The Balance Sheet
Your company analysis is not complete without computing your balance sheet. Key stumbling points to financing tend to be:
- Intangible assets:
If a company shows a substantial amount of intangible assets, it may raise investor questions about the way the company capitalizes its’ research and development (as opposed to expensing them) which can create a large earnings hit if in the future the company is forced to reclassify them.
- Accounts receivable
Which is calculated by dividing receivables by net sales, and dividing that by 365. If the number is seen as steadily going up over time, it could indicate to funding sources that management is not focusing their efforts on collecting cash in a timely manner.
- Accounts payable
How many payables are more than 60 days old? If it’s a large amount the funding source may see that significant portion of the proceeds are going just to keep supply lines open and not used to create new business, a real deal killer if not addressed correctly.
- Term loans
Investors hate short-term significant liabilities (due in less than two years). If the term is three to five years, the loans may be less of an issue. Debt free is the ideal scenario. Term loans payable to founders cause problems for entrepreneurs who want to be paid from funding proceeds. For the funding sources it is a waste of working capital to pay founders off because it doesn’t promote the company’s growth. If founders aren’t willing to defer payment, it will usually kill the deal.
- The equity
See whether it’s negative or positive. Net income or net loss is posted towards the company’s equity. If the company continues to lose money year after year, investors will gauge the company’s financial health by looking at the remaining equity.
List anything of value that is owned or legally due the business. Total assets include all net values. These are the amounts derived when you subtract depreciation and amortization from the original costs of acquiring the assets.
- Cash — List cash and resources that can be converted into cash within 12 months of the date of the balance sheet (or during one established cycle of operation). Include money on hand and demand deposits in the bank, e.g., checking accounts and regular savings accounts.
- Petty cash — If your business has a fund for small miscellaneous expenditures, include the total here.
- Accounts receivable — The amounts due from customers in payment for merchandise or services.
- Inventory — Includes raw materials on hand, work in progress and all finished goods, either manufactured or purchased for resale.