Category Archives: Back to Fundamentals

Do those summaries, sure. Use those frameworks. But don’t think they replace business planning.

Back to Fundamentals, business plan, Business Planning,

There is some bad advice floating around in the startup world. Useful as the Lean Canvas is, and despite some well-intentioned suggestions of summaries, those are not business plans. They don’t deal with the drivers and components of cash flow. They don’t set milestones, metrics, and tracking. You can’t run a business with them. And you won’t get through investors’ due diligence with them.

Do those summaries, sure. Use those frameworks. But don’t think they replace business planning.

Beware of the straw-man logic that first defines a business plan as a huge ponderous document that takes months to prepare, and then advises against it. That’s very much like defining exercising as running 50 miles in a single day, then advising against it.

Real business plans are not long, not traditional, and definitely not a waste of time. Business owners need them. Startups need them. Angel investors want to see them during due diligence.

They set strategy and tactics concisely, they set milestones and performance metrics for tracking, they set priorities, and lay out the relationships between sales, costs, expenses, balance sheet and cash flow as essential projections. And they stay lean and they get reviewed and revised often, at least once a month.

The worst thing about supposed experts advising against business planning is that it does such a disservice to real people trying to figure out how to run their business better. The components of cash flow (sales, costs, expenses, assets, liabilities, capital, profits) are way easier to understand and manage when laid out in an organized way than when just kept in somebody’s head. And milestones, tracking, and metrics, the components of accountability, take writing down, reviewing and revising as necessary. That’s all called management.

The myth about people – investors especially – not reading business plans is just a myth. It’s a word game. Some investors and a lot of supposed experts feel cool saying they don’t read business plans, but ask them whether there should be well-defined strategy, tactics, milestones, metrics, and projected numbers. Ask them whether they want milestones met and priorities established. They’ll all say yes. But the myth makers have first misdefined business plans as long, traditional, and so forth.

I’m was in an angel investment group for several years. We wanted summaries first, then pitches. We didn’t read business plans until after we were really interested, and even then, we didn’t want those long traditional business plans. But we do want to see that core information, including financials, as part of due diligence. We’ve never read a business plan until after liking the summary and the pitch and meeting the founders; but we’ve never invested in a startup that didn’t have a business plan.

So how can you do a good business plan in a week? Do a lean plan.

  1. Set your strategy as a focus on how you’re different, what you’re offering, and who’s your market. Use bullet points. Use the lean canvas if you like, as Luca suggests, or those other summaries. Just write it down.
  2. Set tactics to execute strategy. Think of them as the key decisions that make up a marketing plan, product plan, and financial plan, but linked to your strategy, to make your strategy happen. Keep it to bullet points, as lean as possible.
  3. Set monthly review schedule, milestones, performance metrics, and other concrete specifics to track. List assumptions. Make sure task assignments are clear.
  4. Develop projected sales and direct costs monthly for 12 months, and annually for the following two years. Then do the same for spending and cash flow.

And then do it again and again. Review and revise monthly.

So do a business plan. Do a lean plan. Not just a summary.

Business Plan Events and Why They Matter

Back to Fundamentals, business plan, Lean Business Plan

(Note: I posted this earlier this week on the SBA Industry Word blog. It’s reposted here for your convenience.)

What do you think of when you hear the phrase “business plan?” Does that bring to mind a formal document that starts with a summary and includes modules describing your business’s products, market, strategy, team, and essential projections? If so, let me introduce you to the concept of the business plan event and explain why this is worth thinking about.

The more common business plan events

Sometimes, in the normal course of running a business, growing a business, or starting a business, you need a business plan. I refer here to situations that require showing a business plan document to somebody outside the organization.

For example, the most common business plan events are:

  • Banks often require the business plan document as part of a business loan or other commercial credit. Most SBA loan programs, which guarantee bank loans made by local small business banks, require a formal business plan.
  • Angel investors usually require a business plan from a startup as part of the process of seeking investment. Unlike the common myth, they don’t use the business plan as an introduction to a business. Instead, they use it during what they call the due diligence phase, after they’ve met with founders and had a pitch, when they study the details before making a final decision.
  • Business plans are usually part of the process of buying and selling a business. That applies to the small business transactions that happen all the time, as well as to major acquisitions by big businesses.

There are other business plan events that come up. When I started my business 30 years ago, I needed to show a business plan to my bank just to get authorized to take credit cards. And I’ve heard of business plans used as part of negotiating divorce settlements and inheritance claims.

