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Tuesday, May 27, 2014

Master the Balance Sheet or else...

I recently came across a Forbes magazine article by Jeff Thermond that addressed the need a for a startup business to focus on the balance sheet and it made a lot of sense. Most startup entrepreneurs do not have keen financial backgrounds. They very often come from marketing, sales, or operations. They may even understand income statements, and gross margins and be able to talk to financial analysts and bankers.

The balance sheet lists (read as BALANCES) the assets against the liabilities plus stockholders equity of a company. The two sides of this equation must be equal. In businesses generating positive cash flow and operating income, current assets will be greater than current liabilities resulting in increased stockholder equity. This situation generally does not exist in the early days of a startup. During this time profits are not being generated and losses are mounting with negative shareholder equity. In the beginning it is not uncommon, even with high margins (if they are possible), to be unable to cover operating costs.

The article makes the point that the startup CEO should admit that there is a gap between the amount of time it will take the cash to run out and his experience and seek experienced help. This is not a bookkeeper, but someone, even on a part time basis, experienced with startups.

How are you handling this in your business?

Steve Koenig, SCORE Counselor

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