A Guide to Financial Reporting: Best Practices for Startups

Running a startup can be incredibly stressful. From product creation to marketing, fundraising, and team building, everything hits you all at once. With so much going on, it's easy to push aside financial reporting. After all, your accountant can handle it, right?
That's a big mistake many founders make.
Good financial reporting is crucial to your company's bottom line. Investors want to know everything about your numbers as they reflect your startup's performance. As a founder, are you well-equipped to handle financial reporting?
At Momentum Growth Partners, we help startups overcome the operational and financial challenges they face, preparing them for the next stage of growth and success. From business structuring to strategic planning, financial advisory, and everything else in between, our experienced business consultants have the knowledge, expertise, and skills to scale your venture.
In this blog, we will cover many different aspects of financial reporting, including the following:
- Common financial reporting problems
- Essential elements of financial reporting
- Basic and advanced financial reporting KPIs and metrics
- How to make financial reporting work for startups
Let's get started!
What Are the Common Financial Reporting Issues That Startups Face?

Understanding the problems most founders face can help you steer clear of them in the first place. Here are the most common financial reporting issues startups experience:
- No financial visibility: Many founders only check bank balances without investigating further. They overlook upcoming bills or deferred revenue, which can adversely affect the company's financial position.
- Reactive reporting process: Some founders generate reports only when investors request them or when a crisis arises. Financial reporting is a must. You need to have access to financial data at all times, enabling you to identify business opportunities and make informed decisions.
- Audit chaos: A lot of new business owners are unaware of regulatory compliance and its importance. This could get them in legal trouble.
- Ignoring unit economics: Some founders have no clue about analyzing operational data, and they only focus on growing. Ignoring unit economics is a huge mistake. If you're growing but have high customer acquisition costs, you'll start burning capital and eventually go bust.
Essential Financial Statements Every Startup Needs for Decision-Making

Financial reporting plays an important role in your startup's success. To get started, there are three financial statements that you need to master. They include:
- Income statement
- Balance sheet
- Cash flow statement
You should also learn how to read these statements. Most founders prefer looking at a fancy dashboard to get an overview of their organization's financial performance. However, that's the wrong approach, as you need to be hands-on.
Financial analysis starts with looking at the numbers and understanding their impact on profit, cash flow, and other key performance indicators (KPIs). It shows how these important elements are interconnected, enabling business owners to derive actionable insights that ensure sustainable growth.
Let's look at these three financial statements in a bit more detail.
Income Statement
Also referred to as a profit and loss statement, an income statement shows your company's financial performance over a specific period. It tells you whether your business is making or losing money, providing essential insights that are crucial for strategic planning.
An income statement consists of many different numbers, but some of the most important ones are as follows:
- Revenue: This is your top line and reflects your company's revenues. A big mistake that some startups make is booking all upfront cash as revenue. This inflates the numbers, which investors quickly spot during performance analysis.
- Cost of Goods Sold (COGS): These are the direct costs involved in producing your product. Depending on what your startup sells, COGS may include raw materials, direct labor, and factory overhead.
- Gross Profit: This is not your bottom line. Gross profit tells how much money your startup makes prior to paying expenses. It indicates whether your core business model is sustainable.
- Operating Expenses: These are all of the day-to-day expenses your startup incurs. They may include sales, marketing, R&D, and administrative costs, such as salaries and rent.
- Net Income: This is your bottom line after deducting all of the expenses. Most early startups do not make a profit. That's normal when you're investing in growth, but understanding this KPI helps with making informed decisions.
So, what are the best practices when it comes to reading an income statement? Well, you need to review such financial statements on a monthly basis.
When analyzing, look for trends. You can also compare the actual results to your budget. Find out where your company is lacking and take corrective measures immediately.
For startups, it's always encouraged to use the accrual accounting method instead of the cash method. It provides a more accurate picture as you record revenue and expenses when incurred.
Balance Sheet
Now that you've got an overview of your company's financial performance, it's time to look at the balance sheet. This represents your startup's financial position at a specific point in time, usually at the end of the year.
A balance sheet provides information about your assets, liabilities, and equity. Here's what you need to know about each:
- Assets: There are two types of assets that your company may own, and they are:
- Current assets: These are your company's properties that you can quickly liquidate to raise cash. Some examples of current assets include accounts receivable, inventory, and prepaid expenses.
- Non-current assets: These are your company's assets that cannot be converted to cash within a year. They can also be referred to as long-term investments and may include patents, trademarks, land, buildings, machinery, and bonds.
- Liabilities: There are two types of liabilities that are part of the balance sheet, and they are:
- Current liabilities: These are amounts that your business needs to pay immediately. They may include accounts payable, accrued expenses, and deferred revenue.
- Non-current liabilities: These are all of the financial obligations that you need to pay after a year, such as long-term loans and deferred tax liabilities.
- Equity: When you're done paying off the debts, whatever you're left with is equity. It represents the actual value of your startup, which is everything you have minus your liabilities.
To ensure accurate financial records, we recommend reconciling bank accounts every month. It helps identify and resolve errors, providing an accurate representation of your business's financial position.
Cash Flow Statement
Your business can be profitable, but if you don't have cash, you'll shut down fast. This makes the cash flow statement very important. It provides reliable financial information regarding money inflows and outflows across the following three categories:
- Operating activities
- Investing activities
- Financing activities
When analyzing financial data in a cash flow statement, we highly recommend calculating the burn rate. This refers to the amount of cash you spend each month.
Once you've calculated the burn rate, determine your cash runway to get an idea of the time you have before your startup runs out of money. These metrics are important, as they show your company's ability to survive.
A cash flow statement has two essential figures that you need to keep track of, and they are:
- Net Cash Flow from Operations: This shows if your core business generates or uses cash. Early on, this will likely be negative, but as your sales increase, you'll have more money to spare for investments or expanding business operations.
- Free Cash Flow: This shows the cash from operations minus capital spending. It tells you how much money your business actually generates, which you can use to make investment decisions.
The following are some of the best practices when it comes to cash flow statements:
- Monitor your bank balance daily or weekly for better control over your spending.
- Forecast your cash position for the next 4 to 8 weeks as part of your reporting process. This is a great way to know what's coming, ensuring better decision-making.
- Always refer back and forth between your company's income statement and balance sheet when preparing a cash flow statement. It helps understand the connection between the three reports and provides greater financial insight.
Dig Deeper into the Numbers with Advanced Financial Reporting

