Amortization

How to use

The Standard Financial Model and Runway Tool share a core component on the Forecast sheet that handles the purchase and disposal of other assets and their amortization. It's the intangible-asset twin of the capital expenditures component, and it works the same way.

On Forecast, any expense line assigned to the purchase of other assets is summed into total new purchases for that period. The amortization period is set by the Amortization, straight-line for N months input on Get Started. It's straight-line, and it's one period across every asset in the category. To add an asset, enter its cost on an expense line in the month you buy it and assign the line to the other-assets category. The model does the rest.

How it works

Amortization in the model works the same as depreciation. Read that guide and replace "Capital Expenditures" with "Purchase (Disposal) of Other Assets" and "Depreciation" with "Amortization", and you have this one.

The schedule lives in the depreciation and amortization section of Forecast, alongside the CAPEX schedule. Each period the model carries the net balance of other assets forward, adds new purchases, subtracts the period's amortization, and tracks accumulated purchases and accumulated amortization so that fully amortized assets drop out of the basis when their schedule ends. Straight-line means the period's amortization is the amortizable basis divided by the number of months on Get Started.

Where it lands on the statements:

• Income statement. Amortization sits with depreciation, interest and other income and expense, below operating income. It reduces net income.
• Balance sheet. Other Assets carries the accumulated purchases, and Accumulated Amortization sits beneath it as a contra line. The difference is the net carrying value.
• Cash flow statement. The purchase is cash out in the period you buy, under investing activities, next to CAPEX. Amortization is added back to net income under operations, because it's a non-cash charge.

That split is the whole reason the component exists. Expense the purchase and your burn is right but your income statement is wrong. Amortize it without the cash line and your income statement is right but your runway is wrong. The model does both.

Overriding the schedule

One straight-line period for all intangibles is a simplification, and for most early-stage companies it's the right one. If you need different lives for different assets, or an impairment rather than a schedule, enter amortization manually as an expense line on Forecast, using drivers or a direct input, and leave the prebuilt schedule at zero for those assets. The same technique is described for depreciation in the CAPEX guide.

Background

Amortization recognizes the cost of an intangible asset over its useful life, following the matching principle: the expense is spread across the periods that benefit from the asset rather than taken all at once. It applies to patents, trademarks, copyrights, licenses, and capitalized software development costs. Typical periods run up to 20 years for patents and three to five years for software.

Goodwill arising from acquisitions is the exception. Under current accounting rules it is not amortized. It's tested annually for impairment and written down if the acquired business is worth less than what was paid.

Amortization is non-cash. It reduces net income on the income statement, reduces the asset's carrying amount on the balance sheet, and is added back in cash flow from operations. Founders sometimes ask whether to capitalize software development at all, since it flatters the income statement in the short run. For an internal forecast I'd usually say no: expense it, keep the model simple, and let your accountant decide what the audited statements should do.

Debt amortization, which is the repayment of principal over time, is a different thing with the same name: Debt. Depreciation of tangible assets: CAPEX.