How to Go Bankrupt | Hacker News Reader

How to Go Bankrupt

jacquesmattheij.com

74 pointsbussetta26 comments

There are three accounting reports that every business owner should understand. Profit-Loss, Balance Sheet, Statement of Cash Flows. Most small business people that I have met only look at the Profit-Loss (P&L) and do not look at the other two. They are the three legs of a stool. The P&L tells you how much money you made (or lost), the Balance Sheet tells you what the balances are on your accounts (bank balances, monies owed to you and monies you owe to others), and the Statement of Cash Flows tells you where and how the Balance Sheet changed and where the money moved to.

If you are C level at your company, spend at least an hour a month understanding these three reports. If you don't understand something ask your accountant or Google. As the OP says, there are more than just employees jobs riding on these reports (or what they represent); their families are also depending on good numbers. Sometimes the reports are not good news - they key is not to fool yourself, but to understand the truth. If you understand the truth you can make better decisions. If you do not understand the truth, it is very hard to make a good decision.

Some days you are making money, but you have to wait for accounts receivable to get paid. Some days you have a bunch of money in the bank because of new funding, or a customer pre-paid, or you haven't taken care of all the payables yet. Just don't lie to yourself, and don't get lied to.

It is not that hard to understand the three reports; they are basic arithmetic and counting - the key is to just do it. Personally, I look at it every week after doing payroll. You can choose your own schedule, just choose one and look at all three reports. Even if you only do it quarterly, you will at least know what is going on.

It blows me away that that C-level staff would either ignore or not have the smarts to understand these basic reports.

The recent story about the parenting ecommerce store (I forget the name) where the CEO didn't understand the financial reports was crazy. It's high school level math!! How can you feel good about making decisions when you can't even do the basic math to figure out if you're gonna be profitable or not?

How do these people get to their position without being able to do that type of stuff?

Richard Branson claims to not understand basic financial statements.

> How do these people get to their position without being able to do that type of stuff?

Typically by hard work and good fortune. A non-accountant/non-MBA has a good idea, starts making money, hires a few friends, and tada, a person who has never read a P&L, never mind the more arcane reports, is now a CxO.

The audience of HN is programmers. Why would you be amazed that someone could code up a success, and then have a bunch of employees and an accounting department before they knew it? I have known Phds that had no experience reading financial statements of their companies. It is not that they CAN'T do it; it is that it has never been a priority.

In any small business (tech or not) there are always many, many things to do.. so my advice is simply about which of the hundreds of reports that your accounting software spits out that you should look at. To be honest, I did not look at Statements of Cash Flows for the first 10 years I was in business. It is less essential to watch SoCF if you are doing Cash accounting instead of Accrual accounting, and if you have positive cash flow it is not as dangerous to ignore it. But when the crap hits the fan, you should know what is really happening. The OPs post was about a business in decline.

The problem is that businesses live and die on making money. Accounting keeps track of your money, and by my made-up-but-probably-true commutative property, accounting keeps track of your business.

If you are managing a business, you should be managing accounting by default.

If you're starting a business, especially if you're a programmer who's not afraid of basic math, shouldn't you spend a day or so learning the basics of accounting?

Granted, that might not tell you to "watch cash flow like a hawk", but ... say, the moment you either have a paying customer or hire an employee, you have a minimum duty to not crater your company out of sheer ignorance of the basics.

This is why every programmer needs a regular, non-STEM, internship. Small, medium, large businesses all have accounting departments that need enhancements. That 4-8 week adventure will change your outlook on accounting, risks, and valuations for the rest of your life.

Financial auditing also changes your outlook on software auditing. It opens up new doors when everything you do is watched like a hawk. The amount of people who deal with financial transactions and do not deal with audits or accounting brings much worry to me.

There is a fourth thing to know as well: Off-Balance Sheet Liabilities, which can sometimes be so large that they make the other 3 reports seem like a joke. (For example, Google 'Netflix off balance sheet liabilities').

Well, put your liabilitites into your balance sheet. It's your company, the only one you'll fool by taking them out is yourself. And you are a fool if you want to fool yourself.

But yeah, if you are investing in other people's companies, you must seek those.

There are serious problems for failing to disclose. Of course that doesn't discharge the buyer that doesn't look for them but as a seller you also have obligations.

As a programmer, not an accountant, a great book I enjoyed reading is Financial Statements by Thomas Ittelson. He walks you through all three reports as someone running an applesauce factory. The great thing about this book is it explains not just what each line means, but why you should care and what common kinds of trouble you can get into. It explains why some lines matter more for one kind of business than another. It's a great introduction!

