Liquidity – where did all the money go?

Or rather: don’t I want to know where the money was spent in the functional areas? Marketing, sales, development, operations, etc., right?

Facing each other are two different concepts which, especially in the start-up world, often cause confusion and – in our view – lead to additional complexity and therefore costs. The structure of the income statement (P&L), which is mainly preferred by international investors, versus the structure used in the German-speaking countries.

The latter is also often referred to as the “betriebswirtschaftliche Auswertung” (BWA), the German-style business management report. Every entrepreneur knows it, since it is the reporting that the tax adviser or accountant submits on a regular basis. Incidentally, the term was introduced by DATEV in 1960 as DATEV-Standard-BWA-1. Today the BWA is also used by banks as an instrument to assess the liquidity of companies.

Initial vs. ongoing planning

Especially in business planning (for start-ups), the GAAP structure is often used. Why? Because many templates on the internet prescribe this structure and it is found in the downloadable Excel templates. Incidentally, there is an excellent template by Christoph Janz of Point Nine Capital here.

For the venture-backed company it is practical, because it makes all plans internationally more comparable and easier to read. When drawing up the first business plan in particular, the structure plays a subordinate role. The areas often listed separately under GAAP, such as administration (general & administration, or G&A for short), sales & marketing (S&M) and research & development (R&D), require detailed planning assumptions anyway, which are then usually worked out in separate worksheets in Excel.

It gets more interesting when the business plan then becomes an instrument for monitoring day-to-day operations or a financing instrument.

The tax adviser as the spoilsport

And then the BWA arrives from the tax adviser. And it does not fit the GAAP business plan at all. After more or less lengthy phone calls it becomes clear: the tax adviser will NOT reproduce the business plan structure. But how difficult can that be? So you start reconciling it manually via Excel and before long you are spending half a day on administrative tasks. As if there were not already enough of those!

The investor as the critical questioner

And then due diligence comes up. An investor wants insight into the company and asks for the business plan and the ongoing reports from the tax adviser. The cross-check causes problems, though, so questions land on the entrepreneur’s desk that really should not have to be asked and that have little to do with the actual company vision. In the worst case, trust is lost.

Is the BWA a cure-all?

Of course it is not. But for reasons of efficiency, planning on the basis of a BWA is highly recommended. It gives you a closed reporting system. The business plan can be reconciled with the monthly reports. Ideally this report is maintained by the tax adviser as well. (That does involve additional costs, though.) In addition, the business plan can very easily be updated on the basis of historical figures. You immediately see how individual items have developed over the last months or years and can make projections accordingly.

But don’t I want to know where the money was spent in the functional areas?

If you take a closer look at the GAAP structure, you find that the functional areas often merely break down the personnel costs, plus expenses that are easy to identify and allocate. Sales & marketing, for example, would be the salaries of the sales and marketing staff as well as the marketing spend. But the marketing spend can easily be derived from the BWA as well.

A “real” breakdown of the functional areas would require cost centre accounting (cost centers). That is laborious, expensive and maintenance-intensive. The question everyone has to answer for themselves here is: how much information do I really need, and how much money or time am I prepared to invest in it?

And what can be done better?

In our view, ongoing reporting, especially for small and medium-sized enterprises (SMEs), is above all about keeping an eye on the cash flow. That is why COMMITLY, as a cash flow planning tool, has effectively merged the BWA with an indirect cash flow calculation. You can read here how COMMITLY determines the cash flow. The categories in detail can be found here.