then ensure to fill your value added tax (VAT) returns too. Having reliable accounting software can be a valuable asset, so consider investing in one. It can help you to streamline and automate the business process.
Reconciling your bank statement:
Matching information on your bank account to the transaction history is one of the most crucial parts of maintaining account records and bookkeeping. Automating the process can fully prove that all income and expenditures are accounted for. For example, accounting software can pull your bank statement and tally it against each of the spending. You can see what has been added and whatnot, so you can amend manually. Making it a practice from your early days will definitely help you to maintain a clear account. And when you reach out to investors for fundraising in the future, this will certainly help you win some brownie points.
Don’t miss out on the invoices:
Late payments can affect your cash flows. You need to spend extra time following up on the payment. So, it is critical that you keep constant vigilance on the invoices and follow up if there is a default. It is also a good idea to add a default fee in case of late payments. You can also take advice from your accountant on how to implement these. Having a late fee attached will ensure you stay on top of payment collection against your invoices.
Apart from keeping your financial records up-to-date, your investors may also want to see some documents to verify. Certain documents that you should maintain a record of include:
- Invoices and receipts that you provide and receive for your business and service
- Invoices for goods, services, or other business purchases for your business
- Bank account and credit card statements
- Records of stock purchases at the end of the financial year and asset register
- Filing of business tax returns proof
- All financial statements related to your business. These may include profit and loss statements, and balance sheets
- Records of payments made to employees plus payroll source deductions submitted on behalf of employees
What will investors look into?
Apart from maintaining a detailed record of all your transactions, there are some parameters that investors will check before considering you for giving funds. So, keep a tab on the following while growing your business:
- Net profit: Net profit is an important parameter to determine the financial health of a company. Investors pay a lot of attention to this. So, ensure you have a stable profit. Losses can be good if you’re on track to profitability as you grow. Ensure to have a good understanding and vision about our net profit.
- Sales: No matter how attractive your business model, the one thing your investor will pay attention to is how much sales you have. So, focus on setting up an exemplary sales record before approaching an investor. Remember, investors also like to see sales growth. Are you showing an upward trend, or the initial excitement is going to fizzle out soon? Clear your grounds before making a pitch.
- Cash flow is the king: A sign of sustainable operation is free cash flow or the amount of money left in your account after you meet all the overheads. Investors like to see if you have steady cash flow so that you can invest in new opportunities or fight any unannounced problems.
- Break event point: Short-term losses are often acceptable by investors, but they would like to see that they can earn a profit by investing in your company. The break-even point would help them understand that. A break-even point can be a sales target that can help you pay all the overheads and make some profit. A break-even point can also be built on other assumptions like increased production, optimised marketing, economies of scale, etc.
While many other factors that an investor may consider, a strong financial statement will help you earn some extra points. Even if you are not considering approaching an investor at the moment, you may want to reconsider it in the long run when you want to grow your business. So, it is essential that you keep your financial statements clean and up-to-date from the first day of your business.