Why Some Startup Companies Fail: The Importance of Financial Reports!

March 2023

Indonesia has an enormous number of startup companies, some of which have grown rapidly in the past four years. However, many startups fail in their first year due to their lack of business sustainability. The problem for most startups is measurement. To measure their growth and efficiency, startup companies need good accounting methods.

Recently, many startup companies in Indonesia have laid off their employees including: Tanihub, Zenius, LinkAja, Pahamify, JD.ID, and MPL. The layoffs do are not only occurring in Indonesia. Several international startups such as Cameo, On Deck and Robinhood, have also carried out massive layoffs this (2022) year.

Negative profit as a startup business model

This is known as the "bubble burst" phenomenon, a business condition that quickly expands like a bubble, but also quickly pops like a bubble.

In order to reach customers, most startups have to carry out money-burning strategies such as promotions through television, billboards, digital, cashback programs, and big discounts. However, in the midst of uncertainty, the potential for a global recession, and the Fed's policy of raising interest rates, many people are choosing to save their money as cash rather than invest. 

Traction is an achievement that was initially intensified by startup companies. This is a maneuver to increase user loyalty to the startup's services or products. Unfortunately, to achieve traction in a short period of time, some startups have used various methods, one of which is by implementing a money-burning strategy.

The startup business style that prioritizes growth with negative cash flow and/or profits will not last, as believed by financial experts, because a healthy business must have positive cash flow and profits.

Here are the characteristics of a good issuer's financial report

A company's financial information for a specific period is recorded in a financial report, which serves to summarize the success of the organization.

A company's financial information for a specific period is recorded in a financial report, which serves to summarize the success of the organization.
After each accounting period, financial statements are produced and are one of the’s organization most significant reports. Each business has its own accounting cycle. For some, it’s at the end of the year, every six months, or even every three months, depending on the kind of business.

The benchmarks that must be taken into account when assessing a company's financial status to establish whether it is in good health or not are as follows:

1. Spending does not go beyond income.
   The company's financial statements must contain profit and loss figures obtained from the sale and purchase of its products or services.

   The profit and loss report is later needed to calculate what level of efficiency has been achieved and to apply a strategy on how the company's profit can be increased in the next period. This is an efficient balance sheet structure.

2. Business revenue performance consistently grows.
   The main benchmark for a company that can be called "growing well" is when it can generate a growth rate of revenue and sales performance that grows every year.

   A growth rate with an average of above 10% per year is usually considered pretty good performance growth for market players in Indonesia.

   Some parties also use the comparison of business growth rates to the national economic growth rate, as a reference in assessing a company's growth. That is, if a company can record a compound annual growth rate (CAGR) or an average annual growth of above 5% (the average national economic growth), then the company can claim steady performance growth.

3. Have a Reserve Fund 
   There are circumstances where a company may be quite confident about the future of its business. Usually, this is marked by an increase in the number of customers, increased profits, and the need to attract new investors.

   However, no one knows for sure what may happen to the future state of your business, right? For example, one of your big clients suddenly cancels your contract, and you lose most of your revenue. Your business's circumstances will undoubtedly alter as a result, requiring you to make adjustments like reducing budgets in some areas. In light of this, only companies with financial reserves can qualify as a healthy firm.

   Therefore, having a reserve fund will help to keep your business operating if things go wrong.

4. Debt ratio levels tend to be low. 
   The debt-to-assets ratio and the debt-to-equity ratio are the two sorts of debt ratios that you should be aware of.

   How much of the company's total assets are financed with total capital is determined by the debt-to-assets ratio. The debt-to-equity ratio, on the other hand, is the ratio that analysts and investors use to determine how big a company's debt is relative to its equity or the equity of its shareholders.
   
   A healthy company ideally has a low debt-to-equity ratio. However, you are required to keep your debt-to-asset ratio at a maximum of 1:2. If your company's financial situation exhibits any of the four aforementioned indicators, you shouldn't be concerned because it indicates that your company is in good financial standing.
    

Preparing financial reports regularly is one action you can take to keep your company's finances in good shape. In this manner, you can always be aware of the state of your company's finances and make sure they are on track.

Moores Rowland's Financial Audit goes a step further; we advise on the consistency and reliability of company financial information. As well as looking at the financial statements of your company, we will help you improve the way that you produce and present economic and financial information to help you manage risks effectively.

Our financial audit services are all about producing trustworthy financial information. Please get in touch with us via the following email addresses for additional details on our services, including financial audits: contact-Jakarta@moores-rowland.com or contact-Bali@moores-rowland.com.

**By: Stefani W. Anggraeni — Marketing Communications & Social Media Specialist