Startup Strategies: Four Common Challenges Startups Must Conquer

Startups face four financial statement hurdles

In our Startup Strategies article series, we’ll be reviewing financial statement challenges and how MAXIS^® by Freed Maxick is positioned to help.

The early phase of building a startup business is like dating. You remember that, right? Daters find each other through different avenues, get together, gauge their respective interest in one another, and then pursue a relationship or go their separate ways.

If you’re an entrepreneur, you’re following a similar path. You court a variety of ideas, products, and/or services until the day you fall in love with a strong business concept. At that point, you may need to find employees to join you on your journey, so you network and continue exploring until you click with the right match.

The similarities don’t end there. To obtain capital, you have to flirt with investors and bankers to demonstrate all the best qualities of your business and convince them you are a respectable partner prior to starting a relationship and are able provide long-term stability.

There is one aspect of this startup love story, however, that often gets ignored and, unfortunately, is probably the most important element: your financial statements (and the underlying data).

Sound Startup Financial Statements

Financial statements provide a snapshot of a corporation's financial health, giving insight into a company’s performance, operations, and cash flow. They are essential since they provide information about a company's revenue, expenses, profitability, and debt, and are used by investors, banks, and creditors to evaluate a company's financial stability and earnings potential. You’d be hard-pressed to find a bank or investor who doesn’t require a financial statement to assess investment probabilities.

MAXIS^® by Freed Maxick was designed to help startups and small and medium-size business (SMBs) leaders better understand accounting making financial and operational decisions easier. MAXIS brings expertise and insights and delivers the highest levels of strategic leadership, consistent results, and extraordinary business value.

Identifying Financial Statement Obstacles

For startups and SMBs, there are four common financial statement hurdles to overcome to gain attention and traction from investors and lenders:

Despite what your gut feeling is on the success of your company, you need to produce recurring financial statements for several reasons. For starters, they tell you if you are making a profit or a loss, as well as what cash (if any) you have remaining after paying your bills. Generating recurring (at least quarterly, but ideally monthly) statements can highlight trends and show you areas of your business that may be getting out of control.

For example, periodic analyses of your financial statements may lead you to understand that you are producing too much inventory and not generating enough sales to cover the costs. Or, perhaps you are making too much of Item A and not enough of Item B, hence, not maximizing your profit potential because you are producing the wrong products at the wrong time.

Additionally, banks will require you to produce financial statements for loan covenant purposes and additional financing requests. If you don’t have a complete and accurate set of financials, say goodbye to that funding. 

2.) Your financial statements are not in accordance with GAAP: Producing a complete and accurate set of financial statements means they are compiled in accordance with U.S. Generally Accepted Accounting Principles (GAAP). I’ll highlight three of the many reasons GAAP is important: One, banks, creditors, and lenders are depending on your financial statements to tell the truth about the health of your business, so if you are accounting for items incorrectly, you are potentially misrepresenting the overall success of your business. Two, because you may be expending cash on long term assets that are inappropriately being expensed instead of capitalized on the balance sheet. Three, you may be receiving cash payments today for products or services that are going to be performed in the future.

If your business is a software as a service (SaaS) startup, chances are you have a subscription-based revenue model. SaaS subscription-based operations generally have a significant amount of prepaid and recurring contracts or up-front setup fees. If you are not applying the accrual basis of accounting properly, you may be understating deferred revenues or inappropriately recognizing revenues too early.

Loan underwriters and bankers need actual financial data, principally recurring revenue stream(s) data, to determine the risk of investment and the price at which your business should be valued. If you have ever seen the television show “Shark Tank,” the “sharks” are only looking for data on what entrepreneurs have done, not what they think they will do.

Financial statements may not be the most thrilling things to put together when first starting a business—who wants to report that they’re not making money? Though you might not fall in love with the process, compiling complete and accurate financial statements will save you a lot of headaches, and perhaps even heartache, down the road.

MAXIS is a fully outsourced accounting service that can create your GAAP financial statements to get you launched and growing. We are a full-service finance and accounting partner, with a scalable service model, experienced and prepared to accompany you through every stage of your evolution.

Our next article will discuss how MAXIS^® by Freed Maxick helps solve financial statement challenges.

Do you want to leap over startup financial statement hurdles?

Learn how MAXIS can help. Contact Alexis Becker for a complimentary conversation at alexis.becker@freedmaxick.com.