Money Talk - Communication with and about liquidity

Why are investor reports often carried out incorrectly or irregularly?

It is widely known that regular and open communication forms the basis of a good relationship, and this applies to the interaction between startups and their investors as well. However, in reality, this communication is often not handled optimally. Frequently, too little emphasis is placed on communication with investors, as startups believe that all important matters have already been discussed with the investors or that they only wish to be informed about significant and positive milestones.

A lack of knowledge also impairs communication between the two parties. Since there is no general reporting standard, the startup may not know what expectations the investors have for reporting or whether they even expect regular reporting at all. And often, in the hustle and bustle of daily business, there is simply no time for proper and detailed reporting.

Which Stakeholders Need to Be Involved in Communication Regarding Liquidity?

Generally, stakeholders are institutions and individuals who are directly or indirectly connected to the company and have a claim or expectation from this company.

When we consider communication with and about liquidity, there are stakeholders depending on the company and investment model that should not be overlooked in reporting. What the following stakeholders have in common is that they act as financiers for the startup. This naturally results in an interest in the current status of the startup, and in addition, the investor agreements often set out conditions for reporting that the startup is obliged to provide regular updates on.

Venture Capitalist

Venture capitalists (VCs) provide founders with capital for their product or service. In addition to capital, VCs often offer know-how and acquire equity in the company. Naturally, with this capital investment comes a responsibility towards 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 Angel

Business angels are typically crucial for startups in a very early phase. They support with know-how and their network, act as advisers, and invest in the startup. Although they generally invest less than VCs, they take on a higher risk due to the early stage of their investment.

Banks and credit institutions

Naturally, traditional banks and credit institutions should not be omitted from this list, as they are also frequent sources of capital for startups. However, communication about liquidity is generally only significant when a loan is taken out; regular reporting on liquidity status is not common practice here.

How Should Liquidity Communication Be Structured for These Stakeholders?

The basic rule for communication is that it should be agreed upon with the investor in suitable formats (PDF, Excel, etc.), be error-free, and clearly structured, containing all liquidity-related key figures relevant to the stakeholder. The reporting frequency is individually determined between the startup and the investor, but a three-month cycle is often sufficient.

Basic Liquidity Key Figures That Should Be Communicated to Investors:

• P&L/BWA for the past period, including an overview of revenue and expenses (wages, rent, marketing expenses, investments, etc.)
• balance sheet for companies subject to accounting obligations to depict the financial situation
• Cash flow statement to track cash flows
• Burn Rate: Measure of negative cash flow, indicating the amount of cash spent per month
• Cash Runway: The time a company has left until it runs out of cash if the negative cash flow continues

Key figures whose relevance for investors depends on the startup's business model:

In addition to Liquidity ratios, which apply to every company, there are important key figures that depend on the respective business model. For e-commerce companies For example, is it important to communicate the value of a customer's average shopping cart; for companies that are based on subscription models, the customer lifetime value is an important value.

A selection of possible liquidity KPIs relevant to your business model includes:

• Churn Rate: The rate at which customers stop using your product or service within a specific period.
• Customer Acquisition Cost: The necessary marketing and sales expenses to acquire an additional customer.
• Customer lifetime value: The average value a customer represents to a company over the entire duration of their relationship.
• Average Order Value: The average value of a customer's shopping basket.
• And more.

Effectively Communicate Liquidity Thanks to Tidely

With Tidely, you can successfully manage communication about liquidity, as the individually customisable dashboards not only provide an ideal overview of your financial status but also allow the insights gained to be exported as professional reports in Excel and prepared for external communication. Convince yourself and lay the foundation for optimal communication with your investors.