Monthly Financial Statements for Investors and the Board

Which monthly financial statements do investors and the board expect?

The core of a monthly board package is three statements, all drawn from the same books for the same month: a balance sheet, an income statement and a cash flow statement. Each answers a different question, and each catches errors the others miss. The IRS describes the same core: good records produce income statements and balance sheets, and the same records support the tax return.

Use the same basis every month and say which one. On the accrual basis, income counts when earned and costs when incurred; on the cash basis, when money is received or paid (Publication 538). Prepaid plans, unpaid bills and payroll timing show correctly only on accrual. Whether the books must be accrual before investors see them is covered in cleaning up your books before fundraising.

A case is not simple when customers prepay annual plans, when SAFE or note money has arrived, when stock options have been granted, or when the books are months behind. Each changes what the statements show and how they tie to the Form 1120.

Gather the chart of accounts, payroll registers, bank and card statements, customer contracts, unpaid vendor bills and the board-approved budget.

What goes in a board package that comes from the books?

The books supply the actuals; forecasts and models belong to management and start from those actuals. A package built from the books typically holds:

1. The three statements, for the month and year to date.
2. Budget against actual, with a short reason for each large difference.
3. Net burn and cash runway, figured from the books, not the bank balance.
4. A deferred revenue schedule if customers prepay. How to build one is in deferred revenue for SaaS subscriptions.
5. Headcount and payroll cost, tied to the payroll register.
6. Cash by account, tied to the bank reconciliations.

Write the package expecting it to be read later. For a Delaware corporation, materials provided to the board in connection with its actions count as "books and records" that stockholders can demand to inspect under section 220, and every package becomes part of the history checked in due diligence.

What does a month-end close include, and what decides how fast it can finish?

A month-end close is the set of steps that makes the month's books final. How fast it finishes depends on how quickly the outside records arrive and whether they reconcile, not on a target day. The steps, in order:

1. Collect bank, card, payroll and payment-processor statements for the month.
2. Reconcile every bank and card account to its statement. The IRS advises reconciling the checking account each month.
3. Record payroll from the payroll register: gross pay, employer taxes and benefits.
4. Enter vendor bills received, and accrue costs incurred but not yet billed.
5. Spread prepaid costs, such as an annual software plan, over the months they cover.
6. Move earned revenue out of deferred revenue for prepaid customer plans.
7. Record depreciation and stock compensation.
8. Review the balance sheet account by account, then lock the month.

What slows a close: statements that arrive late, bank feeds left unreconciled for weeks, card charges with no receipts, payroll recorded as one lump transfer, and bills that sit in an inbox. What speeds it: connected bank and card feeds reconciled weekly, a payroll register delivered on payroll day, and a written list of recurring accruals.

If the books are already months behind, catch up first; see cleaning up your books before fundraising.

How do we show burn and runway from the books rather than the bank balance?

Net burn is what running the business consumes in a month: its costs minus its revenue as the books record them, leaving out non-cash costs such as stock compensation and depreciation, and adding cash spent on equipment. Runway is cash on hand divided by average net burn. Both read better from the books than from the change in the bank balance, because the bank balance mixes timing and financing into one number.

Three things distort a bank-balance burn:

• Prepaid bills. An annual vendor bill paid in one month makes that month look expensive and the next eleven look cheap.
• Unpaid bills. Costs incurred but not yet paid leave the bank later; the cash is already committed.
• Financing. SAFE, note and stock money raises the balance but is investment, not revenue and not a reduction in burn. Show it as financing on the cash flow statement. How SAFEs show on the balance sheet is covered in cleaning up your books before fundraising.

Figure runway on that accrual burn, and say in the package which months the average uses.

What goes in cost of revenue, and why does gross margin depend on it?

Cost of revenue holds the costs of delivering what customers pay for; gross margin is revenue minus cost of revenue, divided by revenue. Because the margin is only as reliable as that split, write down which accounts belong in cost of revenue and keep the same policy every month.

For a software company, a written policy often places hosting, third-party software used to run the product for customers, payment processing fees and the customer support team in cost of revenue, and research, sales and general costs below gross margin. Moving a cost between the two lines changes the margin without changing the loss, so a policy change should be disclosed to the board.

The tax return has its own line: cost of goods sold on Form 1120, line 2, from Form 1125-A when it applies (Form 1120 instructions). That line follows tax rules, so the return's figure need not equal the books' cost of revenue.

