by Barry Schwimmer, Managing Partner, Stamford Innovation Center
Financial statements, projections, valuation and the like are critical to success but often seen as a dark art to be avoided for fear of looking naive. This dynamic was apparent to me recently when I had the pleasure of participating in The Refinery’s (the Westport based accelerator focused on developing women-owned businesses) session on finance. We were able to help participants develop a level of comfort by breaking financial projections and modeling into a few basic concepts.
Valuation-Pre and post money.
Pre money is what your company is worth now-before you accept outside investment. Post money is equal to pre money plus outside dollars invested. Therefore the entrepreneur’s ownership post money (after outside investment) is equal to 1-(new money invested/ post money valuation). In other words as pre money valuation increases, dilution for investor capital decreases. Pre money valuation and investment terms are frequently heavily negotiated. The end result is a capitalization or “cap” table. Here’s an example:
Financial Statements and concepts
Businesses have three key financial statements-Income statements (essentially your revenues and expenses), balance sheets (what you own and what you owe) and cash flow (reconciles income with actual cash used or generated by the business). Typically you or your bookkeeper can and should generate these statements on a regular (at least monthly) basis. They exist to inform you as to how the company has performed and help make operating decisions going forward.
A few quick concepts-
- Projected financial statements will always be wrong. Get the methodology right and modify for actual results
- Income statement revenues and expenses are not equal to cash received
- Analyze fixed vs variable costs, recurring vs individual sale revenues-starting, building and scaling the business will have different capital requirements and risk depending on the composition of your revenues and expenses.
- Cash flow statements are key to understanding your businesses capital requirements
- They add net income, and depreciation, subtract/add increases/decreases in accounts receivables, subtract/add decreases/increases in accounts payable and subtract capital expenditures to show cash used or generated by operations before financing and then show funds raised or disbursed to shareholders.
- Balance sheets are a snap shot of a point in time as opposed to income and cash flow statements which describe operations over a period of time.
- Cap table depicts who owns what percentage of the company.
- Always know these amounts and terms when speaking to potential investors
- Financial projections are projections and again they will always be wrong
- Actual results are key to improving the quality of your projections and predictability of your business
Financial statements do not exist in a vacuum. They are tools to help guide your growth and measure success while pointing out areas of potential improvement. I’ll do separate blogs on these individual concepts at later dates.
About Barry Schwimmer:
Barry brings over 25 years of experience in private equity to the Stamford Innovation Center with expertise in distance education, communications & media, retailing, consumer products, business services, and manufacturing. Additionally, Barry is the founder of Stoneybrook Capital, former MD at Commonwealth Capital and co-founder of Chemical Venture Partners.