Are You a Startup with No Finance Background? Here Are How to Analyse Your Financials in 5 Steps
As a financial consultant with an audit background, I’ve met people from billions of sectors. I’ve met a finance team in a vast automotive firm. Unfortunately, the head of finance was a… how can I say correctly… Ok, I am not an expert psychiatrist, but when I see a man who goes nuclear and yells at a pregnant coworker when the financials are not quite like he expects, I call him a sociopath. (Sorry, the guy, I don’t remember your name, but your face). And there was the most lovely lady from this oil company asks me if writing “Fifty Shades of Grey” as a general expense is proper. (I must admit, the book was in sales, and the lady was so excited to go home and start reading immediately.).
As I mentioned, too many people, too many firms, and most of them sour on their career and even their lives. They were completing their time on jobs and running away from their offices. I know, cause exactly I was one of them.
On the contrary, startups are always sparkling. They constantly search and discover new and innovative, they always try to explore different topics for their projects, and they always fight for everything they need. Do they need money? They fight for it. Do they need a genius developer? They fight for cathing him. This ambition, passion, and excitement mesmerized me every single time. So, I’ve quit my job and joined the startup world.
The fact remains that finding a super cool idea or working with a genius developer may not be sufficient to grow successfully, but reading the financials and predicting the future in the light of the past are two critical beneficial skills that you may not have. Still, no worries, I am here to help!
How to Analysis Financial Statement of a Startup?
Step 01: Organize the Items in The Income Statement (Profit and Loss)
I have two perfect formulas for you. Write them to a post-it (if you still lived in 1996) or a sticky note in digital:
1st
Net Sales + Other Revenues = Total Revenues
Total Revenues — Cost of Goods Sold = Gross Profit
Gross Profit — Operating Expenses — Other Expenses = Net Income (EBIT)
2nd
Net Sales + Other Revenues = Total Revenues
Total Revenues — Cost of Goods Sold — Operating Expenses = Operating Profit
Operating Profit — Other Expenses = Net Income (EBIT)
Step 02: Organize the Items in The Balance Sheet
Here is another equation: (You may not have to note this):
Assets = Liabilities + Shareholder’s Equity
That’s all. Ok, the next step is …
Just kidding. Yes, it is that easy, but I should add some additional boring accounting terms to be more explanatory.
Cash + Account Receivables + Prepaid Expenses + Inventory = Current Assets
Current Assets + Property & Equipment + Goodwill = Total Assets
Account Payables + Accrued Expenses + Unearned Revenue = Current Liabilities
Current Liabilities + Long-Term Debt = Total Liabilities
Equity Capital + Retained Earnings = Shareholder’s Equity
Just like Sudoku, right?
Step 03: Horizontal Analysis
Financial statement analysis is based mainly on the comparison. Horizontal analysis is the comparison of the line’s for two different periods. The main aim is to analyze the reasons and results for your business. Here is an example of the comparison of horizontal analysis for your sales:
Your net sales in 2020 1st Quarter: £187.000
Your net sales in 2021 1st Quarter: £93.000 (Damn you Covid) Your sales decreased by £84.000 due to Covid restrictions.
Step 04: Vertical Analysis (% Analysis)
It compares two items in a specific year by calculating the percentage of the items to the total. It is a static analysis since it is compared in a single year. The aim is to be able to compare the percentages in different periods and even between other firms. It looks complicated but is not. Let’s shoot an example:
There are two different firms: Acme Corporation and Wayne Enterprises.
Acme’s profit: £475.000
Wayne’s profit: £300.000
It looks like Acme is in a better position. BUT when we check the vertical analysis, we see that Acme’s profit is %17' and Wayne’s is %23. Maybe explosive tennis balls are not profitable as we thought.
Step 05: Ratio Analysis
The aim is the examining and calculating the connection between two items.
Liquidity
The capability to pay your short-term debts.
Current Ratio= Current Assets / Current Liabilities
Profitability
The ability to generate profits.
ROA = EBIT (Earnings before interest and Tax) / Total Assets
ROE = Net Income / Shareholder’s Equity
Solvency
The ability to meet your long-term debts.
Debt Ratio= Total Liabilities / Total Assets
Growth
The speed at which your financials are growing.
Revenue y-o-y %= (This Year’s Revenue / Last Year’s Revenue) — 1
EBITDA (Earnings before interest and tax and depreciation & amortization) y-o-y %= (This Year’s EBITDA / Last Year’s EBITDA) — 1
There are so many additional ratio analysis and more detailed phases of financial statements analysis. Still, this summary’s most important goal is ringing a bell when your accountant shows you your result at the end of your fiscal year, and the second most important goal is making you able to speak about how your business going well in a brunch with your friends at a fancy restaurant, by using fancy terms. Do you prefer just saying, “Well, it is going well.” -a real chat killer- when your friend asks, “How your start-up business is going?” or do you want to say, “Our EBITDA growth was 7% in the last year, and we forecast 9% for this year. It couldn’t be any better!”
But if you still don’t care about any of this and want to focus 100% on your lovely business’ operational things, why you don’t use this service I give? Click on me.