Reading the three financial reports and knowing the basic numbers isn't enough to succeed. You need to analyze the statements and interpret the financial results for a comprehensive view of your business's performance. This is where advanced financial reporting comes in, and it contains the following key components:
Key Performance Indicators
While the three types of financial statements show the big picture, key performance indicators (KPIs) provide information on what drives your business. There are many different KPIs you can track as part of your reporting process, some of which include the following:
- Customer Acquisition Cost (CAC): CAC is the total sales and marketing spend divided by new customers acquired. Many founders underestimate this by missing overhead costs or free trials. Prior to allocating resources, track customer acquisition costs by channel to make informed decisions.
- Customer Lifetime Value (LTV): LTV refers to how much revenue a customer generates over their entire relationship with you. For startups, it's essential to have an LTV to CAC ratio of at least 3:1. There have been many companies with impressive growth that failed to raise follow-on rounds because they couldn't show healthy unit economics through proper performance analysis.
- Churn Rate: This refers to the percentage of customers who cancel over a specific period. High churn can kill businesses. Track both customer churn and revenue churn to monitor performance.
- Monthly Recurring Revenue (MRR): For subscription businesses, MRR is everything. It is the revenue that you predict every month. That said, don't just track total MRR. Try to explore this metric further by looking at MRR from new sources, expansion, and customer cancellations.
- Capital Efficiency Ratio (CER): Capital Efficiency Ratio refers to how well you use invested capital to generate revenue. CER is a lesser-known metric that helps evaluate your company's performance
.
Financial Forecasting
Financial forecasting is a crucial part of advanced reporting. If you have a poor financial model, you could risk losing a potential deal. Inconsistent or unrealistic projections that lack proper financial reporting objectives can adversely impact funding.
For accurate financial forecasts, here are a few tips to keep in mind:
- Revenue forecasts should be driver-based. Instead of simply projecting "more sales," founders should forecast existing customers based on their retention rate and average contract value while also incorporating potential new sales.
- Growth drivers should be your basis for budgeting for expenses. If you're planning to increase customer growth, consider the costs associated with achieving this goal, such as hiring more staff.
- Always think about staffing, as this is your largest expense that can have a significant impact on your business's financial position.
When reporting, present three different situations to your investors. Inform them about the best, worst, and most likely case scenarios. Investors respect knowledgeable founders who understand risks and demonstrate transparent financial reporting practices.
Want to get the most out of financial forecasts? Here are some of the best practices:
- Build from granular drivers, not guesses
- Document every assumption clearly
- Update projections monthly with actual data
- Avoid unrealistic hockey stick growth curves
- Identify trends through proper trend analysis
Investor Communication
Now that you're managing cash flow and analyzing data, it's time to communicate all this information clearly to key stakeholders.
Most founders gather all of the data they have into spreadsheets and send it over to investors. Don't do that, as disorganized financial information can be overwhelming and leave a poor impression.
A great way to communicate your startup's financial performance is to create user-friendly reports. They should include the following sections:
- Executive Summary
- Key Metrics Dashboard
- Financial Performance
- Operational Deep Dive
- Challenges and Risks
- Strategic Asks
Don't sugarcoat bad news. Your board can help you solve problems, so make sure to present challenges with proposed solutions. This builds trust and shows maturity while enhancing transparency.
So, what should an investor update report include? You can mention the progress against certain milestones, show three to five crucial KPIs, highlight your cash position and runway, and inform about the challenges and opportunities. If you need something from your investors that could help your startup, make sure to ask in the report.
A key thing to remember is to always send frequent updates to your investors, even if there's not much happening. Timely financial reports ensure loyalty and pave the path to future fundraising.
Some of the best practices when producing investor reports are as follows:
- Ensure internal numbers match what you share externally. Discrepancies kill credibility fast and damage your market position.
- Avoid jargon, and explain complex concepts simply using clear and concise language.
- Be honest about issues. Transparent financial reporting, even when presenting bad news, builds more credibility than hiding problems.
- Transform your financial reporting by moving away from basic number crunching to providing strategic and benchmarking performance analysis.
How to Make Financial Reporting Work for Your Startup

The biggest challenge isn't knowing what to do. It's doing it right every time, with strong internal controls and regulatory compliance.
To ensure proper financial reporting that leads to effective decision-making, you need to:
Build a Strong Finance Team
As your business grows, so does your finance team. During the different stages of growth, you must make smart decisions to achieve your startup's primary objectives. What do we mean by this?
Simply put, if you're in the early stages of running a startup, you may be doing most of the legwork. Bookkeeping, handling operations, and sorting HR issues can become overwhelming.
In such situations, it's best to hire a fractional CFO or partner up with an accounting firm. Investing in getting it right from the start beats fixing mistakes every time and ensures that regulatory requirements are met.
A fractional CFO gives you a high-level strategy without full-time executive costs, while on the other hand, a good bookkeeper handles daily transactions and reconciliations. Both options can help you focus on growth while maintaining accurate financial reporting.
As you scale, financial complexity increases. You're doing more transactions, working with multiple entities, carrying out international operations, and closing bigger funding rounds. All of them demand more attention to your financial reporting process.
When your daily financial operations require dedicated focus, it's time to hire internal staff. Hire a financial controller or an experienced accountant to work under the management of a fractional CFO. This will ensure greater accuracy when it comes to data collection and preparing the company's financial statements.
Ensure Data Accuracy
If your underlying data is incorrect, it can impact reports and your ability to make informed decisions. Always record all transactions, keep receipts and documentation, and understand your customer contracts for accurate revenue recognition.
Before preparing reports, reconcile everything on a monthly basis. This lets you catch errors and identify any missing transactions. It can also prevent fraud while ensuring operational efficiency.
When running a business, you're bound to make mistakes. While there is nothing wrong with that, it's essential to have a clear process in place to address any issues that may arise. You also need to be actively monitoring KPIs to identify root causes and take steps to prevent such situations from repeating.
Take Action to Achieve the Objectives of Financial Reporting
Your numbers shouldn't just be reported. They should drive decisions and provide valuable insights for company leaders. Here's what you should do:
Spot trends and opportunities
Is your customer acquisition cost rising? Are admin costs growing faster than revenue? Is gross margin improving with scale? These trends signal what's working and what isn't, requiring informed decisions to address them. For example, if you have a high customer lifetime value, you need to focus more on sales and invest in marketing.
Link finances to operations
Every finance decision you make impacts operations. Consider the link between the two for effective decision-making. For example, if you want to reduce churn by 5%, how does that improve lifetime value and monthly recurring revenue?
The best founders are those who treat financial reports as strategic playbooks rather than scorecards. They connect every operating initiative to its financial impact and make informed decisions based on this analysis.
Create a Continuous Cycle
Having a list of to-do things can help with financial reporting. They could include the following:
- Generate monthly statements and KPIs
- Analyze against budget and trends
- Discuss findings with your team and board
- Adjust operations based on insights
Build Strong Financial Reports That External Stakeholders Trust with Momentum Growth Partners

Good financial reporting isn't just bookkeeping. It's your startup's foundation for growth and funding success, providing the financial information needed for informed decision-making.
From tracking cash flow to knowing your runaway, picking the right KPIs, and forecasting, there's a lot you need to know to master financial reporting. This is essential for showing your company's financial health and achieving your key objectives, which include raising funds fast and at better rates.
When investors see that you have a good grip on numbers, your business immediately becomes more valuable. To help you get started and set the right direction, consider hiring a fractional CFO. There are numerous benefits to outsourcing financial management, including regular investor updates, consistent annual reports, and better strategic decision-making.
At Momentum Growth Partners, we turn your financial data into your biggest competitive advantage. With proper systems, accurate reporting, and clear communication, our fractional CFO services can help set the right trajectory for growth and success.
Call us at +1 (888) 682-8004 to schedule a consultation with an experienced business consultant and bring financial stability to your startup today!