Widespread confusion between plan and planning

If you answered yes to my question in the first paragraph above, that you do think of a business plan as something hard to do that has only specialized use, then I say you are in good company. Let me suggest that you’d be better off, as a business owner, with an attitude adjustment.

My recommendation is that you dismiss the idea of the daunting big formal business plan, but adopt business planning instead. The distinction, in my mind, stands out with the famous quote from former president and military strategist Dwight D. Eisenhower: “The plan is useless; but planning is essential.”

I love that quote and use it a lot because it leads to what I call good planning process.

  • The process starts with a simple, lean business plan that covers the main points you need to write down. You can do this with simple bullet point lists and tables. Set down strategy, tactics, major milestones, metrics, and essential projections.
  • Then, as you steer your business with ongoing planning process, take that lean plan and review results regularly. As results uncover insights, revise that plan. Keep it lean, and review and revise it often.

The business conclusion: planning, not plan

My suggestion for business owners: Think about what business plan events are. Separate, in your mind, the business plan required for a specific business plan event from the business planning you can use on a regular basis to run your business better.

Then, once you’ve seen the difference, manage a lean plan that’s always fresh, with regular reviews and revisions. And when you face an actual business plan event, then and only then take your latest version of your lean business plan and dress it up, adding descriptions and summaries, as a formal business plan document.

Take Real Steps to Fight Sexism in Tech

Back to Fundamentals, Business Ethics, Current Affairs, Leadership

Harassment in the workplace. Sexism. Genderism. Bigotry and prejudice. Brogramming. Not just everywhere, but also in high tech, which – you’d think – should have been advanced past that backwardness.

Silicon Valley too. Blue city, blue industry, in a blue state. If you’ve been off the grid for a while, read this from the New York Times, Or google “Dave McClure Apology”, “Chris Sacca apology”, or “Justin Calder harassment” and you’ll see. Or just go straight to google brogramming. And these are just the most recent tip of the iceberg.

I don’t want to just wring my hands and write how bad it is (although I can’t resist some of that, but I’m putting it at the end, below) … I have compiled some lists of what, concretely, you can do about it.

Steps to fight sexism in tech. Seriously. Now.

Minda Zetlin published a three-point list in this article in Inc:

  1. VCs must publish the percentage of their funds they invest in women- and non-white-led startups.
  2. Hire more female VCs.
  3. Create an organization where women can make anonymous complaints.

Stephanie Manning of Leher Hippeau Ventures published a five-point plan (excerpts):

  1. Talk about it. Blog about it, Tweet about it, or reach out to your team about it. Acknowledge that this is unacceptable behavior and communicate to your team that this isn’t how you do business. Don’t think this isn’t my fund, this isn’t my co-investor, this isn’t my problem. It’s a problem for all of us.
  2. Don’t be creepy. Just don’t. Don’t put yourself in a position where actions or words could be misinterpreted. If you think “could this be crossing the line?” go out of your way to make sure you’re on the right side of the line and then take 5 steps back.
  3. STSD. Shut that sh*t down. If you are a male leader or any male within your organization and hear or see inappropriate things coming from your colleagues, shut it down. Right then and there. You can choose to do it in front of everyone or pull that person aside, but do it in real time. Make sure to follow up with the female who received the inappropriate comment to let her know that behavior will not be tolerated, you’ve confronted the individual, and you’d like to know if anything else comes up.
  4. Diversify. Look at your team, maybe you have all male leaders/partners/executives but where are the women? If they are already on your team, include them in important meetings and decision making. Studies show diverse teams outperform homogeneous ones so it’s mutually beneficial to bring more women to the table.
  5. Educate yourself. Don’t use the few women on your team as the go-to “token females” to answer all your questions about gender diversity. Seek out feedback from friends, family, and colleagues. Reach out to friends at companies that tackle diversity and inclusion exceptionally well.

Human rights of women entrepreneurs

Reid Hoffman, founder of LinkedIn, published a manifesto titled The Human Rights of Women Entrepreneurs that concluded with a pledge that all of us should take. He has his own list of three points (excerpts):

  1. VCs should understand that they have the same moral position to the entrepreneurs they interact with that a manager has to an employee, or a college professor to a student. If you are interested in pursuing a business relationship of some kind, you forfeit the prospect of pursuing a romantic or sexual relationship.
  2. If anyone sees a venture capitalist behaving differently from this standard, they should disclose this information to their colleagues as appropriate – just as one would if one saw a manager interacting inappropriately with an employee, or a college professor with a student.
  3. Any VC who agrees that this is a serious issue that deserves zero tolerance – and I certainly hope most do think this way – should stop doing business with VCs who engage in this behavior. LPs should stop investing. Entrepreneurs of all genders should stop considering those VCs.

