Understanding the loss at start-up

Question:

I don't like the loss at start-up, because it looks bad. Why a loss at start-up, and how is it calculated?

Answer:

The loss at start-up depends on an important principal in accounting, validated as well by tax policies of governments everywhere: Expenses are deductible against income, assets are not. Therefore:

1. 1. Even though you include start-up assets as part of your start-up costs, they don't affect the loss at start-up. You have to purchase starting inventory, equipment, office furniture, and other assets, they are part of the money spent to start the business, but they aren't part of loss at start-up.
2. 2. Loss at start-up is not a bad thing, it is a normal thing. As long as you can account for the expenses incurred, your business and your business plan doesn't look bad because of it.
3. 3. If you're working with Business Plan Pro's start-up table, the cell for loss at start-up should show the same amount (except it's negative) as your total start-up expenses.
4. 4. If your loss at start-up shows a loss greater than expenses, you raised money you haven't accounted for, so you need to add that amount into your start-up cash requirements. What you've got is money that went into the business as capital or loans, but wasn't accounted for as either expenses or starting assets. Add to cash to correct it.
5. 5. If your loss at start-up shows a loss less than expenses, you haven't raised enough money. You have incurred these expenses and acquired these assets, perhaps by stealing them. Add more money into start-up investment or start-up liabilities.
6. One of the most basic rules of accounting is that assets are equal to liabilities plus equity.

The loss at start-up should be equal to your start-up expenses, period. That's actually a good check on Business Plan Pro uses the loss at start-up calculation to adjust equity to make equity plus liabilities equal to assets.

Example: you specify $20,000 in start-up investment, $5,000 in liabilities, and $10,000 in assets. The loss at start-up is $15,000 because you have only $10,000 in assets, you borrowed $5,000, and you invested $20,000. Where did the missing $15,000 go? Loss at start-up.

Sorry, lots of people don't like it, but that's the way the accounting works. It has to be.

-- Tim Berry experts@paloalto.com