

Mistakes I made as a young entrepreneur - ryancarson
http://ryancarson.com/post/35870237288/3-mistakes-i-made-as-a-young-entrepreneur

======
jpdoctor
Nice article. One nit tho:

> _When it came time to sell my events business, it turned out our Balance
> Sheet was in bad shape because we had collected a lot of revenue that we
> couldn’t recognize because it was for a future event. That means it was a
> liability, not an asset. Ouch.

... When someone buys your company, the transaction is done on a ‘zero balance
sheet’ meaning they pay extra for assets or take away cash for liabilities.

This was a timing issue and if I had understood it, I could’ve timed the sale
of the business more effectively to maximize the purchase price._

Unrecognized revenue is an asset with an offsetting liability. (And if you're
using cash-accounting instead of accrual, it's not even revenue yet.)
Honestly, the whole thing sounds more like a negotiating tactic, and that you
got taken advantage of for not understanding the balance sheet.

Put another way: If you had competing buyers, no one would really have cared
that much about whether the revenue was recognized yet or not.

~~~
ryancarson
It was down to the fact that I couldn't accrue future staff costs towards the
event. Yes, I would've had much more power if their was multiple interested
buyers but it wouldn't have changed this very real accounting problem.

Essentially, I hadn't optimized the BS pre-sale (>1 year in advance) as I
should've.

~~~
jpdoctor
> _It was down to the fact that I couldn't accrue future staff costs towards
> the event._

You lost me: Unaccrued staff costs are quite different than unrecognized
revenue, which is what you originally mentioned. In fact, such costs would be
on the liability side, so a sensible buyer would love to see you put them on
the balance sheet since it would lower the assets in the company. (Buyers are
always trying to accrue costs in advance, sellers are trying to accrue revenue
in advance.)

I'm obviously not getting what you're saying.

~~~
btilly
You describe perfectly what I understood him to be saying, then say you don't
understand.

As you said, a sensible buyer would love to see those costs on the balance
sheet since it would lower assets in the company. Which is exactly what
happened, and the buyer spent $150K less. However the OP was the _seller_ ,
and so was significantly less delighted to find at the last minute that $150K
less money than expected would be received.

------
thinkisgood
The author still does not understand how a P&L or balance sheet works. If you
are selling a business and you can show the buyer you have a $175k contract
that is profitable pending, it will only add value to the business. Showing
guaranteed revenue and income to a potential buyer would only make a buyer
more confident in buying the business and more willing to pay more, not less.

What it seems like happened is the customer paid all or a portion of the
contract in advance. As such, the business recorded an increase in cash and
had a corresponding liability recorded for unearned revenue. What likely
happened was this cash was used to pay expenses and/or pulled out of the
business and all that was left was a liability. Thus, it wasn't the fact that
he had a future $175k contract that made the business worth less, but the fact
that he used the funds he had been paid with for something other than the
event. Thus, the author had less cash than he should have, which the buyer
deducted from the sales price.

------
csomar
_That mistake cost me around $175,000 personally as the buyer knocked that
amount off the purchase price._

I don't get this. If you didn't have the event, the $175K wouldn't have
existed in the first place, right? If the event took place, then you'll be
only left with the profit after the event expenses (which I think should be a
lot less than $175k)

$175K can't be a liability. It's obviously cash. Your liability is your
obligation to do the event. Your assets is the cash remaining after the event
expenses.

------
daemon13
I am in finance for 18 years, of them 7 as CFO, I passed my CPA exams 11 years
ago. I really don't get this finance part and it makes by head spin :-O

>> because we had collected a lot of revenue that we couldn’t recognize
because it was for a future event. That means it was a liability, not an
asset. Ouch.

No. This is called Deferred Revenue or Prepayment. You can not recognize it in
P&L, but you are required to recognize it in Balance Sheet as an asset (I
think this would be Debit Cash / Credit Prepayment | Deferred Revenue).

>> It was down to the fact that I couldn't accrue future staff costs towards
the event.

You can not accrue future staff costs - that is not appropriate. See Cash
Based Accounting vs Accuals Based Accounting.

However, if you failed to accrue the legitimate expenses - that would results
in overpaying profit tax and restatement of financial statements. Not sure
about consequences for the CPA, who signed off your books.

Chaps, finance is not that difficult! Configuring network, hardening web
servers, compiling nginx with proper modules/flags is way more difficult.

May be I shall trade finance lessons for devops lessons? :-)

~~~
ashray
Maybe I'll take you up on that trade. Just emailed you :D

------
earroway
Traffic generation and product development could have progressed in parallel.
We approached it in a serial manner and wasted valuable time.

------
daemon13
Completely agree with #2.

The only way to properly manage people and ensure execution and good
performance is by delegating right tasks to right people and doing regular
formal and irregular informal follow-ups.

There is great book on this topic - "Execution. Getting things done" by Jack
Welch's right hand. Have read it at least 3 times. Highly recommend.

------
econnors
It seems to me like a lot of startups featured here make his #1 mistake -
treating employees like friends (<http://news.ycombinator.com/item?id=4790767>
immediately comes to mind). A lot of the job offers featured here mention
fridges packed full of beer and going out together after work. I'm all for
having fun together as a team, but I think younger entrepreneurs probably
often have a difficult time drawing the line between their business/personal
relationships with employees, especially those around their same age.

~~~
msteigerwalt
I've worked with managers who could successfully drink with employees as well
as fire under performers (often in a way which didn't end the beer
relationship), but all of them had multiple decades of experience.

I suppose it's much, much easier to avoid the need for a line entirely than to
learn how to draw it.

~~~
jakejake
I had to fire a guy and we managed to remain friends. I think it depends a lot
on the employee not taking it too personally. Also helps if you don't fire
them in a nasty way, but more in a way that the situation didn't work out.
Also offering to provide a reference if you feel the person has good qualities
- that can help because they will need that to get another job.

------
bajsejohannes
It's probably just the wording, but I wouldn't like to be an employee with a
"delegated" list. It just seems too much like you're a stupid droid with no
saying on your task lists. Call it "tasks" or "working on", and I'd be happy.
It's probably even closer to the truth -- after the first month in any company
I start creating my own tasks, and from then on the discussion with my bosses
become one of prioritization more than delegation.

~~~
misterjangles
Nobody really says "here is a task I am delegating to you." Delegation sounds
more like "I need this by Friday" or "How long will XYZ take?" or "Let's put
this task on the top of your priority list."

Learning to delegate tasks is a tricky hurdle to get past if you start to get
into management. For one you have to get over the guilt of assigning other
people tasks. You just can't be a good manager if you don't learn to delegate.
There's also a weird thing when you are too nice and timid about assigning
tasks then it tends to create problems due to, I guess, lack of respect for
the boss. If you're pretty confident and no-nonsense about it then people
don't seem to question it. It's a weird thing. Assuming of course you're being
reasonable, aware and considerate about people's abilities and workload.

------
rprasad
My number one takeaway from this article and the comments here on the article:
_Learn basic accounting,_ especially how to read a balance sheet and financial
statements. The time spent in the short term will more than pay dividends in
the long term.

As other commenters have noted in greater detail, how future revenue is booked
depends on your accounting method. If you use the "cash" method (default for
everything except C Corporations), meaning that you generally book revenue
when received and expenses when paid. Under the accrual method (C
Corporations), revenue is accrued when earned and expenses when owed
regardless of when payment is made or received.

Ryan's company was a C-Corp, so the accrual method applies. The $175k
prepayment is thus not booked on the P&L until earned. However, it is booked
on the balance sheet as an asset. To account for the fact that the $175k has
not yet been earned, it is _offset_ by a "reserve account" liability (i.e,.
"refund reserve" or "unearned income reserve") to reflect the amount that the
$175k could have to be reimbursed to customers. Generally, the reserve account
is less than or equal to the prepayment and reflects the dollar amount of
uncertainty as to how much of the prepayment will be retained. Thus, the $175k
could increase the net assets of the company by anywhere from $0 to $175k.

~~~
daemon13
No, no, no...

Step 1 - receive cash from customers

Debit Cash Account [Asset] Credit Prepayment / Deferred Revenue Account
[Asset]

Cool - everything balances.

Step 2 - you render services.

Debit Prepayment / Deferred Revenue Account [Asset] Credit Revenue Account
[P&L]