And finally, an earlier list, 5 Ways For Men in Tech to Support Workforce Equality While Barely Trying, published in 2015 by Megan Berry, head of Product at OctaneAI and previously RebelMouse (also one of my four daughters). Megan wasn’t in the specific context of venture capital and investors, but was very much immersed in the day-to-day of high tech. She had her own 5-point list (again, excerpts)

  1. “I’ll get it”. It’s all too common for the woman in the room to be asked to get coffee or water or pick up lunch. It’s usually done casually, even unintentionally, but all too often. Here’s a thank you to the guys who interrupt the ask to the only woman in the woman and say “I’ll get it.”
  2. “Actually, you’re the pretty face.” True story. I was once leaving the office to give a talk, accompanied by a male co-worker. As we were getting ready to go, he made a joke about how I was the “pretty face.” A coworker told him, “Actually, you’re the one we’re sending to be the pretty face. She’s giving the talk.” Whenever you can turn a sexist joke back on the joketeller, women everywhere will thank you.
  3. “Come grab a drink with us!” It’s easy for the only woman in a group to feel unsure if she’s welcome at the happy hour, the casual beers in the office or similar situations. These casual environments are important for anyone’s career. You gain mentorship, bond with your coworkers and get the insider knowledge to advance in the company. Don’t assume she feels welcome, welcome her.
  4. “What do you think we should do?” Women are more hesitant to speak up in meetings than men. This is a generalization and not a rule (just ask my coworkers, I’m sure they’ll assure you I have no issue speaking up), but if you find yourself in a meeting with only one woman in the room, it can’t hurt to make sure she feels comfortable speaking up. It’s so easy to do and, hey, maybe she’ll have the best idea in the room.
  5. “It’s so easy a dad could use it” The examples we use in everyday language and business are surprisingly powerful. If you talk about it being so easy a “mom could use it” I encourage you to push your creativity a step forward to think beyond the simplest of stereotypes.

OMG it’s 2017!

Jeez! This sh*t was obsolete years ago. I grew up in the 50s and 60s and even then, already, my mom taught me better than this. And, God knows, there was a whole lot of bias back then. (Mad Men was realistic for my generation. But it’s been 50 some years since Betty Friedan first published The Feminine Mystique. And 35 years since my sister encountered sexism in her career in Silicon Valley high tech. And 20 since one of my daughters first encountered it.

For those of us old white guys, it’s way too easy to forget, or ignore, that this is going on. I was shocked when my sister encountered it in a 1980s tech company that eventually went public. Shocked and saddened, when I discovered, via my daughters (I have four daughters, all in tech) first encountered it was they merged into the work world beginning in the late 1990s. Dismayed when my youngest got it in a San Francisco SOMA startup in 2012.

For the record, I haven’t been ignoring it. I’ve been fighting it. It’s been a thing in this blog for 10 years. I may be older white male, but I do know right from wrong.

Sexism in tech is a cancer. Stop it.

5 Things Entrepreneurs Need to Know About Valuation

Back to Fundamentals, Business Financing, Business Planning, , , , ,

Valuation is one of those four-syllable business buzzwords you’re going to have to deal with, eventually, if you either want to start a business or own a business. If it doesn’t come up when you start, it will come up later. Here is what I think you need to know, in five short points.

