When you’re building your business, preparing financial statements can feel like just another task on your to-do list. We get it, breaking focus to perform admin duties is the last thing you want to do.

But we encourage you to think about financial statements differently. They may feel like an administrative task, but they can be so much more than that. If used correctly, financial statements can help you make smarter, more strategic business decisions. And if you use the right software, preparing those reports is simple.

What are financial statements?

“Financial statement” is a broad term that refers to many different reports, so let’s go over the basics.

At its core, a business’s financial statements include three reports: 

1. Balance Sheet
   Your Balance Sheet is a snapshot in time of your business’s assets, liabilities, and owner’s equity. Its purpose is to show your company’s financial position as of the report date. 
2. Income Statement
   Your Income Statement, also called a Profit and Loss (P&L) Statement, shows the financial performance of your business over a specific period (month, quarter, year, etc.). It shows the revenue you’ve earned and the expenses you’ve incurred, and the income or loss that results. Its purpose is to help you see how profitable your business is and how efficient it is at controlling costs.
3. Statement of Cash Flows
   While less commonly used or referenced, your Statement of Cash Flows shows the movement of cash over a specific period (month, quarter, year, etc.). It assigns cash inflows and outflows into one of the following three categories: operating, investing, or financing activities. Most Puzzle users don’t require this, but if needed, they can be generated through our integration partner Joiin.

Most financial statements also include a notes or disclosures section that provides context to the numbers shown on the face of the financials. Some things that startups might include in their Notes to the Financials are:

• Judgements or estimates made
• Accounting policies selections or changes
• Related party information, like transactions with owners or other related parties
• Material events that occurred after the balance sheet closed
• Forward-looking statements and projections
• A narrative about plans for the business in the years ahead
• Status of material legal proceedings
• Changes in operations or strategy

Why do financial statements matter for startups?

Financial statements are clear, undisputed facts about the company’s financial performance. These facts are essential for all businesses, but they’re of paramount importance for businesses that are growing quickly and pivoting strategy on a dime. Here are just a few reasons why financial statements are so important for founders and their businesses:

Third parties will require financial statements.

Public companies registered with the SEC are required to report financial statements, but even non-public entities will need to present financial statements throughout the course of business. A startup might need to present financial reports in the following situations:

• When selling futures.
  Startups that sell futures — like those that use simple agreements for future equity (SAFEs) as a funding option — will be expected to present financial statements to investors at the time of their investment and at least annually throughout the term of the agreement.
• When establishing new credit.
  Banks and other lenders will require audited or reviewed financial statements before opening credit lines for a startup.
• When refinancing.
  Startups that need to refinance a loan — a line of credit, a mortgage, or some other business loan — will likely need to present financial statements to their lender or the underwriter.
• When merging with another business.
  Mergers or acquisitions (M&A) transactions require a business to be valued, and valuations rely heavily on current and past financial statements.

Financial statements improve decision-making.

Business leaders already have the information they need to develop strategy and make smart business decisions. If they open their accounting software, they’ll see hundreds and thousands of transactions, adjustments, purchases, new investments, etc. But as raw data, the information isn’t very useful. 

If you have high-quality software, you can generate draft financial reports at the click of a button. These financial reports can be displayed in a way that’s simple to understand at a quick glance. They can also be dynamic so that you can see only the information that’s relevant to you. Here’s an example of how good software can help you strategically:

Your business developed software used in wearable technology. You are considering adding more salespeople to your workforce, but you aren’t sure how many you can afford to hire. If your accounting system is dynamic and integrates with a high-quality payroll and HR platform, you’ll be able to run reports that tell you:

• What percentage of payroll costs are spent on your sales force compared to engineers, developers, customer support staff, etc.
• What non-payroll expenses are attributed to your sales staff (like costs for travel, product demos, trade shows, etc.)
• How your sales team is compensated (like what percentage of their pay comes from salary vs. commissions)

With this information, you can see the true cost of hiring.

Financial statements help align founders and investors.

Founders may have good ideas, but unless they can prove that their ideas are financially viable, investors won’t be interested. 

Financial statements can help the founder/investor relationship in other ways, though. They can:

• Encourage informed conversations.
  Investors are an integral part of any startup’s success. When investors have the full financial picture, they can ask better questions.
• Track progress.
  Seeing the same report over multiple periods reveals how the startup is progressing, which helps investors see if their investment is sound.
• Improve trust.
  Financial transparency from the founders will improve trust between the parties and build confidence that founders are focusing on the details. 

Financial statements identify inefficiencies.

Financial statements summarize large swaths of information. On a transaction-by-transaction basis, you may not notice anything is off, but as inefficiencies compound, they’re harder to ignore. Regularly running financial reports, whether they be formal reports or draft reports to be used internally, can help spot inefficiencies, mistakes, and outliers. The faster you spot these problems, the sooner you can address them.

Don’t know how to get started? 

Successful founders are successful for a reason: they’re adaptable, they’re resilient, and they leverage relationships around them. You want business software that has those same characteristics.

Puzzle is a modern accounting software that helps startups improve accuracy of their financial reports. It uses automation technology to categorize expenses and draft reconciliations, making your lives simpler and freeing up time to spend on other things. And when you couple Puzzle with a high-quality HR and payroll platform like Rippling, you’ll see those automations extend beyond the financials and into workforce management. Puzzle and Rippling integrate seamlessly so that your GL always reflects the most up-to-date payroll data. 

Get started here:

Discover Puzzle:
👉 Visit Puzzle

Want to activate via Rippling?
👉 Go to Rippling

‍

‍