What Investors Want to See in Financial Statements Today (2023)

What do investors look for in financial statements? It is a question that can send shivers down the spine of many business owners and financial executives.

Those cryptic documents known as financial statements hold the key to attracting investors or sending them running in the opposite direction. Investors, whether they are venture capitalists, angel investors, or even potential shareholders in a publicly traded company, have a keen eye for deciphering the financial health and potential of a business.

In this blog, we’ll delve into the intriguing world of what investors look for in financial statements, unveiling the secrets and nuances that can make or break a deal.

What Investors Want to See in Financial Statements

Picture this: You are sitting across from a potential investor, and they are scrutinizing your financial statements with laser-like focus.

What are they really looking for? Are they trying to uncover hidden secrets, or are they simply checking off boxes on a financial checklist? The truth is, it is a bit of both and much more.

Investors aren’t just interested in the numbers; they are on a quest for a deeper understanding of your business’s financial story.

Financial statements are the narrative of your business’s financial journey, and investors are avid readers. They want to see a compelling storyline that paints a picture of growth, stability, and profit potential.

The Income Statement, Balance Sheet, and Cash Flow Statement are the chapters of this financial novel, each revealing critical insights. Let’s delve into what investors look for in each of these statements.

The Income Statement

The Income Statement is a dynamic page-turner that details your company’s revenue, expenses, and profitability over a specific period.

Investors want to see a steadily rising revenue stream, but they also pay close attention to the bottom line. Are your expenses in check, or is there a leak in your financial ship that is causing profits to sink?

Investors desire a healthy and sustainable profit margin that promises a return on their investment.

The Balance Sheet

The Balance Sheet is a snapshot of your company’s financial position at a given moment.

Investors are like detectives here, searching for clues about your assets, liabilities, and equity. They want to see a strong asset base that indicates your ability to weather storms and seize opportunities.

A low debt-to-equity ratio is desirable, as it suggests financial stability and less risk. Investors desire a solid financial foundation that bolsters their confidence in your business’s long-term potential.

The Cash Flow Statement

The Cash Flow Statement is often the unsung hero of financial statements. This statement reveals the ebb and flow of cash into and out of your business.

Investors desire positive cash flow from operating activities, as it demonstrates your ability to generate cash from your core business operations. It is a clear indicator of liquidity and your capacity to fund growth and meet obligations.

A consistent and healthy cash flow is the desire that can seal the deal for investors.

What do investors look for in financial statements?

KPI stands for key performance indicators. These indicators are the essential information you want to analyze as an investor in any company. The data is usually available in the company’s quarterly report listed on its website.

Note, that a business’s financial statements are like a school report card in that they tell investors how well the company is working.

So, what do investors look for in financial statements? These categories within a financial report are the areas investors should care about most.

1. Is There a Personal Investment?

A positive sign for an investor is that the owner has a financial equity investment in the company. If you see that the founders have money at stake, you’ll know that the team will do what it takes to protect their investment and create a profit.

For example, if we look at Facebook and check to see what FB insider trading is, we will find that the employees and directors believe in the stability of the company because they have invested interests in it.

2. Net Profit

The net profit is the money that the business has left over after paying operating costs, salaries, taxes, etc. It is the amount left over after paying for the expenses of running the business. As an investor, it is essential to know if the company is making money, and this is where you will find that information.

Analyze this information because unsustainable profits can be bad for an investor, and losses can be good if caused by the company’s scaling up.

3. What Are the Sales

Even if a company has a great idea and a great product, you need to know if they are selling. Look for the information on sales that tells you whether people are willing to buy the product.

As an investor, you don’t want to risk not knowing this answer. It would help if you cared about sales growth and an upward trend in sales or whether the excitement started to fizzle out.

4. What Are the Margins

Sales stats are meaningless if the investor isn’t making any money. So this information is essential to you, the investor. Then, compare these margins to other leading companies in the industry. Again, higher margins mean more money for the investor.

On the other hand, low margins can mean a loss, so look for information on how the company demonstrates its plan to improve these low margins and increase profitability.

5. Cash Flow

As an investor, you want to know the cash flow of a company. Projections are great, but unless the company has enough cash to meet employee needs and expenses, even the best plan will fizzle out.

6. Cost of Acquiring Customers

The cost of acquiring customers tells you how much a company has to spend on getting a new customer. This information tells you how much a company spends on marketing and advertising to bring in new customers.

This expense can be substantial for new businesses, but more stable companies have less marketing expense and repeat business through repeat sales.

7. Customer Loyalty Rate

Along with the cost of acquiring a customer, you also need information on customer loyalty rates. For example, can the company keep its customers? A return customer rate can compensate for a higher customer acquisition cost.

8. How Much Debt Does the Company Carry

Although debt often scares investors, it is common for a company to carry at least some debt. However, you want to know how much debt a company has incurred to make sure that they aren’t going to go under. Use the quick debt ratio to calculate debt against assets and sales.

9. The Accounts Receivable Reports

Learn about the accounts receivable turnovers for the company. This information refers to the amount of time it takes for the company to collect the money from customers. The information tells you two critical things.

First, it tells you that the company is willing to do what it takes to get paid. You want to make sure a company has proven processes that allow it to collect promptly. Second, it also tells you how stable the company is with customers.

You don’t want to work with a company that has a problem collecting money from its customers when a company has a slow cash turnover. It indicates the company doesn’t have a financially sound operation and it adds risk to you as an investor.

10. What Is the Break-Even Status

While you may be able to accept short-term losses, you do want to see that the company has a profit and a return at some point. The break-even point tells you when the company has made all of its obligations and can start to see a profit.

More often than not, the company will list this information as a sales target for the quarter.

Conclusion

Now that you understand what investors look for in financial statements, it is time to take action. Prepare your financial statements with precision and transparency.

Seek professional guidance if necessary to ensure accuracy and compliance with accounting standards. Make your financial story compelling and consistent.

When you present your financial statements to potential investors, do it with confidence, knowing that you’ve addressed their desires for a strong Income Statement, a robust Balance Sheet, and a healthy Cash Flow Statement.

In conclusion, financial statements are not just numbers on a page; they are the heartbeat of your business’s financial health.

Investors are not simply number-crunchers; they are visionaries seeking opportunities. By understanding what investors look for in financial statements, you can craft a narrative that captivates their attention, piques their interest, ignites their desire, and compels them to take action—investing in the future of your business.