Money Talk - Communicating with and about liquidity
As a startup founder, company liquidity is a critical topic that you deal with on a daily basis. What is the current liquidity situation? How long will the money last? What levers can be pulled to save money? And what measures can be taken to bring more capital into the company? These questions and their answers are not only of interest to internal stakeholders, but also to external investors such as business angels, VCs, etc., who naturally want to be informed at all times about the current liquidity status of the startup they have invested in.
Why is investor reporting often carried out incorrectly or irregularly?
It is common knowledge that regular and open communication is the foundation of a good relationship – this also applies to the relationship between startups and their investors. In reality, however, this communication is often not optimally structured. Too little importance is frequently placed on communicating with investors, as startups believe that everything important has already been discussed or that investors only want to be informed about major, positive milestones.
Also, a lack of knowledge hinders communication between the two parties. Since there is no universal reporting standard, the startup may not know what expectations investors have regarding reporting or whether they even expect regular updates. And often, in the hectic day-to-day business, there is simply no time for proper and detailed reporting.
Which stakeholders must be included in communication regarding liquidity?
In general, stakeholders are institutions and individuals who are directly or indirectly connected to the company and have a claim or an expectation of that company.
Looking at communication with and about liquidity, there are stakeholders who must not be forgotten during reporting, depending on the company and investment model. What the following stakeholders have in common is that they act as financiers for the startup. This results in a vested interest in the status quo of the startup, and investor agreements often stipulate framework conditions for reporting that oblige the startup to provide regular updates.
Venture Capitalists
Venture capitalists (VCs) provide founders with capital for their product or service. In addition to capital, VCs often provide expertise and acquire company shares. This provision of capital naturally comes with a responsibility toward the investors, who want to be regularly informed about the current state of development. Regular reporting helps VCs assess the risk of the startup failing and intervene if necessary.
Business Angels
Business angels usually become important for startups at a very early stage. They provide support with expertise and their network, act as advisors, and invest in the startup. They generally invest less than VCs but take on a higher risk due to the early stage of the investment.
Banks and credit institutions
Naturally, traditional banks and credit institutions should not be missing from this list, as they are also frequent providers of capital for startups. However, communication regarding liquidity is usually only essential here when taking out a loan; regular reporting on the liquidity status is not standard practice in this case.
How should liquidity communication be structured for these stakeholders?
The basic rule for communication is that it should be prepared in consultation with the investor in appropriate formats (PDF, Excel, etc.), be error-free and clearly structured, and contain all liquidity metrics relevant to the stakeholder. The reporting rhythm is determined individually between the startup and the investor, though a 3-month cycle is often sufficient.
Fundamental liquidity metrics that should be communicated to investors:
- P&L/BWA for the past period, including an overview of revenue and expenses (wages, rent, marketing costs, investments, etc.)
- Balance sheet for companies required to maintain accounting records to show the asset situation
- Cash flow statement for tracking cash flows
- Burn rate: A measure of negative cash flow, expressed as cash spent per month.
- Cash runway: The time a company has left with negative cash flow before it runs out of money
Metrics whose relevance for investors depends on the startup's business model:
Beyond the liquidity ratios that apply to every company, there are key metrics that depend on your specific business model. For e-commerce companies, for example, it is important to track the average order value, while for subscription-based businesses, customer lifetime value is a critical metric.
A selection of potential liquidity KPIs relevant to your business model:
- Churn Rate: The rate at which customers leave over a given period
- Customer Acquisition Cost: Marketing and sales expenses required to acquire a new customer
- Customer Lifetime Value: The average value a customer brings to a company throughout the entire relationship
- Average Order Value: The average value of a customer's shopping cart
- and much more.
Communicate liquidity effectively with Tidely
Tidely makes communicating with and about liquidity easy. Our customizable dashboards provide the perfect overview of your financial status, and the insights gained can be exported as professional Excel reports for external use. See for yourself and lay the foundation for optimal communication with your investors.
