Asset Investment Impact on Startup Proforma Financial Statements
Q: I’m a first-time entrepreneur without a numbers background and I must say that I LOVE your app because it is very easy to use and super helpful as I walk through the inputs. However, one thing I do need help with is trying to figure out how the whole CapEx thing works. Can you please explain a little bit more how my Asset Investment assumptions will work once I enter something in that section? What all happens on my financial statements?
First, here are a few quick definitions without getting too technical:
While an expense is recorded immediately and will impact your startup’s Income Statement, an asset investment is will show up on your Balance Sheet and the expense of that asset will be spread out over its useful life.
There are two types of assets: Tangible Assets (physical assets that will be depreciated such as Plant, Property, and Equipment, including any existing property at the time of launch) and Intangible Assets (non-physical assets that will be amortized such as Intellectual Property, software, and organizational expenses). Depreciation and Amortization work the same way in that the expense is spread out over the useful life.
Both asset types work the same way, but Tangible Assets show up on your financial statements as a Fixed Assets and Depreciation Expense, but Intangible Assets show up as Other Assets and Amortization Expense.
Here’s an example of a SaaS (Software as a Service) app startup: Let’s say you are developing a SaaS app and are going to spend $250,000 developing the initial version of your app prior to going “live” with subscribers. According to normal accounting rules, you would capitalize your initial development cost of $250,000 (and let’s assume that your useful life of your app is five years) and then you would expense your ongoing development and support thereafter. (See this post R&D Expense Assumptions for a SaaS Startup for more details on pre-launch and post-launch SaaS expenses.)
Your Asset Investment assumption input, in this case, would be entered as an Intangible Asset because it is a software investment and would look like this:
And after calculating your model, your simple entry from above is automatically added to an amortization table and applied to all of your financial statements, financial ratios, investor return summary, key metrics, etc.
Here’s how the CapEx and Depreciation Schedule looks with your assumption from above (you can click on Month to see the monthly detail, also, note that we’ve also entered another $25,000 of hardware expense as a Tangible Asset):
Here’s how the Operating Activities and Investing Activities of your pro forma Cash Flow statement looks with the yellow highlights showing the impact of your assumptions from above:
Here’s how your pro forma Balance Sheet looks when we click into the Other Assets detail – you can see the full value of the Intangible Asset of your SaaS app and the Amortization amount:
Here’s how your pro forma Income Statement looks when we click into the G&A Expenses detail to see the Amortization Expense: