Section Overview

Chapter 6: Describe Your Company - Page 6.10

Loss at Start-up

Because of accounting principles, your loss at start-up will always be exactly equal to your start-up expenses, but in the opposite direction. In the example, the start-up expenses total $18,350, so the loss at start-up should be exactly -$18,350. This is correct accounting. These are expenses taken against future income, and you have no income, so you have a loss. This is normal, since the vast majority of start-up companies start with a loss.

The rule of accounting is that assets are equal to capital plus liabilities. That is the same as capital being equal to assets minus liabilities, which is also your company's net worth. That's the law in accounting: if you have $32,000 in assets and $350 in liabilities, your capital should be $31,650 (assets less liabilities). If you invested $50,000 in this case but your capital should be only $31,650, then your loss at start-up has to be $18,350. The original $50,000 investment minus the $18,350 loss at start-up gives you the correct number for capital, $31,650. Your loss at start-up will always be equal to start-up expenses. Whether you like the loss at start-up or not, it happens whenever a start-up company has expenses before it starts to sell. This makes your balance correct at the start.

If your loss at start-up is greater than your start-up expenses, this means that you haven't accounted for all of the money you raised in investments and liabilities. Remember, all the money has to be accounted for as either expenses or assets.
If your loss at start-up is less than your start-up expenses, you haven't raised enough money to meet your funding requirements.

If you don't like the loss at start-up, there is only one way to reduce it: reduce start-up expenses.

Section Overview

Now that you've written the details, go back to the beginning of the section and create a good summary paragraph that you can use as part of a summary memo or a loan application support document. Include the essential details, such as the name of the company, its legal establishment, how long it has been in existence, and what it sells to what markets. Summarize your start-up requirements and funding, or recent financial history, in a sentence or two.

Summary

You should include a good company description, especially if you're developing a plan to be shown to people outside the company.

Don't stop with just legal formation and history; include some strategic topics, such as competitive edge and value proposition. You need one of two tables, either start-up or past performance, to establish a starting balance for your projected cash flow and balance sheet.

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