The basics of investor reporting

For many startups, investor reporting feels like a burden. Most startups don’t have a routine of producing the required information automatically. It’s tedious, and it takes time to prepare. That’s the reason you should automate what you can from the get-go. 

Let’s look at this from a different perspective:  

What if I tell you that the obligation to report financial numbers is a motivator to use financial analytics to make better business decisions and review the data regularly? 

The more you know about the reality of your business, the easier it is to navigate strategically. Your investor reports serve to do exactly that AND communicate the potential and evolution of your partnership with the investor. 

Financial reporting generally answers many questions about your company’s financial health. There are a total of nine main elements of financial reporting that every reporting review should include. However, not all elements are of equal importance to each stakeholder. 

Every stakeholder has an area of interest in your financial reports. And yes, you don’t have to include every element in every report. Instead, you can tailor your reports accordingly depending on whom you’re communicating to. In addition, automating the process of creating these reports saves you a ton of time. 

For example, as a SaaS CFO, I’m most interested in gross margin and EBITDA when I am analyzing profitability because they give me an immediate picture of the company’s financial performance. On the other hand, a human resource director would be interested in headcount reports and the Operational Expenses (OpEx) and how they contribute to the company’s growth. 

The first question an investor asks: “How long is your runway?”

When faced with an investor, you’ll very quickly find that the main topic of discussion typically revolves around money: 

• What did you do with it, and what results did it yield?
• What is your current financial status?
• If there are challenges, how are you planning to solve them? 
• If you’re performing exceptionally well and hitting all your KPIs, how are you planning to scale?  
• What is your plan to spend the new round of investment, and what results can you expect? 

It means that your investor reports are all about reporting growth status, cash runway, and profitability – especially the latter. Your company’s profitability is the key to a successful investment partnership. 

Typically, an investor report includes:  

1. Executive summary to give your investors a rough idea of what to expect.
2. Scope to present the success of your company’s last activities and strategies during a selected period (monthly or quarterly).
3. Business activities with description, strategies, and ownership of each activity.  
4. Timeline and status of each activity.
5. Results and industry metrics for the selected period.
6. Cash runway as of current state.
7. Financial analytics and analysis. 
8. Plans and projections for upcoming events and activities
9. What keeps the CEO awake at night

From the list above, investors are most interested in your industry metrics onwards. This is because they directly reflect your company’s performance and growth potential. 

Past, present, and future

Let’s start by categorizing your metrics. Most business metrics can be divided between lagging and leading indicators.  

Lagging indicators tell you what has already happened and your current state. They look back at whether you achieved the intended result. For example: 

1. Revenue: ​​Your Monthly Recurring Revenue (MRR) helps you understand the factors that contribute to your business’s growth and the adjustments you need to make for the company to keep growing.
   
   
2. Gross margin: Your overall gross margin gives you an idea of your production costs in relation to your revenue. It helps you figure out how to grow your revenue faster than your production cost and how to build a scalable business.
   
   
3. Churn: It’s inevitable. Ideally, your churn rate should remain below the 5% industry benchmark.
   
   
4. Net profit: Your net profit gives you an idea of the money you have left after you’ve paid all expenses, loan interests, and amortized your assets.
   
   
5. Growth rate: Your month-on-month (MoM) growth rate gives your investors an idea of your company’s potential. (Here’s a secret that’s not so secret: it also tells them if you’re doing the right thing with their money)

However, investors typically invest in a company’s potential for growth and scaling rather than their existing successes. 

That said, investors are more interested in knowing how you’ll spend the rest of the money and how much revenue you can generate from your upcoming plans – your leading indicators. 

Leading indicators look forward to future events and can be used in financial forecasting. For example, the number of leads in your sales funnel, sales headcount, sales funnel conversion rate.

While your lagging indicators show them what has happened and your current state, your leading indicators tell them what kind of return on investment they can expect soon. 

For example, suppose you have a shorter cash runway than initially forecasted. Your investors want to know you are planning to navigate your next quarter to recover from the situation. 

Using your Profit & Loss (P&L) forecast is the most effective and comprehensive way to convey your next steps. Remember, your investors are looking for growth and profitability. The three main elements of your P&L forecast are: 

1. Staff cost forecasting: This is typically the highest cost of running a company because it is more than just paying wages and all other expenses surrounding a hiring process.
   
   Investors want to know: How are you planning to allocate resources to grow your revenue faster than your costs? 
   
   
2. Sales and revenue forecasting: Most companies have limited working capital and cash-in-hand to start with. Limited access to cash means they also struggle to find scalable growth.
   
   Investors want to know: What is your plan to acquire as many customers as you can? How are you going to increase your Net Revenue Retention (NRR)
   
   
3. Expenditure forecasting:  Any kind of expenditure is recorded as costs in your P&L statement because they are related to ongoing business operations to keep your doors open.
   
   Investors want to know: How are you planning to spend the money? What are your plans to scale? 

Key takeaway:

Your investors are more interested in your leading indicators – they’re investing in your future. So just because you’re not making a profit now doesn’t mean that you won’t succeed in your fundraising. 

Start by identifying the KPIs, conversion rates, and resources that impact driving growth and profitability in your investor reports. While it’s tempting to include as much as possible in your report to make it look good, not all elements are of equal importance to each stakeholder. Avoid information dumping. VCs are looking for profitability and growth indicators only when they comb through your investor reports. 

Happy Calqulating!