One of the sore spots about business planning is the need to deal with frustratingly exact definitions of financial terms. It’s not unreasonable for somebody to assume that “expenses” means buying stuff, resulting in the question here…
… my startup gets $2 million investment and spends $712,417 in expenses and $154,000 in other assets, leaving $1,133,583 in cash. Of the $712,417, $425,000 was for depreciable L.T. assets (i.e furniture).If I enter $425,000 in startup table under L.T. assets, and keep the $2 million total committed, I would have to reduce the cash available balance which is double dipping.
Well no, not if you subtracted that $425,000 from the $712,417 that you have as expenses.
And the balance sheet is affected because it shows $0 L.T. assets yet depreciates $33,600 annually. How can I account for the $425K in L.T. assets in balance sheet without affecting cash balances and paid in capital value of $2 million?
Here too, after subtracting the $425,000 from the expenses and putting it into the starting long-term assets, it will then show up as starting balance of long-term assets, which will make your depreciation make sense as well.
What’s going on there is the questioner is double-counting $425,000 in long-term assets by including it as part of the expenses. It should have been $287,417 in expenses and $425,000 in long-term assets.
And I’m posting it here because it’s just another reminder that in the world of financial projections we’re kind of stuck with definitions as standard accounting (that would be generally accepted accounting principles, called GAAP) defines things. It doesn’t help to just assume common meaning. And of course the tax authorities stick with very exact definitions too, and for taxes, there is a huge difference between money spend on expenses and money spent on assets.
Too bad, this should be simpler. But it isn’t.
— Tim
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
