CFO Reporting: Is Your CFO Giving You These Financial Reports?
The Chief Financial Officer (CFO) of a company is the one who can give a prudent view of the company’s state of business. The financial reports that a CFO presents to the company’s board contain all the necessary information that helps its members make critical decisions.
Accordingly, the Financial Directors must ensure that the company’s board receives unbiased and even-handed information through multidimensional financial reports.
It is impossible for a company to exercise its strategic function fully in the absence of a comprehensive financial reporting of CFOs. CFO’s reports to the board give board members a snapshot of current performance indicators as well as future projections and forecasts.
Such historical, current, and projected scenarios enable the board members to uncover significant variances and determine the operational challenges.
As per studies, startups that consistently track their metrics have 400% more user growth. Accordingly, a CFO must work on important financial reports and focused KPIs for board members to take key decisions easily.
Here are the top 7 financial reports that a startup founder should get from a CFO.
1. Gross Burn vs Net Burn Analysis And Cash Runway
CFOs report to the board must include Gross Burn Vs Net Burn Analysis as well as Cash Runway.
Gross Burn, Net Burn, and Cash Runway are the fundamental Key Performance Indicators (KPIs) that a CFO must track. This is because such KPIs help the company’s top management in determining the requisite changes they need to make in their strategic approach towards business.
Accordingly, Burn Rate refers to the rate at which a company loses its cash reserves to finance its overheads. There are two types of Cash Burn Rates: Net Cash Burn Rate and Gross Cash Burn Rate.
a. Net Cash Burn Rate
Net Burn Rate is also referred to as Burn Rate. It determines how quickly a business loses cash out of its cash reserves to fund its overhead expenses. Thus, a company has a Net Burn Rate when its operating costs are higher relative to its revenues.
However, the Net Burn Rate of a firm is negative if it’s earning profits and generating positive cash flows.
This financial metric is important to calculate, specifically for startups. It’s because Net Cash Burn Rate allows the CFO’s and top executives to determine whether the company has the risk of running out of cash soon.
Note that firms witnessing rapid growth rates have a higher chance of running out of cash. This is because such companies might be burning cash too quickly than anticipated. Though, it may seem that such high-growth firms are approaching profitability.
Accordingly, CFOs and executives of a company want that their Net Cash Burn Rate to remain low for a good period of time. A low Net Burn Rate may help the firm avoid bankruptcy or attain the next round of funds.
A CFO uses the following Net Cash Burn Rate formula to calculate the amount of cash lost:
Net cash Burn Rate = Operating Expenses – Gross Margin
Gross Margin = Revenue – Cost of Goods Sold
b. Gross Cash Burn Rate
Gross Cash Burn Rate refers to the total amount of cash spent on the overhead expenses of a firm. In other words, it refers to the total cash spent on the operations of a business. That is the total amount of outgoing cash in a given period.
Typically, Gross Cash Burn Rate is calculated on a per-month basis. The operational expenses on which the cash is spent may include manufacturing costs, rent, employee salaries, other overheads, interest, and taxes.
Accordingly, a CFO uses the following Gross Cash Burn Rate formula to calculate the total amount of cash spent on operational expenses:
Gross Cash Burn Rate = COGS + Salaries and Overhead + Depreciation and Amortization + Other Operating Expenses + Interest and Taxes
c. Cash Runway
Both Net and Gross Cash Burn Rates help to calculate the Cash Runway of a company. Cash Runway of a company refers to the time period before your firm runs out of cash if you continue to spend cash on expenses.
Basically, Cash Runway provides the CFO and executives with an estimated time period when the company will get broke or run out of cash.
This metric is typically expressed in the number of months before cash out.
Gross Burn vs Net Burn Analysis
Gross Burn Vs Net Burn Analysis report is one of the fundamental financial reports that the CFO must provide to the company’s board. According to a study, 82% of businesses fail due to poor cash management.
Thus, the Gross Burn Rate of a company will give a snapshot of its total expenses as well as the cash needed to stay afloat. Note that Gross Burn Rate is easy to foretell as its value does not vary based on other factors apart from the amount of cash spent by the company.
Whereas, the Net Cash Burn Rate is relatively volatile because it considers the net incoming cash. And the net incoming cash changes with the change in the revenue and cash collections made in each period.
For instance, the net burn rate seems more favorable when the net incoming cash increases either due to increased revenue or collections figures. Thus, CFOs need to be cautious while calculating this financial metric.
2. Current Monthly Income Statements
The most critical financial report that a CFO must give to a startup founder is the monthly income statement.
This report showcases the total revenues that a company generates through running its business operations. Plus, it also indicates the total expenses it incurred to generate those revenues over a period of time.
The fundamental objective of preparing a monthly income statement is to know the net income that a company earns over such a period. Thus, a monthly income statement of a company gives an overview of its financial performance over a period of time.
It helps CFOs and top-level executives answer key questions like potential risks, growth opportunities, and the potential challenges that may impact the future financial performance of a company.
For instance, the managers need to find out the underlying reasons why the bottom line of their company is negative. This will help them in preparing a plan for turning it around.
Then, they may look at each income source as well as expense type. Such an analysis will help them in understanding whether the expenses have increased over a period of time. Besides this, it may also help them to know whether the revenue streams are sustainable or not.
Likewise, CFO’s and startup founders can compare their current monthly income statements either with previous monthly income statements or other financial statements such as balance sheets and cash flow statements.
