Starting a Blog Series on Financial Statements

One of my most popular blog series ever was on Term Sheets.  I’ve been pondering another series for a while and a reader inspired me this morning to start one on Financial Statements.   

I think your post this morning opened up a subject area you might wish to develop further. Your point was start with the cash flow because of the confusing nature of GAAP. In fact almost all sophisticated readers of financial statements start with the balance sheet or the cash flow and read the P&L last. I think some posts on balance sheet and cash flow analysis techniques or working capital management for a startup would be useful, for the following reasons:

  1. I suspect most of your readers are probably young, in their first startup and unsophisticated financially
  2. You and most of the VC blogging community put a lot of emphasis (correctly) on revenue and revenue growth which leads the unsophisticated to focus almost exclusively on the P&L
  3. While you correctly talk about cash flow with some frequency the unsophisticated do not understand well the relationship between the cash flow and the balance sheet.

Having taught these subjects for several years and been involved in several workouts/turnarounds, I am confident that balance sheet/ cash flow analysis is not either obvious or well understood (even after an MBA).  Good working capital and balance sheet management leads to capital efficiency, a theme I know is dear to your heart.

At the risk of being tedious, boring, ponderous, dull, and monotonous I’m going to take on Financial Statements over the next few months.  I hope you eventually find them as stimulating as I do.

  • I just spent an hour explaining to someone why I really don’t care about the P&L or the balance sheet at the moment. This person has two MAs and experience in IB; they told me that it was important. I just wanted to get a straight cashflow which would more or less work for the next six months from now (and on a rolling basis from there). I have also been at the other end where recognized revenue issues and the importance of the P&L were really important, so do understand.

    I despise book-keeping, hate finance and get sick if I have to review financial statements. Basically, I prefer to focus on developing a business. When it is early stage none of the heavy financial stuff matters; with the exception of a solid cash flow projection. When business develops, get an expert in-house or out-house a firm to run it.

    I know too many people who start companies and waste days/months on financials when they should be concentrating on value-creation. I am now convinced that no business that is early-stage should care about the P&L until there is a CFO/FD in place and investors should only be asking for a cashflow statement and projection.

    Good luck with the series 😉

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  • Dmitry Bittson

    I first came across your blog two years ago when I linked into your Term Sheets posts, and have been reading you since. If you do half as well with Cash Flow/Balance Sheet you will be providing an enormous service. In a country where business is the principle interest, the level of financial illiteracy (innumeracy) amongst business people is breathtaking.

  • Look forward to this series… understanding cash flows is not only useful… but IMPORTANT!

  • Cash flow is a crucial factor, not just for investors and owners, but for potential financing sources: VC's, angels, banks.

    They will measure and understand cash flow. So, entrepreneurs should too.

    You may look at a cash flow statement as the combination of the income statement (P&L) and balance sheet. Cash income and expenses from the P&L are combined with changes in balance sheet items. A change in a balance sheet item might include taking out a new loan, receiving payment from a client, or purchasing equipment. These changes affect cash flow, so they are added to income and expenses to see the true picture-cash flow.

  • Following the recession and the challenges that third sector organizations face in obtaining funding, the issue of social finance is a hot debate topic.

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