I picked up the following Dr. Seuss quote on a piece of paper laying around in the conference room I was in earlier today.

You have brains in your head.
You have feet in your shoes.
You can steer yourself
any direction you choose.

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.

Bill Burnham has an excellent rant up on GAAP accounting titled Is It Just Me or is GAAP Completely Broken?  In case you don’t know, GAAP stands for “Generally Accepted Accounting Principles” and is a term regularly thrown around when staring at an income statement, balance sheet, statement of cash flows, or any other “supplemental information.”

I’m not a public market investor so I don’t have the twisted experience that anyone that deals with a public company has with GAAP since I don’t really care about understanding the financial statements of public companies (in any great depth.)  Bill is – and he does a nice job of covering why GAAP has become such a mess in the public arena.

GAAP is also a mess in the private company arena.  I get monthly financial statements for all the companies I’m on the board of (and quarterly for all the companies I’m an investor in.)  The presentation varies, but it always includes a balance sheet, income statement, and statement of cash flows.  I learned the value of understanding the financial statements early in my life – we were obsessed with them in Feld Technologies (my first company) and I was particularly fascinated with them when I started seeing them from other companies.  Numbers stick in my brain and I can do straightforward math on the fly, so it’s easy for me to look at a set of financial statements and figure out what is going on pretty quickly.

Except for when the accountants get in the way.  SaaS business models, revenue recognition, FAS xyz rules, tax vs. book, and option value / accounting creates a mess in private companies.  All of a sudden I’m starting with the cash flow statement and working backward to actually understand what is really going on. 

The irony of all of this is that most young private companies struggle to conform to GAAP, yet present their financials in a way that is clear and helpful – until they start trying to conform to GAAP.  Of course, we have the accountants do an audit each year, at which point they ultimately restate things (sometimes minor, sometimes major) – almost always impacting the balance sheet and income statement, but rarely impacting the cash flow statement.

The arcania involved has radically increased in the past few years.  I’m finding auditors reversing themselves within one year cycles – at one point they say “do things this way” and then nine months later they say “do things a different way.”  It’s especially entertaining when you remind them of their previous approach, they say “we never said that”, and then you present them with the email they originally sent.  Any accountant worth his paycheck knows how to say “yes, but it’s different now.”

It’s remarkable what a total waste of time and energy this is, especially when you get into the second order effect of actually trying to figure out what is really going on.

My advice to all entrepreneurs (and investors) is make sure you can read a statement of cash flows.  Start there – not with the income statement.  Once you understand the actual cash flows for a period, the chances of you catching the GAAP nuances of the income statement and balance sheet are much greater.

Every great investor has made some investments that he wishes he’d never made.  Occasionally he’ll make another one like it.  And another one like it.  Eventually you learn.  Or maybe you don’t.

I heard the following quote today attributed to an extraordinary successful investor (I’ve editorialized a little.)

“I’m fascinated with airplanes and the airline business, but every time I invest in them I regret it and lose money.  I finally set up an 800 number, and every time I feel like buying an airline I call it, and it is a recording of me, telling me not to do it.” 

There are several areas that I’ll never invest in again.  Maybe someone can make money in them, but I can’t.  And I eventually learn.  Time to go set up a few 800 numbers to remind me.

April 23, 2007.  Another 24 fanatic just came in my office and announced that to me.  Unfortunately I agree.  I watched it last night with Amy, Jason, David, and Jill and we all had that ho-hum look on our face when it ended.  Oh well – it’s rare that a show makes it six years anyway before it loses it.  At least GeekSugar has great pictures of Chloe.

I love Leland – he totally cracks me up.  Nothing like having a rock star on staff at NewsGator that likes a video camera.  Knowing Leland, he did this in one take.

Not quite the RSS in Plain English video, but much more melodic.

The Common Craft Show has a brilliant 3.5 minute video called RSS in Plain English.  If you’ve ever wondered what RSS is and why you should care, it’s a phenomenal explanation.  Of course, I wish they had used NewsGator as the example (instead of Google Reader), but the explanation is superb and you can still give NewsGator a try.

The Wall Street Journal has a long article today titled Microsoft Embeds Sleeper in Business Software.  It positions SharePoint clearly in the collaboration battle that is emerging with Oracle, Adobe, IBM, EMC, Cisco, and Google and then goes on to mention “lesser-known players” such as Zimbra, Alfresco, Plone, and Socialtext.

According to the article Microsoft has sold 85 million licenses of SharePoint across 17,000 companies.  Say that again slowly: 85 million licenses across 17,000 companies.  I don’t know how many are “free” (according to the WSJ Microsoft has to be careful about giving SharePoint away due to their antitrust settlement) and while I used to tease my friends at Microsoft about simply giving away SharePoint and not caring who used it, this clearly was an effective strategy.

17,000 companies.  I wrote about my positive experience with SharePoint recently.  I now use it every day as part of my regularly work activity and am very pleased.  I’m expecting the hosted version of SharePoint to be announced anyday (maybe at Mix) which will be a logical stab by Microsoft back at Google’s collaboration activity.

Syriana was one of my favorite movies last year – the Bob Barnes character captured my imagination completely.  When I found out that Bob Baer’s books See No Evil and Sleeping with the Devil were the inspiration behind the movie, I immediately one-clicked them on Amazon.

I’m hugely cynical about the intelligence machinery of our government.  I’ve been exposed to enough spin in my life to understand that the cliche “things are rarely as they appear” is deeply valid.  In trying to understand my obsession with 24, I think I’ve concluded that it represents the “anti-me” – I get to spend one hour a week living in a parallel universe that isn’t in line with my values.

See No Evil was a delicious romp through this terrain by someone who lived this for twenty years.  Baer’s writing is sharp witted and he takes no prisoners in his critique of the people he worked with and his increasing disillusionment with the CIA. 

Next up is Sleeping with the Devil right after I knock off Supreme Conflict.

On May 15^th and 16^th leaders from over 100 distinguished universities, corporations and non-profits from across the country will attend the National Center for Women & Information Technology (NCWIT) semi-annual meeting at the University of Colorado at Boulder. 

I’ve been chairman of NCWIT for the past few years and am incredibly proud of what Lucy Sanders and her team have created.  NCWIT is a capacity-building coalition working aggressively to increase women’s participation in computing/information technology (IT) – we believe that women’s participation is a compelling issue of innovation, competitiveness, and workforce sustainability.

On the evening of May 15^th, at 6:00 pm, NCWIT and the ATLAS Institute at CU Boulder are hosting a reception on the CU Boulder campus (on the North Club Level of Folsom Stadium) at which you can meet these leaders and share ideas with them about the meaningful role women can play in technical innovation.  If you are a member of the tech community in Colorado, I encourage you to come join us.

The reception is sponsored by NCWIT Investment Partners Avaya, Microsoft and Pfizer and we are honored to have State of Colorado Lt. Governor, Dr. Barbara O’Brien, and CU Boulder Chancellor Dr. Bud Peterson offer remarks.

I hope to see you there.