According to statistics conducted by Harvard Business School, 90% of the startup do fail within the first five years. Among this 90% startup, 75% got bankrupted within the first two to three years. Harvard business school found that the most common reasons for being failed are inefficient financial knowledge, lack of financial analysis capability and inappropriate leadership.
Most of the founders of the startup cannot afford to have an individual CFO [Chief Financial Officer] or a professional financial statement analyzer. That is why they cannot prepare cash flow statements, balance sheets, and other financial statements. These statements are very important to monitor the cash flow inside the organization and the financial condition of the business.
How to do the Financial Analysis of a Startup
For example, Mr. X is the founder of a fashion store. He just started a fashion store and planning to scale it up on an international level.
Now Mr. X had invested $1000 to buy a showroom place. After that, he had invested $5000 to buy the products. But after some days he was frustrated because none of his products been sold. Also, he needed money to pay the expenses of the business like utilities, tax, etc. That is why he had sold all products on the loss. Let, he had sold all of the products on $3000 and paid his expenses which were $2000.
Cash Flow Statement
Cash from Buyers = $3000
Cash invested = $5000
Gross Profit = -$2000
Operational Expenses = $2000
Net Profit = -$4000