Amortizing a an asset purchase


I'm writing a business plan. In the first year of operation I'm spending a big amount on machines. This skewed my P&L because I'm paying them in installments. Do I amortize them in my business plan or do I state the full amount?

Business Plan Purchasing

asked Jun 17 '12 at 01:52
Random Joe
3 points
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2 Answers


Potential investors care more about cash flow. To give investors a complete picture, you should model both the income impact and the cash flow impact.

Income Statement Impact You should amortize the cost of the machines over the expected life of the assets. The amortized cost on your P&L will show up under depreciation and amortization and thus when potential investors look at EBITDA (earnings before interest, taxes, depreciation and amortization) it will not skew results when compared to similar companies if machinery is not a big driver of your business costs in the long-term. In addition, you should also model the interest expense related to the debt taken on because of the purchase of the machinery.

Cash Flow Impact The Cash Flow Statement is where you would model the impact of the actual cash payments for the debt and interest. This will show investors how you will use the cash from income earned and well as their investment.

By modeling the full impact (debt and cash flow) under the appropriate financial statement you will give potential investors the full picture of your business model.

Hope this helps.

answered Jun 18 '12 at 07:15
Kimberly Loftis
39 points


Why not do both? Itemise initial debts and payment plans (possibly with asset value and depreciation thereof if necessary). This tells the whole story, and any investor worth their salt will be happy to see that you understand the debt and have accounted for that in your P&L analysis (they will expect initial set up costs also, so no real worry there either).

If it makes that much impact, then you could alway annex it in the document. Investors do not like nasty surprises, better to be straight up front. A short term impact on profit due to debt repayment adds to both asset worth and better revenue expectation as debt reaches maturity.

answered Jun 17 '12 at 23:09
191 points
  • Ahhhhh that should do it. Thank you! – Random Joe 12 years ago

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