Financials: How to Present Your
Data to Attract Outside Investors
alex.castelli@cohnreznick.com
July 24, 2014
What is Accounting?
“The language of business”
Accounting communicates financial
information to users for decision-making.
Users of financial information include:
 shareholders,
 debtors,
 creditors, and
 investors.
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What is Accounting?
Accurate financial information provides:
 Information on your historical results(where you have been)
 Your current financial position(where you are today), and
 Insight into your future plans (where you plan to go)
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Why Accurate and Complete Books
and Records are Important
1. Credibility when dealing with investors, vendors and
lenders
When confidence in the numbers and underlying
assumptions is lost, questions are raised and opportunities
may be delayed or lost
2. Vital tool in running your business
Cash management
Tracking sales and expenses
3. Ability to respond to inquiries by regulators on a timely basis
IRS
4. When opportunities arise, you need to be ready
Potential investors
Sale of the company
4
Common Financial Mistakes That
Startups Make
•
Not doing anything – until it’s too late i.e. not maintaining
any accounting books and records
•
Not seeking professional advice – accounting and tax
•
Not using accounting software or maintaining accounting
records in a spreadsheet database i.e. excel.
•
Not separating the Company accounts from personal
accounts i.e. having a separate bank accounts
•
Lack of proper backup (offsite or cloud preferred)
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Common Financial Mistakes That
Startups Make
•
Not understanding the difference between cash and
accrual basis accounting
•
Not understanding their revenue model and the
assumptions underlying financial projections.
•
Not keeping accurate and complete supporting records i.e.
invoices, contracts, notices, etc.
•
Not maintaining an accurate capitalization table
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Ta x M i s t a k e s T h a t S t a r t u p s M a k e
•
Sloppy record-keeping
•
Employees vs. independent contractors – a hot button with
the IRS
•
Creating deductions you can’t use or lack of support for
deductions taken
•
Making short-sighted decisions when deciding the type of
legal entity to form, i.e. C- corp, S-corp, LLC
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Selecting the Right Entity
Structure
The choice of entity structure is impacted by the
future plans of your company.
C-corporation
•
Most common and easily understood entity structure
•
Issue common and preferred stock
•
Taxed on earnings at the corporate level – “double taxation”
•
Distributions can be made to shareholders
S-corporation
•
Flow-through entity for tax purposes / Members receive K-1s at year end
•
One class of stock/no more than 100 shareholders
•
Shareholders must be citizens or residents of the U.S.
•
Distributions must be proportionate
•
Election must be made
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Selecting the Right Entity
Structure
Limited Liability Company
• Flow-through entity for tax purposes/Members receive K-1s at year
end
• Flexibility based on Operating Agreement
• Can be taxed as partnership or corporation based on election of
members
• Single member LLC is disregarded for tax purposes
• Distributions do not need to follow ownership
• Members cannot be employees. Guaranteed payments instead of
W-2 wages
• Certain jurisdictions may not recognize the LLC as a flow-through
entity
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Guide to Financial Statements
There are four main financial statements.
 Balance sheets - show what a company owns and what it
owes at a fixed point in time.
 Income statements - show how much money a company
made and spent over a period of time.
 Cash flow statements - show the exchange of money
between a company and the outside world also over a
period of time.
 Statements of shareholders’ equity - shows changes in the
interests of the company’s shareholders over time.
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Guide to Financial Statements
Balance Sheet
 Assets


− Anything tangible or intangible that is capable of being
owned or controlled to produce value.
Liabilities
− An obligation of an entity arising from past transactions or
events,
Shareholders’ Equity
− Sometimes called capital or net worth.
− Represents the money that would
be left if a company sold all of its
assets and paid off all of its liabilities.
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Guide to Financial Statements
December 31
2013
2012
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable - trade
Prepaid expenses
Related party receivable
Other current assets
$
Total current assets
Property and equipment, net
Deposits
Total assets
$
3,161,602
38,187
163,060
13,945
81,236
$
405,848
291,974
119,109
5,329
302,676
3,458,030
1,124,936
2,364,328
43,868
2,428,779
29,543
5,866,226
$
3,583,258
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Guide to Financial Statements
December 31
2013
.
2012
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Revolving line of credit
Accrued income taxes
$
Total current liabilities
155,449
578,777
5,088,522
179,714
$
558,676
929,396
1,418,685
1,936,927
93,622
6,002,462
4,937,306
Noncurrent liabilities:
Other long-term liabilities
1,391,668
1,335,743
Total liabilities
7,394,130
6,273,049
Commitments and contingencies
-
Stockholders' deficit:
Common stock - $0.01 par value, 50,000 shares authorized,
15,888 shares issued and outstanding
at December 31, 2013 and 2012, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders' deficit
Total liabilities and stockholders' deficit
$
-
159
3,573,876
(5,101,939)
159
3,481,659
(6,171,609)
(1,527,904)
(2,689,791)
5,866,226
$
3,583,258
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Guide to Financial Statements
Income Statement
 Shows how much revenue a company earned over a
specific time period (usually for a year or some portion
of a year).
 Shows the costs and expenses incurred.
 The literal “bottom line” of the statement usually shows
the company’s net earnings or losses. This tells you how
much the company earned or lost over the period.
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Guide to Financial Statements
.
