Here’s why you should care about financial reporting: You can’t avoid burning money. But that doesn’t mean you can’t do it cleverly – Yes, there is such a thing as burning money sustainably.
Every entrepreneur wants to scale their operations and the cash reserve is the root of any business’s success. A sure-fire way to hit your milestones without running your cash reservoir into the ground? Make finance-led decisions.
When running a startup, you probably have a laser focus on growth and revenue. That’s completely normal – especially when the future of your company relies on them. Without growth and revenue, a company will cease to exist.
But you also need to spend money to make money. Every penny spent is an investment, and you should always expect a return on investment. Many startup founders assume the money will always be there for them – especially after closing a funding round. That’s a dangerous assumption.
Your financial reports come in handy here – they’re more than just obligations you need to fulfill as a founder. In essence, financial analytics helps sales and marketing burn money in a sustainable and smart way so that the company can scale faster.
Your financial analytics are crucial for:
Knowing when to scale
The purpose of building a growth engine is to scale and accelerate growth faster. Imagine getting to a point where your revenue and profit are going to grow faster than your costs. Wouldn’t that be lovely?
Scaling is all about timing. Invest in growth too early or too late, and you’ll find yourself at the end of your cash runway sooner than expected. You’ll be surprised by how easy it is to burn through your cash reserve without proper planning.
To invest at the right time, you need to know your Customer Lifetime Value (LTV) and Customer Acquisition Costs (CAC). You also need to know your:
- Targeted growth rate
- Lifetime Value to Customer Acquisition Cost ratio
- Customer Acquisition Cost payback time
Annual cashflows and forecasting
As mentioned, your cash reserve is the root of your business success. Ask any startup founder and they will tell you their number one worry involves cash. Cash runway is THE THING that keeps entrepreneurs awake at night. It’s one of the most challenging factors in getting a startup running. The lack of it will hinder scalable growth.
Your goal however is to be cashflow positive from Day 1. But it takes time to build a solid recurring revenue base and stabilize your revenue and cashflow forecasting.
When reinvesting revenue into acquiring customers, it’s normal that you have higher expenses – hello again, Customer Acquisition Costs (CAC). It takes approximately one to three months before you start seeing an increase in revenue.
So how to be cashflow positive and scale at the same time? Ask your customers to pay annually instead of monthly or one-off.
The biggest impact of it all is on your CAC payback time – how long it takes to break even. Typically, it takes approximately 9-12 months for a SaaS business to breakeven with CAC for every new customer. You should always aim to have a CAC payback time of less than 12 months to be profitable.
With annual cashflows, you will receive an upfront payment of 12 months at the beginning of the customer relationship. That means your CAC payback time is immediate (or negative) and you have more available cash to acquire new customers.
Being cashflow positive from Day 1 will allow you to focus on onboarding new customers at a faster rate and accelerate product development.
Evaluating your company’s financial performance
Your investors will be looking at your company’s financial performance before investing. For example, Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is an essential element in a financial report.
Investors rely on this particular metric and your revenue growth rate to determine how much they’re willing to pay for your company. The general rule of thumb is the higher your EBITDA rate, the better because it shows growth and cashflow potential.
However, this metric is not as relevant to a startup that’s in the growth stage. For example, you’ll see an increase in your Marketing and Sales (M&S) expenses when your company is growing fast or entering new markets. Therefore, it’s expected that your EBITDA is low or even negative when you’re scaling.
Your investors will then look into other profitability metrics during a valuation. A low or negative EBITDA is justifiable as long as you’re hitting other growth KPIs. A steep revenue growth rate is essential to ensure a high valuation in a funding round.
Unless you’re bootstrapping, your investors are one of the biggest stakeholders you need to communicate with. Investors want to know how you spend their money and when they can start seeing a return on investment. Your financial reports inform investors of your company’s profitability and operational performance.
For example, it’s okay for your EBITDA to be low or negative during the growth stage. After a few years, your investors will be looking for a higher EBITDA – especially if you’re looking to close another round of funding. Investors can gauge your company’s potential and profitability by reviewing your financial reports.
As a CEO who’s also the CFO of a tech startup, my advice is: rely on your financial analytics when it comes to making strategic business decisions.
Financial reporting is more than just an obligation. Your reports help you make better-informed decisions so you can stretch your cash runway as much as possible and scale faster.
Writer Niko Laine is a Startup CFO at Calqulate and a financial advisor who is passionate about solving problems, data analysis, mentoring smart entrepreneurs and bringing clarity and focus in difficult situations.
Calqulate helps digital businesses automate their financial analytics and growth metrics. Our customers are struggling with accessing their financial data from multiple sources. We help them make sense of their data, make better business decisions and utilize growth metrics to raise more money. Twitter | Facebook | LinkedIn