Common Pitfalls in Financial Analysis

I have reviewed the financial statements of over a thousand SaaS companies, and here are my red flags. 1.       A “mix” of cash and accrual accounting 2.       No bank reconciliations 3.       Inability to generate a connected income statement, balance sheet, and cash flow 4.       A disconnected MRR report The first point is obvious but nuanced. Cash accounting in SaaS makes revenue data noisy and calculating metrics difficult, but it’s manageable. If managers and investors have good monthly data to compare year over year, they can get what they need from cash accounting. However, companies using a “mix” of cash and accrual accounting are problematic. Mixing and matching, particularly for revenue, creates too much uncertainty. I recently had a client who deferred revenue on some deals but not others. They received three term sheets for new capital, but all the deals fell away as diligence became bogged down in trying to understand the financials. The second item, bank reconciliations, validates the integrity of the financial statements. Cash is king, and the bank knows how much you have. All your debits and credits eventually need to be tied to the amounts in your bank accounts. That is the beauty of double-entry accounting. Investors and CEOs should ask to see bank reconciliations (even if they don’t know what they are looking at.) I had two portfolio companies fall behind on reconciling cash, and the results were disastrous. The financials were restated both times, and the investments were lost. The third item, generating a complete set of all three financial statements, is also a sign of financial competence that adds integrity to the numbers. Income statements, balance sheets, and cash flow statements all fit together to tell a complete story. Companies using ad-hoc accounting methods often can’t generate all three reports, and the accuracy of the financials suffers. The cash flow statement is the most under-used financial report in SaaS. For companies with pay-in-advance contracts, seasonality, or debt, cash-flow statements are an invaluable tool for understanding the business. The last item, a separate MRR report not integrated into the accounting system, is also a financial hygiene issue. Recurring revenue is on the income statement, and that number is tied to cash and validated. Managers and investors should use MRR on the income statement to make decisions, not the numbers on a disconnected spreadsheet. Tools and systems help support accurate and timely financial statements but also require experienced people. Some of the worst financial reporting I have ever seen came from Net Suite systems because the finance people did not know what they were doing. As you scale a SaaS business, you don’t need to add a lot of bodies to finance; it is a function that scales well if you have a few experienced people and the right tools to support them. Read more here: https://lnkd.in/g2F3qv9y

81% of startups don’t fail from competition. They fail because they ignore financial warning signs until it’s too late. After leading finance for multiple turnarounds, I’ve seen it too many times: ↳ Cash flow dries up ↳ Debt piles on ↳ Profits vanish By the time founders notice, it’s already a crisis. Here are 15 financial red flags that can quietly sink your startup: 🚩Income Statement: Profitability Risks 1/ Declining Revenues – Sales are shrinking, but costs aren’t 2/ Rising Operating Expenses – Overhead is growing faster than revenue 3/ Net Losses – Your burn rate is outpacing growth 4/ Unstable Revenue Sources – Relying on one-time gains to appear profitable 5/ Erratic Profit Margins – Revenue swings make forecasting impossible 🚩Balance Sheet: Financial Health Risks 6/ High Debt Levels – Interest payments are eating into profits 7/ Negative Equity –  You owe more than you own 8/ Accounts Receivable Piling Up – Customers delaying payments = cash flow risk 9/ Declining Asset Quality – Core business assets are losing value 10/ Short-Term Debt Dependence – Constantly borrowing to cover daily operations 🚩 Cash Flow Statement: Liquidity Risk 11/ Negative Operating Cash Flow – Your business isn’t self-sustaining. 12/ High Capital Expenditures – Overspending on assets with slow ROI 13/ Frequent Fundraising – Relying on investors instead of profitability 14/ Net Income vs. Cash Flow Mismatch – Profits on paper, but no real cash 15/ Negative Free Cash Flow – No extra cash to reinvest in growth Numbers tell stories. Make sure you’re reading yours before it’s too late. Which red flag concerns you the most? ♻Share this to help founders avoid costly mistakes And follow Mariya Valeva for more

8 red flags your accountant left your financials in ruins. Each one could be killing your business right now Revenue Doesn't Match Sales Activity: If reported revenue seems inconsistent with sales volume or invoices, it could signal unrecorded revenue, premature recognition, or errors in applying revenue recognition standards. Example: A large client payment is missing from revenue, or deferred revenue is mistakenly recognized upfront. Unclear or Inconsistent Cost of Goods Sold (COGS): If COGS fluctuates disproportionately compared to sales or inventory levels, it may indicate errors in inventory valuation, misclassified expenses, or missing purchase records. Example: A business shows high sales but unusually low COGS, suggesting some costs were not assigned to inventory properly. Unbalanced Financial Statements: If the balance sheet doesn't balance (Assets ≠ Liabilities + Equity) or the trial balance is off, it signals data entry errors, missing journal entries, or posting mistakes. Example: A credit entry for a loan is recorded without a corresponding debit entry to cash. Large or Unexplained Adjustments: Significant adjustments to accounts at the end of a reporting period may indicate prior errors or improper initial entries. Example: A large journal entry is made to "fix" discrepancies in accounts receivable without proper documentation. Discrepancies Between Cash Flow and Profit: If the cash flow statement shows cash inflows/outflows that don’t align with reported net income, it could mean errors in categorizing transactions (e.g., operating vs. investing activities) or missing entries. Example: The business shows a profit on the income statement but negative cash flow due to unrecorded expenses or misclassified payments. Misclassified Accounts: Expenses recorded as assets (or vice versa), liabilities classified as equity, or personal expenses mixed with business expenses can distort financials. Example: A computer purchase is incorrectly recorded as an expense instead of a capital asset. Unexplained Variances: Large differences between budgeted and actual figures without clear justification could signal accounting mistakes. Example: Marketing expenses are unusually high compared to the budget due to duplicate entries for vendor payments. Aging Accounts Receivable or Payable Issues: If receivables are significantly overdue or payables don't match supplier statements, it may indicate unrecorded payments, incorrect allocations, or missing invoices. Example: An invoice marked as unpaid even though the client has already paid. If I looked at your financials today, which of these issues would concern you most?

After reviewing hundreds of financial statements from new clients, here are 7 common red flags we see: 1. Cash contributions recorded as income 2. Owner distributions recorded as expenses 3. Loan payments misclassified as expenses 4. Fixed assets with no depreciation recorded 5. Unreconciled bank and credit card accounts 6. Negative numbers on the financial statement 7. Negative numbers on the profit & loss statement These may seem like minor mistakes, but they can lead to big problems, including: 🚨 Overpaying in taxes. 🚨 Ongoing cash flow issues. 🚨 Inaccurate tax filing and IRS audit. 🚨 Poor financial decisions based on inaccurate data So, how do you avoid these mistakes? 1. Reconcile monthly 2. Review your financials regularly 3. Separate personal and business transactions 4. Work with a professional If you need help setting this up for your medical practice or agency, schedule a call with us.