It will help them to understand what events led to an increase in expenses or a decrease in revenues. Such insights would help managers to make strategic or operational level changes as needed.
3. Budget Vs Actual Variance Analysis Report
The third important report that startups need is the Budget Vs Actuals report. It is vital for a startup to prepare this report because things do not work as per plan in a startup.
A founder may expect to generate a certain level of revenues or may believe that a certain amount of expenses will be incurred over the next few months in order to generate revenues. However, in reality, the scenario is quite different.
Budget Vs Actual Variance Analysis report helps startups to overcome this challenge. Budget refers to the financial plan indicating the level different financial metrics of a business are expected to touch over a specific period of time. These financial metrics may include revenue, expenses, cash flow, cash runway, and more.
Whereas, the Actuals refer to the numbers or the level that different financial metrics touch in reality.
A Budget Vs Actual Variance Analysis helps CFOs and founding members of a startup to evaluate its actual financial performance with the one that was planned.
The variances can be favorable or unfavorable. The variances are favorable if the actual numbers are greater than the forecasted ones. Say, greater sales than forecasted, higher income than projected, and lower expenses than anticipated.
However, the variances are unfavorable if the actual numbers are lower than the budgeted ones. For instance, lower sales than forecasted, lower-income than projected one, and higher expenses than anticipated.
In case of unfavorable or negative variances between Budgeted and Actual numbers, managers uncover the reasons for such variances and take appropriate steps to overcome them.
Thus, the benefits of conducting such an analysis are many. Firstly, such an analysis improves the accountability of a startup. Secondly, it helps in uncovering reasons for potential risks and taking appropriate steps to mitigate such risks. Further, it also helps the founders to measure their financial performance by comparing actuals with budgeted figures.
4. CAC Vs LTV Analysis Report
CAC refers to Customer Acquisition Cost. This financial metric determines the total cost a business incurs to acquire or attract a new customer.
Thus, to calculate CAC, CFOs determine the total sales and marketing expenses a business has incurred over a period of time. Then, they divide this number with the total number of new customers that a business acquires during the same period.
Since the nature of businesses is changing over time, the CAC of a business can take different forms. For instance, live streaming apps evaluate Subscriber Acquisition Cost (SAC), whereas a website tracks Traffic Acquisition Cost (TAC).
On the other hand, LTV stands for Lifetime Value. This financial metric indicates whether the effort, as well as funds that a startup invests in its sales and marketing activities, are justifiable or rewarding.
There are different ways to calculate LTV. One of the ways to calculate LTV is:
LTV = Average Revenue Per Account (ARPA) × Average Customer Lifetime
Accordingly, the LTV-CAC ratio is a financial metric that helps a startup to analyze how efficient is its marketing and sales activity. It helps the founders to know the value of a customer relative to the cost that is spent in acquiring such a customer.
In other words, the LTV-CAC ratio determines the level of profitability of a customer for a startup. The benchmark LTV-CAC ratio that the CFOs typically look for is 3:1.
Thus, if this ratio is greater than the benchmark ratio of 3:1, then it means a startup is spending less on its marketing efforts. There is a bandwidth to spend more.
However, if this ratio is lower than the benchmark ratio of 3:1, then it means a startup is spending way too much in attracting a customer compared to the value that such a customer generates for the startup.
5. Financial Forecasts For The Next 6 Months
CFOs must also work on the financial forecasts for a startup company besides working on the historical financial data. They must provide insights that showcase the potential value a business may create in the near future.
Providing insights of only past performance may not be of much use to the board. The board needs to be aware of the future potential as well to avoid any surprises.
It needs to study the financial projections as such insights would help a startup raise funding in the next rounds. In addition to this, such forecasts will also help the startup to develop a strategic roadmap for its business.
6. Ageing of Receivables Report
As the name suggests, the Ageing of Receivables Report showcases the list of accounts receivables that are overdue or outstanding past their due date. In other words, it gives an account of the slow-paying debtors of a business or a startup.
Accordingly, the Ageing of Receivables Report lists the open invoices along with the time period for which such receivables have been outstanding.
Typically, this Report showcases the accounts receivables that are due as well as the ones that are overdue over a span of 30 days.
Thus, the Ageing Receivables report helps a startup founder to determine the credit risk associated with slow-paying debtors. It helps him determine whether it is wise to continue doing business with such customers.
Further, such a report also helps the CFOs to determine the allowance for doubtful debts. It helps them adjust their credit policies and thus avoid cash flow problems in the near future.
7. Status of Statutory Compliances
There are a number of statutory compliances, both internal and external, that a startup company needs to follow. These internal compliances may relate to maintaining books of accounts, board meetings, etc. Whereas the external compliances may include filing tax returns, filing reports, etc.
Besides this, a startup may also require certain permits and licenses to conduct its business operations. Also, the regulatory bodies may bring about certain changes in the statutory compliances from time to time, of which a startup needs to keep track. Or else, there can be any one-off events that may require the company to fulfill certain legal requirements.
A CFO may undertake the statutory health check of a startup. It may give the founders a status of the statutory compliances the company needs to adhere to. This helps the company avoid risks of non-compliance. Further, it may also impact the due diligence conducted by the investor in the next rounds.
Note that non-compliance may lead to heavy penalties or other legal consequences for the company, its shareholders, and directors.
CFOs reporting to the board of a startup must present financial reports that showcase value creation in terms of past and future financial performance. Through preparing important financial reports, the CFOs must provide the startup founders with the necessary financial data that helps them in making key strategic and operating decisions.