Due Diligence · Financial statements

What's expected from financial statements?

Greg Lipinski Patent Examiner at USPTO

June 17th, 2016

My early stage venture has only been operating for a few months. An accelerator program we're in the final round for will apparently be reviewing our financials. I'm told it's not an audit. What will they be expecting? A financial statement I can cobble together on my on in Excel? Access to my backend to verify sales? Certified bank statements? I can't tell if this is to assist me in identifying potential weaknesses, or if it's more of a 'let's make sure you're not lying' kind of thing. My biggest concern is that as an early stage company, we've mixed personal and business expenses fairly frequently so it's a bit of a mess (it's a self-funded venture btw, so we're not blowing investors' money shadily or anything).

Martin Omansky Independent Venture Capital & Private Equity Professional

June 17th, 2016

Requests for financial statements from accelerator mentors are usually solicited to evaluate the soundness of your project and to give you further guidance. They will not require audited statements. They will try to determine from your numbers what mixture of personal and corporate expenses exist, and how that can be sorted out, especially for tax and valuation purposes. Please see this as a helpful exercise. BYW, they will want both historical financials and 3-5 years of projected financial statements. I recommend you find an experienced CPA to help you prepare them. The results might be enlightening. On another subject altogether, are you related to Dr. Bogdan Lipinski? Sent from my iPhone

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

June 17th, 2016

Generally, they want to see that you are operating your business like a business. That you have to ask this question is an indication that you are not. At the very least, you should be on Quickbooks or something similar. You should reconcile your bank statement every month. They want to see your cash flow. They want to know if your sales come all at once, are seasonal or spread out. They want to know that your sales are growing. They want to know that you pay your bills promptly. They want to see your bank balance and know that you have a reserve. If you have mixed your business and personal expenses, you are an amateur, not a professional.  If you are going to run a business you should have a knowledge of basic accounting. Buy a book.  Do not "cobble together" a finanacil statement. Do it right and make a professional presentation.

Don Ross Managing Partner Digital Health at Life Science Angels

June 17th, 2016

I do not know what accelerators are looking for. I can give you an investor's perspective. 

First, as stated above. Going forward, separate your business and personal expenses. Temporarily, simply set up a second personal checking account. Separation is more important than the type of checking account. Prior to investment you will need a formal business structure (usually Delaware C corp) and business accounts. 

Second, financial statements and financial projections are two different things. I will address financial statements. Financial statements are a "three-legged stool" made up of a balance sheet, P&L, and a cash flow statement.  

Balance Sheet. Simple is fine. I look for unpaid bills and other liabilities. Does it look like everything was included? I once received a balance sheet that showed a $1 million debt to the entrepreneurs. Believe me, I make investments to fuel the company going forward NOT to have entrepreneurs peel off $1M for themselves personally. Needless to say, I passed on this deal.

P&L (historical not projected). Early company won't have much. As the company matures, one can look at margins, how money is spent, and where revenue is being produced (among other things). 

Cash flow. The balance sheet, P&L, and cash flow are a "three-legged stool." You need all three to ensure that your financials balance. In financial projections, cash flow projects the most critical date for the company--when it runs out of cash.

Financial statements show that the entrepreneur knows basic business practices and practices good business hygiene (get those personal and business expenses separated ASAP!). 

Hope this helps.  

John Seiffer Business Advisor to growing companies

June 17th, 2016

They will want to know your projections - what you expect revenue and expenses to be going forward. More important than the numbers are the assumptions you make to arrive at those numbers. 

I'm a big fan of self-funded companies (aka bootstrapping) as every company I've ever had was done that way. However you MUST MUST MUST separate business and personal expenses accurately. Otherwise you'll never really no how the company is doing. It's not a problem to keep putting personal money INTO the company when it needs it or to take company money OUT for personal use when that's appropriate. But you should account for it properly in some accounting software like Quickbooks or Xero. You should learn how to use these tools properly if you're going to be serious in business. 

Mark Rosenberg Tax, securities and commercial litigation

June 20th, 2016

Greg--they will be expecting a financial statement, with P & L and Balance Sheet. I do generally recommend that you separate your business expenses from your personal, with separate bank accounts. If you are set up as an LLC or S corporation, you may be able to take the losses, and separate accounts will help on tracking. Let me know if I can help at all in this venture.

Kevin Smith Advisor at SmartEar, Inc.

June 17th, 2016

Greg, Two points and 1 question: 1. You must separate business and personal accounts immediately. First, it can get extremely messy and expensive if you do this later and second, you lose the ability to protect personal assets once you mix them with business accounts. Question: Have you incorporated? (You should have formed a new entity, separate from your personal matters, and almost certainly it should have been a Delaware c-corp.) 2. Most likely the accelerator will want to see financial statements, including historical financials and 3 year projections, that you can compile on excel. It's not very likely that they will require bank statements or access to a CRM. Cheers, Kevin

Steve Simitzis Founder and CEO at Treat

June 17th, 2016

Typically a balance sheet or operating model (or both). I've never been asked for bank statements.

Hoofar Pourzand PhillyTalent.com

June 17th, 2016

1- If you can't open a business account, it takes two to three weeks to establish everything you need for it, some states even less,  create a separate spending/checking account under your own personal account to track spendings. Costs add up pretty quickly.
2- The last time I was asked for a financial statement was when I was looking for an office space, the place I have now. A well known CPA in my area for that job costs about $100 to $200 an hour. I sent them all my financial printed- they had their own CPA and it all worked out eventually. 


June 21st, 2016

Greg - you have already received some sage advice above.  Make sure you have a legal entity for your business.   Wyoming is just as business-friendly as Delaware and less costly.   Give strong consideration to a S-Corp.   Separate your business and personal bank accounts and try your very best not to co-mingle.  Get Quickbooks Online - it only costs some $45/month and will allow you to grant others (your accounting person, partners, etc) to have access to your books.

As already stated above, they'll want a P&L, Balance Sheet, and Cash Flow statement.   Projections for 3-5 years are huge - they must be 'defendable' by you.   What's the market, who is your customer(s), why will they buy from you, etc.

Investors want to make sure the present is 'clean', and that the future is 'promising'.

Saravjit Singh Independent Consultant and Trainer

June 24th, 2016

I suggest you carry only one document - one page Business Model Canvas. Everything relevant about your venture will be found here and can be discussed. If the partnership is going in the right direction, you may want to leave this one pager with them. It is up to you.

If you are not familiar with the Business Model Canvas you can get a lot of material on it by doing a Google search.

Want help - you can email me at saravjit.singh@gmail.com