Due diligence is the part of fundraising that founders dread most. After weeks of pitch meetings and partner meetings, you get the term sheet. Then the real scrutiny begins. Investors (or their accountants) dive into your financials, your operations, and your compliance history with a level of detail that catches many founders off guard.
The difference between a smooth diligence process and a painful one is almost entirely about preparation. Founders who start preparing 3-6 months before they intend to raise close faster, negotiate from a position of strength, and avoid the embarrassing surprises that kill deals.
Here's the complete financial checklist.
Financial Statements
This is the foundation. Every investor will request these. The quality of what you provide sets the tone for the entire process.
- Income statement (P&L): 2-3 years of historical data, monthly detail, GAAP accrual basis. Budget vs. actual comparisons for the most recent 12 months.
- Balance sheet: Monthly snapshots showing assets, liabilities, and equity. Investors will focus on cash, AR, inventory, AP, and any debt.
- Cash flow statement: Showing operating, investing, and financing activities. This reconciles your net income to actual cash movement.
- Consistency: All three statements should tie together. Net income on the P&L should match the change in retained earnings on the balance sheet. Cash flow from operations should reconcile to the P&L and balance sheet changes.
Red flag to avoid: Cash basis financials, annual-only data, or statements that don't reconcile across the three reports.
Revenue Detail
Investors don't just want to see total revenue. They want to understand where it comes from and how sustainable it is.
- Revenue by channel: DTC, wholesale, Amazon, retail marketplace. Broken out monthly with growth rates.
- Revenue by product or SKU: Which products drive the business? Is revenue concentrated in one hero SKU or diversified?
- Customer concentration: What percentage of revenue comes from your top 5 and top 10 customers? If one wholesale account represents 40% of revenue, that's a risk factor investors will flag.
- Cohort analysis: For DTC brands, how do customer cohorts behave over time? What's the repurchase rate at 3, 6, and 12 months?
- Net revenue reconciliation: Gross revenue to net revenue, showing returns, chargebacks, trade spend, and other deductions by channel.
Red flag to avoid: Inconsistent revenue recognition methods, gross revenue reported without deductions disclosed, or inability to provide channel-level breakdown.
Expense Detail
- Headcount plan: Current team roster with titles, salaries, start dates, and fully loaded costs (benefits, taxes, equity). Planned hires for the next 12 months.
- Vendor contracts: Key vendor agreements, including co-manufacturer, 3PL, warehousing, and software platforms. Include terms, minimums, and renewal dates.
- Burn rate calculation: Average monthly cash burn over the trailing 3 and 6 months. Show the trend. Is burn increasing, stable, or declining?
- Runway: Cash on hand divided by monthly burn rate. How many months until you're out of cash at current pace?
- Marketing spend efficiency: Total marketing spend, broken out by channel (paid social, search, influencer, etc.) with corresponding CAC by channel.
Red flag to avoid: No headcount plan, undocumented vendor relationships, or inability to calculate accurate burn rate.
Working Capital
For CPG brands, working capital management is one of the most scrutinized areas. It reveals how efficiently you operate.
- Accounts receivable aging: AR broken out by 0-30, 31-60, 61-90, and 90+ days. What percentage is current vs. past due? Any doubtful accounts?
- Accounts payable aging: AP by the same buckets. Are you paying on time, or stretching vendors?
- Inventory aging: Inventory broken out by age. 0-90 days, 91-180 days, 180+ days. Any obsolete, expired, or damaged inventory? What's your write-down reserve?
- Days sales outstanding (DSO): How long it takes to collect receivables. Trend over time.
- Days payable outstanding (DPO): How long you take to pay vendors. Trend over time.
- Inventory turnover: How many times per year your inventory turns over. Higher is generally better for CPG.
Red flag to avoid: AR over 90 days with no reserve, inventory sitting for 6+ months with no write-down, or DSO trending upward with no explanation.
Tax and Compliance
This is where unprepared founders get caught most often. Tax and compliance issues can delay or kill a deal.
- Federal tax returns: Filed for all years the company has existed. If you've taken any extensions, have documentation.
- State tax returns: Filed in every state where you have nexus.
- Sales tax compliance: Are you registered and remitting sales tax in every state where you have economic nexus? This is a major area of scrutiny for DTC brands selling across state lines.
- Payroll compliance: All payroll taxes filed and current. State unemployment registrations up to date for every state where you have employees.
- 1099s: Filed for all contractors who exceed the reporting threshold.
- Business registrations: Current in your state of incorporation and all foreign qualifications.
Red flag to avoid: Unfiled tax returns, unregistered sales tax nexus states, or payroll tax delinquencies. These create real liabilities that investors will either demand you fix before closing or will use to adjust your valuation.
Cap Table and Legal
While not strictly financial, these are always part of financial due diligence:
- Current cap table: Fully diluted, showing all shares outstanding, option pool, and any convertible instruments (SAFEs, convertible notes).
- Option pool: Size of the pool, how much is allocated vs. unallocated, individual grants with vesting schedules.
- Convertible instruments: Terms of any outstanding SAFEs or convertible notes. Caps, discounts, and conversion triggers.
- Material contracts: Any contracts that create significant financial obligations or that would be affected by a change of control.
Red flag to avoid: A cap table that doesn't match your legal documents, undisclosed convertible instruments, or an option pool that's nearly depleted.
Forecasts and Projections
- 3-year financial model: P&L, balance sheet, and cash flow projections. Monthly for year 1, quarterly or annual for years 2-3.
- Assumptions documented: Every forecast line should have a stated assumption. Revenue growth rates, gross margin targets, headcount additions, marketing spend plans. All clearly documented.
- Scenario analysis: Base case, upside case, and downside case. What happens if revenue grows 50% faster than plan? What if it grows 50% slower?
- Use of funds: A clear allocation of how the capital you're raising will be deployed. Hiring, inventory, marketing, product development. With corresponding impact on the financial model.
Red flag to avoid: A "hockey stick" forecast with no credible basis, assumptions that aren't documented, or no downside scenario.
Start Early
The single most common mistake founders make with due diligence preparation is starting too late. If you begin organizing these materials the week you receive a term sheet, you'll be scrambling to clean up issues while simultaneously trying to close the deal. That pressure creates errors, delays, and stress that can threaten the fundraise.
Three to six months before you plan to raise:
- Get your books on accrual basis if they're not already
- Close any open bank reconciliation gaps
- File any overdue tax returns
- Register for sales tax in nexus states
- Build your financial model with documented assumptions
- Start producing monthly financial packages with budget comparison
When the term sheet arrives, you'll be ready. The diligence process will confirm what you've already organized rather than reveal what you've neglected. That confidence, in both the data and in yourself, is what gets deals across the finish line.