Is it possible to manipulate your balance sheet and profit & loss statement? There are three Financial Statements that comprise a set of accounts but as an investor, you should only pay very close attention to one; cashflow. If you are pitching to a business angel - make sure you have complete mastery over this statement. The Profit and Loss Statement and the Balance Sheet can easily be manipulated to show the numbers you want to and will always be subjective (within reason - unless you work for WorldCom or Enron!) Cashflow should be a 100% objective statement that allows someone to understand the cash cycle of a business quickly. “Lack of profits is like cancer, it will eventually kill a business unless cured. Lack of cash though is like a heart attack - it can kill a business straight away” This quote is very apt. Most people still don’t realize that most businesses that go bust are profitable. What made them go bust was a lack of cash. Any Entrepreneur pitching to me must demonstrate to me that they understand the difference between cash and profits. There are many people who don’t understand this difference. (If you want an explanation please ask) The Fund which I am a co-founder of Flight & Partners, takes advantage of being able to buy companies that are profitable but have simply run out of cash - so in a sense, one of my businesses does rely on cashflows going wrong. A cash flow statement should simply show on a monthly basis for the first two years of a business the following; 1) How much cash is coming in from where and when 2) How much cash is being spent, on what and when As an angel investor in a start-up, your only short-term concern should be can the business survive for the first two years? (Most failures occur within this period.) Don’t worry about things like profit at this stage! You should also always ask to have the cash flow forecasts sent to you via email. You need to flex it - in particular, you need to see what would happen if: 1) Customers take an extra 30 days to pay 2) Any additional investment monies take an extra 3 months to come in - again a lot of businesses fail between fundraising rounds 3) Revenues take twice as long to build-up 4) Costs are 25% higher If the business can survive the above, it has a good chance of making it. You can then turn your attention to trivial matters like profit! As a final anecdote from experience, I did invest in a business that did not raise enough money to survive more than six months. What it showed though was that it wanted to raise money again depending on hitting certain milestones and that if money was not raised, it could simply hibernate and carry on operating on minimal funding (£1k per month). Given these facts - I was happy to invest.
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AboutHello! My name is Paul Mylovitch. At present I am an entrepreneur earning my living on my own. I am proud to say that because I’m on my way of accomplishing my dearest dream: to spend my time as I want to and following only my own priorities. I discovered how to create my own financial security in the new economy doing what I like. Twenty years ago it would have been an impossible dream. It has been taken me longtime to get here and I learned some tough lessons before I found my path. When I finished my formal education and got my first job, I realized that from that point on, if I’m going to be all my life an employee, I will never be free. Archives
January 2021
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