  1. The word has vastly Different meanings: don’t you hate it when the same words mean different things? Valuation means at least three different things:
    1. What a business is worth to accountants for legal purposes, such as divorce settlements, inheritance taxes, and gift taxes. A certified valuation professional, usually a CPA, makes a guess. Most of them use financial statements and analyze financial details.
    2. What a business is worth to a buyer. Small businesses go up for sale with  business  brokers. Hardware stores, for example,  get about 40-50% of annual sales plus inventory, as a starting point. Plus a bonus for growth and special strengths, or a discount for lack of growth and special problems.
    3. The pivot point in an investment proposal: it’s simple math, but tough negotiations. If you say you want to get $1 million for 50% of your company, you just proposed a valuation of $2 million.
  2. What’s anything worth? Like your car, your house, and a share of IBM stock, something’s worth what somebody will pay for it. The valuation in A is theoretical, hypothetical, but legal. With B and C, though, valuation is as real as agreeing to buy a house. It’s not what the seller says it is; it’s what the buyer is willing to pay. And this cold hard fact drives many entrepreneurs crazy.
  3. For Small businesses, there are guidelines and rules of thumb. If you do a good search, or work with a business broker, you can find general rules of thumb for what your long-standing small business is worth. For example, a hardware story is worth roughly half a year’s sales plus inventory, with bonuses for positive factors like  recent growth,  and discounts for negatives like lack of growth. You could read up on it in bizbuysell.com, bizequity.com, or business brokerage press. Or do a web search and check the ads for valuation experts.
  4. For Startups, it’s what founders and investors negotiate. Startups and investors and culture clash over valuation.  Investors care about valuation. Founders often misunderstand valuation. And never the twain shall meet. I’ve seen these kinds of problems many times:  Founders walk into the valuation discussion full of folklore and fantasy like stories of Facebook and Twitter. They want lots of money for very little ownership. Investors see two or three people with no sales history thinking their dream startup is already worth $2 or $3 million.
  5. Irony: sometimes traction, and revenues, make things worse. It’s easier to buy the dream than the reality. The same investors who’ll seriously consider a $2 million valuation for a good idea, business plan, and a credible 3-person management team – but with no sales ever — might just as easily balk at a valuation of $600,000 for a company with three years history, 20% growth, and annual sales of $300,000.  Despite the irony, it makes sense: few existing businesses are worth more than a multiple of revenues, but, still, before the battle, it’s easier to dream big. Or so it seems. I’ve been on both sides of this table, and I don’t have any easy solutions to offer.

If it hasn’t come up yet, it will. Every business deals with valuation eventually. The place any business sees it is during the early investment phases; but most businesses don’t get investment, so they can ignore it at that point. But then if it survives, or grows, valuation comes up again, because even if the business is immortal, the people aren’t: so eventually you either sell it or pass it on to a new team, an acquiring company, or your own family. And there’s the divorce and estate planning elements that require valuation. So every entrepreneur and business owner should have some idea what it is.

(Image: courtesy of wordle.net)

How to Start a Business Plan

Back to Fundamentals, business plan, Lean Business Plan,

MarketingHow do I start a business plan? It’s a common question. And you can find lots of definitive answers. People answer with outlines, prescriptions, and recipes. Unfortunately, most of these misunderstand how people are different, and the way they approach the business plan ought to reflect that difference.

Let me explain with some examples of how your own preferences might determine the best way to start your business plan. See if you fit with one of these general patterns:

  • Mission-driven. Some people tend to build the concepts first and go from there to the specifics. So they start with a general concept like a statement of purpose, often called mission. That’s a matter of words only, but it seems to work for some. The downside of this is that these are way too often just empty promise words, vague marketing hype, in which case they are pretty much a diversion, or waste of time. For more on this: How to Write a Mission Statement in 5 Easy Steps – Bplans Blog
  • Problem and solution. Starting with the problem the business solves, and how it solves it, can be a useful way to get going. These two are the core of strategy and market analysis. And don’t think of that problem too narrowly either. Many successful businesses address what people want – prestige, confidence, status – more than what they really need. For more on this: Don’t Just Describe Problem and Solution in Your Business Plan; Make People Care – Bplans Blog
  • Strategy and tactics. Strategy is focus: I recommend a simple framework that considers the interaction between your identity (unique differences, strengths, goals, etc.), your market market, and your business offering. Then add tactics to execute, aligned with the focus. For identity: Strategy Step 1: Understanding Identity. For market: Strategy Step 2: Market Focus. For the three factors together: How to Develop Your Business Strategy
  • Numbers first. I’m one of these. I prefer to develop the sales forecast first (How to Forecast Sales). Thinking about the sales forecast helps me to imagine the whole business, and to think about what will work and what won’t work. In fact, I often to the financial forecast all the way to cash flow, before working on the words and concepts. Numbers help me to think about the whole business. I’m sure I’m not the only one, but I’m also sure a lot of people prefer to do concepts first.

Conclusion: Get started. Get going. Do first whatever seems easiest, or most natural, to you.

Planning Principle: Do Only What You’ll Use

Back to Fundamentals, Lean Business Plan,

Efficient business in general means avoiding waste, doing only what has value. Therefore the right form for your business plan is the form that best serves your business purpose. Furthermore, for the vast majority of business owners, the business purpose of planning is getting what you want from the business – setting strategy and tactics, executing, reviewing results, and revising as needed. And that purpose is best served with lean business planning that starts with a lean plan and continues with a planning process involving regular review and revision. You keep it lean because that’s easier, better, and really all you’re going to use.

