Our balance sheet is off by $18K and we have no idea why

What happens when the balance sheet doesn’t balance? My background is in agriculture and I don’t know much about finance. I can understand the profit and loss account, but I could never understand or read a balance sheet.

I asked our accountant what it meant. She said she wasn’t quite sure, it could be a number of things: it could be a bookkeeping error, it could be that some cash was missing, or there could be something wrong with our depreciation schedules.

She told me there was over $18K difference, which is a lot for a small company like us. I asked her how long it’s been a problem and why we didn’t know about this sooner? She said she didn’t know and that she doesn’t look at the balance sheet or do a reconciliation every month.

We made so many changes to the plan it confused everyone, including ourselves and our strongest supporters

We wrote our business plan for the seed round from friends and family. We sent it out to five people for feedback. We received some great feedback and modified the plan. We didn’t change much of the strategy but we made a lot of changes to the financial model.

We revised the plan and sent it to three more people for review. We got more input and didn’t know what to do when the changes suggested contradicted one another. We ended up using changes and ideas from the people we thought would invest in us. We went through this process four times and ended with a business plan, which differed from the original in many important ways.

The round was schedule to close at the end of the month so we contacted everyone we thought would be interested in investing. A number of people who had reviewed the plan along the way asked for the latest up date. They all responded that the plan didn’t make much sense anymore and they wouldn’t invest. One person asked if it was our plan or the seed investors.

We weren’t able to raise the seed round from our friends and family. We ended up alienating many of the people who were our strongest supporters. We had confused everyone including ourselves.

Our raw materials on hand quadrupled while our sales had only doubled; I had no idea why

The team said we needed a bigger warehouse. The stock of raw materials was growing as we grew and the finished orders were piling up in the loading bay. We had racks from floor to ceiling.

I’m a great believer in analytics, so I started to find the data I needed to see what was going on. When we rented the warehouse, it was supposed to handle three times our existing volumes, so something was wrong. I looked at the relationship between raw materials and sales and this showed that we had increased the raw materials on hand by four times and sales had only doubled. But it was the finished stock that really scared me. We had 12 weeks stock on hand – our bench mark was 45 days. How had this happened?

I knew we were using more cash than we planned and this explained why. Before I lost my temper with the team I realized it was my responsibility for finding these things and asking the right questions. I was distracted by other parts of the business and not paying enough attention to the inventory and stock.

The financial model that got funded isn't one we're committed to

I’ve been working on the financial model for over a month. We’ve been over and over it and I think we have it pretty much right. We included it with the business plan to a range of investors. The first response focused on the gross margin and our pricing strategy. We answered all the questions and modified the model. The second investor was concerned about the growth and working capital requirements. The third investor wanted us to lease our equipment rather than buy it.

All three wanted to invest subject to their concerns. When we factored all their input into the model the results were very different from our original ideas. Their input meant the cash flow was better but margins were depressed and the cash flows remained negative for a longer period. 

We sent the revised model back to the investors. They all had additional questions and suggestions and wanted more modifications. We then went to the investor who we hope would lead the round to see if we could get some consensus and agreement around one model. The investor agreed and we closed the round, but it took three months longer than we had planned for, took up a lot of time, and left us with a plan that we weren’t that committed to, but we did have the money.

We still have no idea how all that stock went missing

At the end of every quarter we did a formal stock count. When we were a real startup, we were always able to reconcile the stock and find it. As we grew, there were some discrepancies but nothing major. The differences were so small that we simply wrote them off.

Last quarter, the first stock count showed that more than 15% of the stock was missing. We counted again and found the same thing. We looked all over the warehouse and couldn’t find it. We now had six people working in the warehouse but they all said they didn’t know where the stock was.

We examined all the invoices and delivery notes and found that they hadn’t been reconciled for over a year. The accountants used the invoices to create the accounts and value the stock. The delivery notes were in piles in the warehouse office. Upon closer investigation it emerged there were no delivery notes for a number of high value items. We called the supplier and they said they were delivered. They provided signed notes to show when they were delivered. All were signed by the same warehouse operator.

When we asked him, he said he didn’t know anything about missing stock. There was nothing else we could do as there was no hard evidence of fraud. We tightened our controls and reconciled all the paper work. All was fine at the next stock count. To this day we don’t know what happened.

We got into a real mess because we didn't keep accounts from the beginning

I have a photographic memory. I keep all the details of the business in my head. I do have a notebook where I record invoices and orders and once every couple of months I do a profit and loss.

In the first quarter, our business had $18K in sales. Now we have $87K and I think we’ll reach $150K by the middle on next year. I still keep everything in my head but I have to admit some things are slipping through the cracks.

Finally, I gave in and we hired someone to do the accounts. He slaved away and after two months had things somewhat under control. He found over $12K in unpaid bills including demands for the local and federal tax offices. Together these came to over $30K; we don’t have that kind of cash on hand.

Two days later we saw the first set of accounts since we started the business. We had lost over $90K, were selling at least half our products at a loss, and had not paid state sales tax for three months.

I was astonished. I priced all my products myself and thought we were making good profit since we had cash in the bank. I was also sure I had paid the tax bills.

I can't deal with my startups' lack of discipline and systems

My to do list was growing everyday. When I looked at the list I got depressed. I could never get it all done. I was never going to catch up. I know that I should prioritize things but I do not really know how to do it. It seems simple but it is very hard for me.

As a team we also have problems establishing priorities. Everything and anything is a priority. Sometimes there are daily changes in what we must do. We are constantly fighting fires.

The CEO often tells us to drop everything and do x. This only makes matters worse. Things are half done and some things just get lost.

When a customers calls asking where their order is, we simply fill that order next.

We can't carry on like this. A business can’t be run this way and it is driving me crazy.