Startup Financials: Why Isn’t Excel? Good Enough?

When you are considering launching a new company, you need to create pro forma financial statements. There are three reasons:

1. You want to make sure that the business path you are on could result in satisfactory financial results,
2. Potential investors are going to want to see them, and
3. The earlier you create them, the earlier you’ll know what underlying business assumptions you need to achieve.

The transformation of all your business assumptions (like product price, rate of sales growth, customer acquisition cost, and so on) into financial statements is “just” a massive combination of mathematical formulas, so why not “just” use Microsoft Excel??

Well, the transformation of all your income and deductions into your annual federal income tax returns is also “just” a massive combination of mathematical formulas, so why don’t you “just” use Microsoft Excel for your taxes?

The answer is the same for both cases! The transformations are non-trivial, error-prone, and extremely time-consuming.

I admit it. For 20+ years, I did use Excel to build customized spreadsheets to create pro forma financial statements for 40+ startup companies. Each took me a few hundred hours to create. Let me say that again:  each one took a few hundred hours! 

Much of that time was spent debugging all the formulas, especially the ones relating to depreciation of fixed assets, interest on loans, cash flows for accounts receivable and accounts payable, and option packages for employees.

For those of you who have done this a few times, you know that the problems usually manifest themselves as the cash balance on the cash flow statement doesn’t equal the cash at the top of the balance sheet :).

I’m a lot smarter now.

Why Use TurboTax? (or an Equivalent) for Income Taxes?

The reasons are:

1. Your goal is to do your taxes, not to program or debug formulas.
2. You want to spend your time earning income, not filing taxes.
3. You don’t want to make mistakes.
4.  TurboTax will walk you step-by-step through all your income and deductions, or if you insist, you can use its checklist and do them in any order you like.
5. TurboTax will warn you of missing items.
6. TurboTax will let you know of problems with your return that the IRS will not like.
7. TurboTax will provide advice on how to fix any problems.
8. TurboTax makes sure you have a complete set of all forms and schedules necessary for your Federal and State returns. For example, if you have capital gains, TurboTax adds Schedule D; if you have none, it excludes Schedule D.
9. You get tips on how to reduce taxes or how to maximize itemized deductions.

Why Use Offtoa? (or an Equivalent) for Financial Statements?

The reasons are:

1. Your goal is to create your pro forma financial statements, not to program or debug formulas.
2. You want to spend your time running your startup, not creating financial statements.
3. You don’t want to make mistakes.
4. Offtoa will walk you step-by-step through all your assumed sources of revenue and expenses, or if you insist, you can use its checklist and do them in any order you like.
5. Offtoa will warn you of missing items.
6. Offtoa will let you know of problems with your financial statements that your potential investors will not like.
7. Offtoa will provide advice on how to fix any problems.
8. Offtoa makes sure you have a complete set of financial reports (income statement, balance sheet, cash flow statement) for five years (monthly, quarterly, and annually), plus extensive graphs. If you expect to have investments, Offtoa includes capitalization tables and estimated internal rates of return (IRR) for your investors based on industry average valuations.
9. You get tips on how much cash you’ll need, or when you’ll become profitable.

Summary

If you have unlimited time, yes, you should do your income taxes using Excel and you should create your startup’s financial statements using Excel.

But if you are a busy entrepreneur and want to spend your time running your company, use a tool to transform your business assumptions into pro forma financial statements.

About the Author

Dr. Al Davis has published 100+ articles in journals, conferences and trade press. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He was a founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003. He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting and optimizing their business strategies. Click on the following to see a short video on Offtoa:  

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