Securing investment is a major milestone for any startup, but before investors commit, they’ll want to dive deep into your financials. This process, known as due diligence, is designed to verify that your business is financially sound and worth the investment. While it can feel daunting, being well-prepared for financial due diligence will not only instill confidence in your investors but also speed up the funding process.

In this blog, we’ll walk you through how to get your financials in order, ensuring you’re ready for even the most rigorous investor scrutiny.

1. Clean Up Your Financial Statements

Your financial statements are the foundation of investor due diligence. These documents offer a snapshot of your company’s financial health and provide key insights into your revenue, expenses, and profitability.

Key Financial Statements to Prepare:

• Profit and Loss Statement (P&L): This shows your revenues, costs, and profits over a given period. Investors will scrutinise this to understand your business’s performance and profitability trends.
• Balance Sheet: The balance sheet lists your assets, liabilities, and equity at a specific point in time. It’s a key document for demonstrating your company’s overall financial position.
• Cash Flow Statement: Cash flow is king, especially for startups. Investors will want to see how money moves in and out of your business and how well you manage liquidity.

Tip: Ensure all financial statements are up-to-date, accurate, and presented clearly. Investors will expect to see statements covering at least the last two years, if applicable.

2. Verify Revenue and Customer Metrics

Revenue is one of the most important metrics for investors, but it’s not just about the top-line number. Investors want to know that your revenue is sustainable and growing, so be ready to provide detailed information on how your business generates income.

What Investors Will Look For:

• Revenue Breakdown: Provide a breakdown of your revenue by product, service, or customer segment. This helps investors understand where your income is coming from and which areas of the business are driving growth.
• Customer Acquisition Cost (CAC): Investors will want to see how much it costs to acquire each customer. A high CAC without a clear path to lowering it can raise red flags.
• Lifetime Value (LTV): Investors will also look at the lifetime value of your customers—how much revenue each customer is likely to generate over their lifetime with your business. A strong LTV-to-CAC ratio indicates a sustainable business model.

Tip: Prepare reports that clearly show trends in customer growth, retention, and churn rates to give investors confidence in your revenue potential.

3. Ensure Your Books Are Audit-Ready

The last thing you want during due diligence is to have investors spot discrepancies in your financials. Before the process begins, ensure that your accounting records are thorough, accurate, and consistent. This involves more than just having clean financial statements—it means having all the supporting documentation ready, too.

Steps to Audit-Ready Financials:

• Reconcile Accounts: Make sure your bank statements, credit card accounts, and other financial records are fully reconciled. Any inconsistencies could delay the due diligence process.
• Document All Transactions: Investors may ask for supporting documentation for major expenses, revenue streams, or debts. Keep records of contracts, invoices, receipts, and loan agreements readily available.
• Review Tax Compliance: Ensure that all taxes are up to date, including VAT, corporation tax, and payroll taxes. Investors will want to know that your business is fully compliant with tax regulations.

Tip: Work with an experienced accountant or bookkeeper to review your financials before due diligence begins. A second set of eyes can catch errors or inconsistencies you may have missed.

4. Prepare for Cash Flow and Runway Scrutiny

Investors care deeply about your cash flow and runway—the amount of time your business can operate before it runs out of money. Demonstrating that you manage cash effectively is key to building investor confidence.

How to Prepare:

• Show Your Cash Flow Management: Investors will want to see how you manage your working capital and whether your cash flow is positive or negative. Be prepared to explain how you plan to improve cash flow if it’s currently negative.
• Highlight Your Runway: Investors will want to know how long your current cash reserves will last. If your runway is short, have a clear plan in place for securing additional funding or reducing burn rate.
• Scenario Planning: Prepare cash flow forecasts that show different scenarios (best, worst, and most likely). This demonstrates that you’ve thought ahead and have contingency plans in place for different outcomes.

Tip: Investors are looking for reassurance that you’re managing your cash wisely. Be ready to explain your approach to cash flow and how you’ll ensure the business stays financially healthy.

5. Organise Your Cap Table and Equity Agreements

Your cap table (capitalisation table) outlines the ownership structure of your company, including how much equity each investor, founder, and employee holds. Investors will want to review this carefully to understand how their investment fits into the overall equity picture.

What to Include in Your Cap Table:

• Equity Allocations: Clearly list how much equity each founder, investor, and employee holds, including any options or convertible notes.
• Employee Stock Options: If you offer stock options to employees, make sure these are clearly outlined, along with vesting schedules and strike prices.
• Convertible Debt or Warrants: If you have any convertible debt or warrants, include these in your cap table so investors can see how they might impact future equity dilution.

Tip: A clean, well-organised cap table helps investors understand the equity structure of your business and makes the due diligence process much smoother.

6. Be Ready to Explain Key Financial Metrics

Beyond the raw numbers, investors will want to know that you understand your business’s key financial metrics and how they influence its success. Be prepared to explain your financial performance and key ratios, and what they mean for your growth strategy.

Key Metrics to Be Ready to Discuss:

• Gross and Net Margins: Investors will want to see healthy margins that show your business is generating enough profit from sales to cover its costs.
• EBITDA: Your Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) gives investors a clearer picture of your operational profitability without accounting for non-operational costs.
• Burn Rate: Be prepared to discuss your burn rate—the amount of money your business spends each month—and how you’re managing it to extend your runway.

Tip: Investors expect founders to be intimately familiar with their financial metrics. Be ready to explain why your numbers look the way they do and what actions you’re taking to improve them.

Wrapping It Up

Investor due diligence is a critical part of the fundraising process, and being well-prepared will not only speed up the process but also make your startup more attractive to potential investors. By cleaning up your financials, preparing for scrutiny of cash flow and revenue metrics, and organising your cap table, you’ll be ready to present a compelling case to investors.