How do we compare actual results with the budget each month?

Compare each income statement line with the board-approved budget for the month and the year to date, and explain the large differences: this is the variance analysis. Use the same chart of accounts for the budget and the books, or the comparison fails line by line.

• Lock the board-approved version; do not overwrite it with a later re-forecast.
• Show the amount and direction of each difference, month and year to date.
• Explain differences above a size the board agrees on, and say whether each is timing (the cost moves to a later month) or permanent (it will not come back).
• Tie the actuals column to the closed income statement, not to a bank export.

Do the monthly books have to match the year-end Form 1120?

The twelve closed months add up to the year the Form 1120 starts from. By law, taxable income is figured under the method on which the corporation regularly keeps its books (26 U.S.C. 446(a)). Schedule L is the balance sheet "per books" and should agree with the books and records; Schedule M-1 reconciles book income to taxable income (Form 1120 instructions).

The books and the return can differ, and the reconciliation shows each difference:

• Stock compensation. The books record option and stock award expense over vesting. The company's tax deduction generally comes when the person is taxed on the stock (26 U.S.C. 83(h)), so the book expense is added back on Schedule M-1. See granting stock options after a valuation.
• Nondeductible costs. Some meals, entertainment and club dues are expenses in the books but not deductions on the return (Form 1120 instructions, Schedule M-1, line 5c).
• Prepaid customer plans. Tax timing of advance payments can differ from book revenue; see deferred revenue for SaaS subscriptions.

Book any year-end adjustment back into the books so next year opens on the same figures. Books kept on accrual while the return uses cash is covered in switching from cash to accrual accounting.

Do stockholders have a legal right to see the books?

Monthly reporting rights come from the investment documents; the company's lawyer can say what they require. The statute sets a narrower floor: a Delaware stockholder may inspect books and records only by written demand under oath, in good faith and for a proper purpose, describing the purpose and the records sought (8 Del. C. section 220).

Under section 220, "books and records" include annual financial statements for the 3 years before the demand, board minutes, and materials provided to the board in connection with its actions. Monthly statements and the ledger are not on the list unless they were board materials of that kind, and a court can order other records only when the stockholder shows a compelling need (section 220(e) and (g)). The corporation may impose reasonable confidentiality restrictions. If it refuses or does not reply within 5 business days, the stockholder may ask the Court of Chancery to order the inspection. A director has a separate right to examine the books for a purpose reasonably related to the director's position.

A corporation formed in another state follows that state's inspection statute, which may differ.

Example

These examples are illustrative and use US dollars.

Seed-stage SaaS with $150,000 of monthly spending

A company spends $150,000 a month on an accrual basis and holds $1,800,000 in cash. In January it paid a $360,000 annual vendor bill that renews each January, so in March the bank shows only $120,000 going out. The books show $150,000 of March expense, because $30,000 of the prepaid bill is used up each month. Runway on the books is 12 months ($1,800,000 ÷ $150,000). Runway on the March bank outflow would read 15 months, which overstates it.

Cash rose far more than revenue

A customer prepays $240,000 in January for a one-year plan. Cash rises $240,000 in January, but the books show $20,000 of revenue each month and $220,000 of deferred revenue on the January balance sheet. In February the bank shows nothing new from that customer, while the books again show $20,000 of revenue and deferred revenue falls to $200,000.

Year-end tie-out

The twelve closed months total a $2,000,000 book loss, including $200,000 of stock compensation for options no one exercised during the year. Year-end assets are under $10,000,000, so the return uses Schedule M-1, and there are no other book-tax differences. On the Form 1120, the $200,000 is added back on Schedule M-1, and the loss is $1,800,000. Schedule L matches the December balance sheet.

Different for you?

• The books are behind or kept in a spreadsheet: start with cleaning up your books before fundraising and get bookkeeping help.
• Customers prepay annual or multi-year plans: see deferred revenue for SaaS subscriptions.
• The return is on the cash method and investors want accrual: see switching from cash to accrual accounting and get corporate tax help.
• A round is coming and investors will open a data room: see financial records investors ask for in due diligence.
• Founders are going on payroll after the raise: see founder salary in a venture-backed corporation.
• Options have been granted: see granting stock options after a valuation.
• Deciding who keeps the books: see doing your own books or hiring a bookkeeper, or get monthly bookkeeping help.