10 Things Investors Want to See in Financial Statements Before Making an Investment
From taking a loan to pursuing investors, there are a few ways of funding your business. However, before investors invest in your business, they will want to review your company’s financial statements. Specifically, you may wish to start tracking and improving these key performance indicators as they show how well your business is doing.
One of the first things to present to your investor is an indicator on whether your business is making money. The most common indicator for this is net profit, which is the amount of money your business has left after paying for all its expenses. Net profit is also known as a business’ bottom line, net income or net earnings. Companies usually try to improve this number by either increasing revenue or cutting costs.
Another way to assess your company’s strength in the marketplace is to calculate the percentage sales growth. To do this, your investor will need current and historical sales revenue data. With the data, it is possible to project your company’s sales growth and determine if it is an upward or downward trend. Your investor is likely to want to compare your sales growth figure against that of competitors in the industry.
Investors will also prefer to invest in companies with high profit margins. They will want to know your profit margins on the whole, as well as profit margins by product. These figures will be compared against others in the industry. If you have low profit margins, you will have to convince your investor that you have a plan to improve them. For instance, you can demonstrate how economies of scale will reduce your costs as you expand your business.
Cash flow will be a topic of discussion as it provides investors with visibility over how your business is performing. Based on your cash flow statement, your investor will be able to view what cash you are generating as income, and how much you are spending on your business expenses and overheads. Positive cash flow is a sign of business sustainability and will attract investors.
Customer Acquisition Cost
Another item that your investor will be interested in is your customer acquisition cost. This cost tells you how much you need to spend to get one new customer. To calculate customer acquisition cost, divide your company’s total sales and marketing expenditure by the number of new customers acquired. To lower your customer acquisition cost, you may need a new business model, such as the freemium model.
Customer Churn Rate
Customer churn is when a customer stops doing business with you. This can happen at natural points of your client relationship, for instance at the end of a subscription or service agreement. To measure your customer churn rate, you can calculate the total number or percentage of customers lost, or the amount of recurring business value lost during a specific period of time. Your investor will be comparing your customer churn rate with others in the industry.
Investors will be interested in how much debt your company has because if it runs into trouble, debt holders will get their money back before equity investors can. In addition, debt would mean that your business will have less cash on hand to pay its short-term liabilities such as payroll. A common debt measure is the quick debt ratio, which is current assets divided by current liabilities. A quick debt ratio of 1 would mean that you are able to cover your short-term financial obligations. Anything above 1 indicates greater flexibility.
Accounts Receivable Turnover
Accounts receivables turnover reveal how efficiently your business collects money from customers. This is because if you do not collect money from customers soon enough, you may tie up your working capital. Investors are unlikely to invest in a business that is not good at tracking down customer payments. A low receivable turnover may also mean that your customers have financial difficulties. This will add risk to your business.
A break-even point of a business is the specific sales target or revenue that would cover all its expenses. Any sales made after the break-even point would mean profitability and a positive return. To convince your investor to invest in your business, you may need to work on breaking even faster. This can be done through a variety of ways, such as by lowering overhead costs, implementing a better marketing plan or raising product prices.
Investors will look out for whether you have made an equity investment in your business as well. This is because if you have money at stake, it is likely that you will do all you can to protect it. If you do not invest your personal savings, investors may feel less secure and less convinced that you will protect their interests. There are relevant financial ratios that reveal how much skin you have in the game. For more details, you may wish to work with your controller or outsourced CFO.
Corporate Services Singapore Can Assist
If you are seeking investments for your business, you will need to convince your investors by furnishing them with your business’ financial statements and reports. This is so that they can get a handle on your business’ financial health. It is better to get the accounting support you need early rather than scramble for figures and ratios at the last minute.
Even if you are not seeking investments, finding ways to improve your business’ financial ratios will lead to better profitability. Consider outsourcing accounting to a professional services firm to access financial expertise and enjoy swift and seamless accounting functions as your business grows.
Access expert financial advice and solutions and stay on top of your business with Corporate Services Singapore. To find out more about our customised outsourced accounting services, give us a call at 6602 8286 or email us at firstname.lastname@example.org to get started today.