Mistakes I made as a young entrepreneur

> 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.

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.

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.

>> 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? :-)

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.

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.