Year Ended December 31
2013
2012
Revenue
$
Operating expenses:
Cost of goods sold
Research and development
Sales, general and administrative
16,045,419
$
17,308,269
487,487
4,533,267
9,407,307
1,392,204
3,876,458
7,847,769
14,428,061
13,116,431
Operating income
Interest expense
1,617,358
78,064
4,191,838
93,295
Pre-tax income
Provision for income taxes
1,539,294
469,624
4,098,543
172,622
Total operating expenses
Net income
$
1,069,670
$
3,925,921
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Guide to Financial Statements
Cash Flow Statements
 Reports a company’s inflows and outflows of cash.
 Important because a company needs to have enough
cash on hand to pay its expenses and purchase assets.
 A cash flow statement can tell you whether the company
generated cash.
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Guide to Financial Statements
Year Ended Decem ber 31
2013
2012
.
Cas h flows from operating activities
Net incom e
Adjus tm ents to reconcile net incom e to net cas h
provided by (us ed) in operating activities :
Depreciation and am ortization
Los s of dis pos al of fixed as s ets
Stock-bas ed com pens ation
Stock warrants is s ued for s ervices
Decreas e (increas e) in as s ets :
Accounts receivable - trade
Prepaid expens es
Related party receivable
Depos its
Other current as s ets
Increas e (decreas e) in liabilities :
Accounts payable
Accrued expens es and other current liabilities
Accrued incom e taxes
Deferred revenue
$
Net cas h provided by (us ed in) operating activities
Cas h flows from inves ting activities
Purchas es of property and equipm ent
Net cas h us ed in inves ting activities
Cas h flows from financing activities
Repaym ents of prom is s ory notes payable to related parties
Proceeds from exercis e of s tock warrants and options
Proceeds from is s uance of prom is s ory notes payable
Proceeds from revolving line of credit, net
Dividends paid
Net cas h (us ed in) provided by financing activities
Net increas e (decreas e) in cas h and cas h equivalents
Cas h and cas h equivalents , beginning of year
Cas h and cas h equivalents , end of year
1,069,670
$
539,350
83,594
8,623
357,959
66,494
98,134
2,024
253,787
(43,951)
(8,616)
(14,325)
221,440
173,385
(119,109)
1,979
(20,564)
(320,834)
(403,227)
(350,619)
86,092
3,912,485
412,145
483,279
160,667
(9,739,541)
5,354,303
(4,518,061)
(474,899)
(1,090,988)
(474,899)
(1,090,988)
(2,200,000)
700,000
(623,650)
-
(1,950,000)
24,104
3,450,000
623,650
(14,000)
(2,123,650)
2,133,754
2,755,754
(3,475,295)
405,848
$
3,925,921
3,161,602
3,881,143
$
405,848
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Guide to Financial Statements
"If I'm making so much money, where is the cash?"
 Net Income and Cash Flow are two different concepts that
cause small businessmen untold confusion and problems.
 Everyone understands the concept of cash coming in and
cash going out. Business decisions are made from this
perspective and not from reported accrued net income.
 Banks lend money on cash flow statements, not on income
statements.
 Businesses survive on positive cash flows, not on reported
net income.
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Presenting to Investors
When preparing projections:
• Build your revenue model from the ground up – focus on paying
customers vs. users of your product or service
• Understand how much it will cost to acquire customers and how
long you think you will retain the customer (customer churn)
• Be able to show the impact of investor money on your projections
– investors want to see how much the business will accelerate with
more capital
• Discuss when you anticipate you will be cash flow positive
• Use a format that is clear and easy to follow -- provide more
detail if needed
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Presenting to Investors
When presenting financial information:
• Keep it simple and easy to understand
• Understand your revenue model and be able to explain flat
periods or delays in generating expected revenue
• In most situations, shareholder loans will become equity and not
repaid
• If you invested cash in the company, show that as capital or
equity. Sweat equity is NOT a financial statement line item.
• Generally, for early stage companies a balance sheet and
income statement will suffice – make sure the balance sheet
balances and you can explain line items on the income
statement.
Don’t assume the team will be able to take significant salaries postinvestment – investors still want to see you hungry and motivated.
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Closing Remarks
You, the founder, need to understand basic accounting. While you
can outsource the accounting or leave it to your controller, you still
are responsible for your numbers.
Not being able to present accurate financial statements to potential
investors or bankers can delay or kill a deal.
It is difficult to regain credibility in your financial reporting once it is
lost.
Seek advice from experienced professionals when you start your
company and as needed as you grow.
Always be prepared for someone to ask to do due diligence on your
financial records. Maintain complete files to support what you
report.
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ABOUT THE PRESENTER
ALEX CASTELLI, CPA, TECHNOLOGY & LIFE SCIENCES
INDUSTRY PRACTICE LEADER
Alex Castelli is the National Leader of CohnReznick’s Technology and Life Sciences Practice which
assists private, public, and venture and private-equity backed companies succeed at each stage of
their life cycle. With nearly 25 years of experience managing the audit, accounting, and reporting
issues of middle-market companies, he dedicates his practice to serving an entrepreneurial client
base. Alex is based in the firm’s Tysons Corner office where he serves as Managing Partner.
Contact:
Alex Castelli
8045 Leesburg Pike, Suite 300
Vienna, VA 22182
703.744.6708
alex.castelli@cohnreznick.com
www.cohnreznick.com
Twitter: @CR_TechInd
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