Current Financial papers vital to investors

Some entrepreneurs wonder why they only get a courtesy listen when they present an opportunity to potential investors. The company founder is usually anxious to show his financial projections and how the company will do millions in revenues and profits in the coming years. But most don’t want to talk about their current income statement and balance sheet, if they have them.

By Joe Ollivier
Brigham Young University

Unfortunately, any investor with even a little sophistication will ask to see these current financial statements. He will want to see where the company is financially right now. Often, the company founder has answers like these:

* "Our accountant takes care of that. We’ll have to get them."

* "We just have to figure out why Quicken won’t get our balance sheet to balance."

* "We have some from last year."

* "We have actually been so busy we haven’t done one yet."

There are some key questions that need to be defended on both the income statement and the balance sheet. And you absolutely have to have answers to get anyone with money to listen to you.

Let’s look at questions that come up on the income statement first:

* Why are there only minimal revenues at this point, especially in view of the promising pro-forma forecasts?

* Why are company officers taking a salary when there is little or no revenue? Isn’t that what they got their founders’ stock for? They should work for little or nothing at this point. As a minimum they should borrow funds from the company if they need something for living expenses. Social Security, Medicare, federal and state withholdings and unemployment taxes could be avoided and cash conserved.

* Why are the expenses so large in relation to revenues — especially for things like professional fees at this starting point?

* How is depreciation being figured on fixed assets, if at all?

Now, the balance sheet:

* Are all the assets listed real? Do they really have the dollar value listed on the balance sheet? If there is intellectual property, trademarks, patents, etc., how were the values obtained? Any intangible assets need to be completely justified.

* How was the initial equity in the company determined? Was cash put in by the founders or the common stock just issued for the idea and labor up until now? How much cash was put in by the founders? What valuation did the company have as the first money was put in?

* If the statement shows a negative net equity then the company is technically bankrupt. What do you intend to do to get the equity at least to a positive balance?

* If current liabilities far exceed current assets — why?

These are just a few of the items that a savvy investor will want to look at on the financial statements. Not being able to come up with realistic answers is a deal-killer right from the get-go.

Joe Ollivier is a founding member of the Utah Angels Venture Group and is associated with the BYU Center for Entrepreneurship. He can be reached via e-mail at [email protected].

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