That is true from an accounting standpoint but does not tell you what a business is worth.
Here are the 2 easiest approaches for "non finance people"
1) Value at a future date of selling the business divided by perceived risk.
Steps:
A) figure out what the perceived absolute maximum value your business is worth in 5 years.
B) determine the perceived percentage chance of that happening
C) multiple by that percentage.
D) discount by risk free rate (this will be over many, many people's heads, but it is the risk free rate because the "risk" is built in to the percentage)
E) that is the max value.
* Improve the perceived future value or the perceived percentage chance of success or decrease the estimated risk free rate and you will increase your current value dramatically.
2) Use an NPV model to determine the value of your business. This is not a good way to go for VC funding
accounting and finance are not the same subject matter, finance is more about valuation, accounting is the input that helps determine it. The author is clearly wrong in his/her approach.
> Company valuation is a complex subject that I won't attempt to cover here. Suffice it to say that the information on the balance sheet is an important part of determining the value of a company, but it is only a small part.
Don't write like you are some sort of genius because you know more about accounting/finance/ops/whatever than people on a forum which is predominantly engineers. ("No, no, no, no.")
Your point is noted. I didn't want to come off as arrogant and it is understandable why it was downvoted based on that.
I added a framework for valuation and accounting which is a much more accurate than what was written in the article and in a fraction of the space.
The point I am making is very valid and extremely important for people to read after reading that article which is completely wrong in almost all ways.
I'd write it again anytime and gladly be downvoted in the off chance one person reads it and is saved from making huge errors later. (I will skip the "no, no, no" part and adjust tone to keep from seeming arrogant.)
Assets = Liabilities + Share holder's equity
That is true from an accounting standpoint but does not tell you what a business is worth.
Here are the 2 easiest approaches for "non finance people"
1) Value at a future date of selling the business divided by perceived risk.
Steps: A) figure out what the perceived absolute maximum value your business is worth in 5 years. B) determine the perceived percentage chance of that happening C) multiple by that percentage. D) discount by risk free rate (this will be over many, many people's heads, but it is the risk free rate because the "risk" is built in to the percentage) E) that is the max value.
* Improve the perceived future value or the perceived percentage chance of success or decrease the estimated risk free rate and you will increase your current value dramatically.
2) Use an NPV model to determine the value of your business. This is not a good way to go for VC funding