"A lawyer that you do not pay is not working for you"

I'm not sure I agree with this. If a lawyer agrees to represent you, they have a legal and professional responsibility to act in your interest regardless of who pays the bills. In the common case where they are also representing the person or company paying their bills, they should be clear on how a conflict would be resolved -- usually with wording along the lines of "in the event that a conflict arises, you understand and agree that we would terminate our representation of you, and we will assist you in finding other counsel".

The most important question to ask is probably "do you represent me, or are you merely advising me?" -- although a good lawyer will make that clear from the start in order to avoid any possibility of confusion.

(The above is not legal advice, and I am not a lawyer. I have however been a party to such joint representation.)

In this particular instance there was a lawyer involved that clearly did not understand things the way you do and having an independent lawyer involved when there are potential conflicts of interest between the various roles is in my opinion a good thing.

Of course there are lawyers that are capable of riding that fine line and making sure that everything is perfect but when in doubt it can get expensive really fast and in the end you are responsible, not your lawyer.

Paying a lawyer out of your own pocket in case of such doubt is a very good way of securing that there is no conflict of interest.

For obvious reasons I can't go into the details of why in this particular case this was essential so that's a pretty weak defense but I will stand by my words.

I agree with the question, still in a fluid situations such as these it is very easy to have such conflicts enter and be unnoticed long enough for trouble to arise.

Err on the side of caution.

If somebody tells you "If a problem comes up, we'll drop you instantly", then I wouldn't call that "working for you". That's more being a hitchhiker than having a personal driver.

I find it hard to follow your logic TBH. Your logic/argument are predicated on one thing: that all lawyers respond to their "legal and professional responsibility to act in your interest regardless of who pays the bills" the same way. I'm sorry but I can't buy into that. What if I said, "A doctor has a legal and professional responsibility to act in your interest regardless of who pays the bills" - would you agree with that? I wouldn't. Many times a doctor will say, "This is what I wish we could do but your insurance won't pay for that, so we'll do this instead." Or worse, a doctor keeps a dirty office/gear because it's cheaper for him/her and then infects patients with hepatitis.[1] I could go on and name almost any profession and change the scenarios around to counter argue your logic - a contractor that makes a choice that requires future work from his company (a.k.a. job security), a police chief who decides that writing cheap/easy/unnecessary traffic tickets is the way to make the city council pay attention to how much work they are doing "for the city", an accountant who decides to steal from the company she is accountant for, etc.

Just because someone has a "legal and professional responsibility" does not mean that a specific person will honor it.

[1] http://www.cnn.com/2013/03/29/health/oklahoma-dental-warning

One of my mentors taught me that a company that dies has usually been killed at least six months before it knows it's dead.

He also beat a simple credo into my mind: if you think that there might be a problem, there's a problem.

"A lawyer that you do not pay is not working for you"

That's pretty good advice on a personal level - in the early days of a company it is easy to view your company's lawyer as "your" lawyer. However, as a company grows and has external investors you may reach a situation where your own personal interests do not coincide with those of the company - this can lead to rather unpleasant surprises!

I guess the trick is spotting the point where your own personal interests and those of "your" company diverge without spending huge amounts of money on redundant legal advice.

Rule of thumb: if you feel that your roles as shareholder, executive and the corporate interests conflict to the point where you would take different decisions depending on which hat you wear.

After all, the decisions flow from those interests so they're a good benchmark.

The specific case where it got a bit exciting for me was actually in an IPO completion meeting - the company's lawyers had prepared some document that wasn't needed until the next day that had been phrased in a way that would have been an immediate (and very large) tax liability for the founders. One of our, extremely smart, non-execs noticed this wording and dragged us three innocents off to a meeting room where he pointed out what this would mean - pretty much immediate personal financial doom for the founders.

It all came down to one sentence in a document that wasn't needed until the next day - we, as individuals, asked for the document to be changed and they said no. The "company" had no view in the matter.

We had to threaten to pull the whole IPO to get the company lawyers to change a few words in a document. The only reason they didn't want to change the document was that they had already prepared it and didn't want to have to edit it again.

Fun and games!

Good catch!

I must admit that I wasn't paying attention - I was sitting coding...

> By keeping [the CEO] out of the loop the CFO was able to hide the problems (including some irregularities involving private accounts and the corporate current account) from his partner.

Seems like you're saying a good way to go bankrupt is to have a criminal CFO. Aye, that will do 'er.

That was a minor (if contributing) factor, the bigger problem was the unprofitable strategy of expansion.

The irregularities were what triggered the review, the actions by the participants hastened the demise of the company but as far as I can see with the information I've got this one was unavoidable. Which totally sucks.

Companies have survived with people raiding the till, but no company will survive basic un-profitability in the longer term.

"Turnover is meaningless if more business decreases your profitability" -- So basic, yet so frequently overlooked.

You can't just "make it up on volume."

Oh, I thought this was a wittily-titled article about Golang.

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