Startup financial statements: P&L, balance sheet, cash flow

The short version

The SEC describes the balance sheet as what a company owns and owes at a fixed point in time, and the income statement as what it made and spent over a period.
Venture investors typically expect all three statements on an accrual basis for board reporting and fundraising, according to startup accounting firm Kruze Consulting.
The statements connect: net income from the P&L flows into equity on the balance sheet and starts the cash flow statement, which must end at the balance sheet's cash.
Burn is how much cash you lose in a month, and runway is cash divided by burn: $658,940 of cash and $41,060 of burn is about 16 months.
If the balance sheet does not balance, or cash flow does not end at the balance sheet's cash, the books have an error.

Each statement answers one question

The SEC's guide for beginners gives the same split: balance sheets show what a company owns and owes at a fixed point in time, income statements show how much it made and spent over a period, and cash flow statements show the exchange of money between the company and the outside world over a period.

The three statements a startup produces every month
Statement	Question it answers	Period	What investors look at
Profit and loss (income statement)	Did we make or lose money this month, and why?	A period, such as September	Revenue growth, gross margin, payroll, net loss
Balance sheet	What do we own and owe right now?	One day, such as September 30	Cash, receivables, payables, debt, equity
Cash flow statement	Where did our cash actually go?	A period	Cash from operations, burn, runway

A worked example with numbers that tie together

Take a seed-stage software company in September. It started the month with $700,000 in cash, $8,000 of customer invoices unpaid and $5,000 of bills unpaid.

Payroll was $58,000 of September's $81,060 in costs

Payroll$58,000
Everything elseLegal, merchant fees, other$6,560
Marketing$6,500
HostingCost of revenue$5,800
Software$4,200

Against $42,000 of revenue, $81,060 of costs made a $39,060 loss.

Revenue of $42,000 less $7,060 of cost of revenue (hosting $5,800 and merchant fees $1,260) leaves a gross profit of $34,940, 83% of revenue. Operating expenses are $74,000: payroll $58,000, marketing $6,500, software $4,200, legal and professional $3,300 and other $2,000. The net loss is $34,940 − $74,000 = $(39,060).

The cash differs from the loss because of timing. Customers owe $14,000 at the end of the month, up $6,000, so $6,000 of revenue has not become cash. The company owes $9,000 in bills, up $4,000, so $4,000 of expense has not been paid.

The balance sheet and cash flow statement share a month

The cash flow ends at the balance sheet's $658,940

1$700,000Cash on September 1
2−$39,060The month's net loss
3−$2,000Receivables up $6,000, payables up $4,000
4$658,940 on Sep 30Accountable's balance sheet cash, to the cent

Investing and financing are $0, so $41,060 left from operations.

The balance sheet ties. Assets are cash of $658,940 plus receivables of $14,000, or $672,940. Liabilities are $9,000 of accounts payable, and equity is $1,200,000 of paid-in capital less a $536,060 deficit, or $663,940; the deficit grew from $497,000 by the $39,060 loss. $9,000 + $663,940 = $672,940.

The cash flow statement starts from the $39,060 loss, subtracts the $6,000 rise in receivables and adds the $4,000 rise in payables, for $(41,060) from operations. Investing and financing are $0, so cash falls from $700,000 to $658,940, the balance sheet's cash.

Net burn for the month is $41,060. Runway is $658,940 ÷ $41,060, about 16 months at this rate. Because these statements are on an accrual basis, burn is easiest to read from the cash flow statement, which shows actual cash.

What investors ask for, and in what form

All three statements, monthly, on an accrual basis. Kruze Consulting says venture investors typically expect this for board reporting and fundraising.
Burn and runway, which the balance sheet's cash and the cash flow statement produce.
Gross margin and payroll as a share of spend, from the P&L.
The support behind the numbers: the general ledger, bank statements and the documents behind large entries.

If you keep cash books today, plan the move to accrual before you raise. See bookkeeping for startups for the choice. The burn rate and runway guides cover the two numbers investors compute first.

Three checks catch an error in any set of statements

Step 1: The balance sheet balances: total assets equal total liabilities plus equity, every month.
Step 2: Net income on the P&L equals the change in equity. In the example, a loss of $39,060 grows the deficit from $497,000 to $536,060.
Step 3: The cash flow statement starts at net income and ends at the balance sheet's cash.

Accountable runs these checks on its own test books and lets you click any number on a statement to see the transactions behind it. Reports has Profit and loss, Balance sheet, Cash flow, Trial balance and General ledger, each exportable as CSV, Excel or PDF, and a Financial package that bundles them for your CPA.

Questions founders ask

What financial statements does a startup need?

Three: a profit and loss, a balance sheet and a cash flow statement, produced every month. Investors and your CPA ask for all three.

What is the difference between a P&L and a balance sheet?

A P&L covers a period and shows revenue, expenses and net income. A balance sheet is a snapshot on one day of assets, liabilities and equity.

Do startups use cash or accrual for financial statements?

Venture investors typically expect accrual-basis statements. Early startups often keep cash books and switch before or at their first raise.

What is the difference between burn and net loss?

Net loss is the P&L result and includes non-cash timing. Burn is the cash that left the company in the month, so it comes from the cash flow statement.

How often should a startup produce financial statements?

Monthly, once the month is closed and every account matches its bank statement.

All three statements, ready after every month

Accountable produces your profit and loss, balance sheet and cash flow from reconciled books, lets you click any number down to its transactions, and exports a financial package for your CPA and investors.

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