what investors look for in financial statements

You can tell a lot about the health of a business by looking at its financial statements.

Financial statements are documents that reveal the financial activities and performance of the business.

They’re prepared to provide the information needed to make decisions about the business by stakeholders, creditors and investors.

Financial statements are important to investors because they;

  • Help investors to determine how stable the business is.
  • Help investors understand the true value of the business
  • And reveal the cash flow strength of the business as well as its reserves

Before an investor decides to invest in your small business, he or she must be convinced of getting some reasonable returns.

But, without the appropriate financial statements, he or she is unable to make that decision.

Worse still, if they’re not well-prepared, they could hinder investors from investing in your small business.

This is why we help small business owners understand everything about their finances and help them to use that knowledge when securing investment.

Because the goal of the investor is to make a profit on their investment, your financial statement serves as a critical guide to help them make that decision.

Now, what do investors need to see in your business’s financial statement?

1. Growth

Investors want to invest in businesses that would yield good returns on their investment.

To determine the growth or sustainability of the business, investors look at the income statement to determine the trend of revenue and financial projections.

2. Ability to Pay Debt

Investors want to see that your business is not overwhelmed with debt.

They look at your balance sheet, and your cash flow statement to determine if your debt is too much and if it would hinder business operations and growth.

3. Profitability

Is your business currently making a profit? Investors want to know that your business is not only making sales but has a large enough profit margin, net profit to show that the business is making money.

4. Sustainability

How sustainable is your business over time, will it go bankrupt before the investors get their returns?

The business may be making sales at the moment, but investors want to look at your sales trend to determine if your sales were growing.

Each of the three financial statements provides different information about the health of the business: –

  • Income Statement -The income statement, also known as the profit and loss statement, informs investors about the revenue, expenses, sales, and profits of the business.
  • Balance Sheet – The balance sheet shows investors the level of debt of the business, the real net worth of the business through a simple analysis of the assets, liability and equity of the business.

 

  • Cash Flow Statement – The cash flow statement paints a more realistic picture of the business’s cash balance. It shows the movement of cash in and out of the business. A positive cash flow statement tells investors that money is coming into the business than it is going out. The net income may paint a fine picture of the business, but the cash flow statement tells investors how much of it is coming into the business. A positive cash flow reveals that the business can face any unexpected expenses and even take advantage of opportunities for growth that may arise.

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SME Finance works with you to make your business investment-ready or credit-worthy and, more importantly, leverages its resources and relationships towards helping you to raise capital.

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