Monthly financial reporting: Do your statements make the grade?

A company sells its software as an annual subscription priced at $100 and experiences 4% monthly churn, which equates to customer lifetime value of two years. Unless the company has good data on the total cost to serve, net revenue churn, total cost of customer acquisition and weighted average cost of capital, it is nearly impossible to tell if each incremental dollar invested in acquiring new customers is profitable or not. If the company is selling multiple products or selling into multiple customer segments with different revenue, margin, churn and customer acquisition cost dynamics, determining investment payback becomes even more challenging.

Based on the loan applications we review, the financial reporting of many post-revenue companies fails to make the grade. Far too often, companies supplement their monthly reporting with manually maintained Excel spreadsheets, which is not only error prone, but also an unnecessary duplication of effort that can usually be fixed for a relatively modest cost.

Fixing poor reporting is not rocket science, but it does require a reasonable level of finance and operational sophistication. If your budget does not allow for an experienced full-time CFO, consider engaging one on a fractional basis. Depending on your company’s needs, the cost can be nominal — as little as $60,000 per annum.

Poor quality financial and operational reporting (and the underlying business processes) can be real impediments to securing growth. We routinely refer clients and prospective clients to CFO resources, and I recently reviewed a dozen such referrals made during the past year. Of the dozen companies, nine companies adopted our recommendation with impressive payback – three quarters are already reporting material improvement in business performance (improved margins, reduced churn and improved cash flow), and half have secured incremental financing.

While there is no “one-size-fits-all” approach to preparing financial statements, there are some common elements that are universal, and understanding users’ needs and requirements is critical. Secondly, “cash is king” when it comes to early stage companies. The ability to fund growth, pay employees, creditors, and generally “keep the lights on” is paramount. We’ve prepared this list of diagnostic questions to help you assess the quality of your financial reporting, and if you’d like a professional opinion, one of the many fractional CFOs working with our portfolio companies would be pleased to provide a complementary, no-obligations review of your financial reporting package.

Blog post by Alkarim Jivraj, Managing Partner at Espresso Capital.