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Why Your Startup Needs Financial Reporting

The average small business starts with about $3,000 to $5,000. That’s not a lot in the world of business. But for a startup, that’s all it takes to get the ball rolling.

Why Your Startup Needs Financial Reporting

Even in the early stages of business, it’s important to track where every penny is spent, and how you’re gaining income. That’s where financial reporting comes in.

Good habits in the beginning stages of your business translate to good habits in the later stages. Make the transition from startup to big business easy with accurate financial reporting.

What Is Financial Reporting?

Financial reports (also known as financial statements) are the official documentation of the state of your business’s accounts, spending, and income.

The purpose of financial reports is to have an understanding of a business’s or person’s financial standing. They need to be understandable and reliable.

Businesses need to keep good financial reports to make sure they’re in check with government regulation and taxes. Also, there are a lot of people within the company who need access to financial reports.

Management

Financial reports are necessary for management and business owners to perform financial analysis. Analysis assists business owners to make decisions that directly affect operations and in turn, profits.

Investors 

Prospective investors require financial reports before agreeing to invest in a business.

They need to see how your business has grown so they can be sure of a good investment. Without good reports, you could miss out on investors.

Banks

If expansion is in your future, you might need to acquire a bank loan. For a business bank loan, the bank requires financial reports to decide whether or not you’re applying for a loan.

Along with keeping financial reports, you need to keep the right kind of reports.

Types of Financial Reports 

Most companies perform monthly financial reports for management analysis. But, quarterly reports are the required minimum for banks, the government, and investors.

To make sure you’re reporting all the relevant information, make sure to have these key reports. This task usually falls under the responsibilities of the CFO of a company:

Balance Sheet

This reports on the financial standing of a business or person. Which includes their assets, liabilities, and equity at any given moment.

Income Statement 

This is also known as a profit and loss report or P&L. That includes company expenses, revenue, and net loss over some time (typically monthly and quarterly).

Cash Flow Statement

Though it sounds similar to an income statement, a cash flow statement tracks the flow of money within a company. It reports the amount of cash gained and spent over some time, including operating costs, investing, and other financial activities.

Statement of Equity 

This is also known as a statement of change in equity or statement of retained earnings. This report is important for determining stock price. This report tracks the amount of retained earnings within a company after stockholders receive their dividends.

Each kind of financial reporting has a specific role in business. The sooner companies can start implementing financial reporting, the easier their future will be.

After all, you never know when your small business will take off, and it’s better to be prepared.

Tips for Startup Accounting 

Startups are a unique breed of business. They have a special need for financial reporting because they’re right at the cusp of gaining investors, and they’re more likely to need bank loans:

Form Relationships Early on

If you’re new to business, form relationships with people who are more experienced than you.

These people can help you set up your accounting and financial process before you even start. This can be from an outside CFO service or a financial institution like your bank.

Keep Personal Expenses Separate From Business

One big mistake that new business owners make is using their bank account or credit card for business expenses.

Not only is it important to put a clear line between your personal and business accounts, but also set up a business entity early.

If you don’t set up your startup as a legal business entity early, you put your personal assets at risk as well.

Choose the Right Accounting Software 

Transparent and accurate financial reporting is essential for financial analysis. Human error is a huge potential downfall that could cause inaccurate reports.

To avoid the problems that come from inaccurate data, many people choose to do their financial reporting in Qlik Sense. Qlik Sense is a financial reporting software that specializes in startup finances.

When choosing accounting software, you need to consider why you’re collecting financial data. Is it to gain investors, sell your company, or get a clear image of how your business is doing at all times?

Understand Contracts

No matter who you’re dealing with (even family members), always get a legally binding contract in order. A legal contract protects you and your investors from future misunderstandings.

This is also true for business partners now and in the future. Always work up a contract and have it reviewed by a qualified attorney before signing.

Even if your business is just getting started and you’re not making a profit yet, contracts will make everything run smoother in the future. A bad contact could ruin a good idea and stunt your business’s growth, so it’s something to take seriously.

Help Your Startup Grow

Anyone can build and grow a startup with the right tools and advice. Whether you’re just starting or you’ve had a business for several years, financial reporting is an important factor if you want to continue to grow.

Let us know if this article helped you better understand the importance of financial reporting, and visit the rest of our website for more helpful information.

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