Form follows function

Consider the illustration that follows. I call the central image the lean plan because the lean business plan is about what is supposed to happen, when, who does what, how much it costs, and how much money it generates. It’s a collection of decisions, lists, and forecasts. It doesn’t necessarily exist as a single document somewhere. You use it to track performance against plan, review results, and revise regularly, so the plan is always up to date. I hope it’s gathered into a single place, as if it were a document, but it doesn’t have to be. And it’s only as big as you need for its business function.

Form Follows Function

The main output, and therefore the main purpose, of the lean business plan is better business, which means getting what you want from your business. That’s what your lean plan is for and that function determines what’s there. Forget the additional descriptions for outsiders until you need them. Wait for that until you have a business reason for it. But don’t let not having to show a plan keep you from using planning to help your business.

The lean business plan is the bones of other business planning outputs, including a summary, a pitch slide deck, and a full business plan document, if you need one. Do the lean business plan, keep it up to date, and to the rest as the need arises. Maybe you’ll never need to do the formal document. But you’ll always need strategy, tactics, milestones, metrics, and essential business projections.

Know your market, yes; describe, analyze, prove – not necessarily

You have to know your market extremely well to run your business. Know your market like you know the back of your hand. Know your customers, what they need, what they want, how they find you, what messages work for them, what they read, what they do, and all of that.

What you don’t have to do, however, is include any of that in your lean business plan. A lean plan doesn’t need rigorous market analysis. It doesn’t normally include supporting information — at least, not until later, with the business plan event, when it is actually required.

However, your lean plan is about what’s going to happen, what you are going to do. It’s about business strategy, specific milestones, dates, deadlines, and forecasts of sales and expenses and so forth. It’s not a term paper. Yes, you should know your market. But you don’t have to prove it until you’re trying to find outside investors.

Form follows function: The function of the lean business plan is management, not selling something to outsiders.

You don’t need supporting information. It’s still a business plan without it. It still serves its business purposes. You don’t have to do a rigorous market analysis as part of your plan if you know exactly what you’re offering, and to whom. So what about market analysis? Think about the business purpose. Do you need the market analysis to help determine your strategy? Then do it. Are you ready to go with that strategy regardless? Then don’t sweat the market analysis.

This is ultimately your responsibility. You don’t gather all the supporting information and do a rigorous market analysis just because somebody said you should. You do it if you’re actually going to use it to make decisions, or if your business purpose requires proving that there is an attractive market opportunity. You do need to know; but proving your knowledge isn’t necessarily part of the plan.

Stick to your business purpose

Planning is about managing. It’s a tool to set priorities, milestones, metrics; to track results, compare results to expectations, and steer the business.

 

Startups and Business Owners Will Thank Me for Posting This Debits and Credits Video

Back to Fundamentals, Business Plan Financials, Videos,

Business owners, startup founders: Do you know debits and credits? If so, cool, you know why I’ve posting this here as my Friday video. And if not, do yourself a favor and stick with this post and this video for a few minutes. You’ll be glad you did. It’s 13 minutes. If you go through this, then, for the rest of your life, for all your business dealings, you’ll know what the hell they are talking about when the financials get serious. Really, I’ve been through this, and it makes so much difference just understanding these basics.

I’ll always remember one of my favorite “this is how I did my startup” talks from a woman who’d made a scaled-up home cleaning service a business success, in Portland, OR. She made a big deal of how “knowing my numbers” became, for her, the secret to living with uncertainty, growing a business, and not obsessing day and night over the business. Once she learned her numbers, she was able to dampen the stress and get things done.

And that starts with debits and credits. Take the time to watch this video. You don’t have to memorize it; you don’t need to know it in detail; you just have to have an idea of how this works.

I run into entrepreneurs and business owners who’ve lived in fear of the phrase “debits and credits” for decades. Don’t do that. Take 13 minutes and watch this video. And then, for the rest of your life, you’ll get it. It’s actually a very easy concept.

 

For the record, I don’t know Mandi Conley and I have no relationship with this video except that I found it in the public domain and I like it.

Transaction analysis with T-accounts from Mandi Conley on Vimeo.

Business Plans are Always Wrong

Back to Fundamentals, business plan, Planning Process

Yes, I admit; I’ve used “business plans are always wrong” a few times in slides, blog posts, and even in both of my two latest books. It’s an important concept. Way too many people misunderstand the point of business planning and assume that because we can’t predict the future, we shouldn’t plan.

Which prompts me to ask: does the fact that flights are often delayed and sometimes cancelled suggest you shouldn’t make reservations to fly? Does the fact that weather or traffic jams might change the optimal route mean you don’t want to plan a driving trip? How can you justify not planning your business with the fact that things change?

I say take that a step further: business plans are always wrong.

That’s because we’re human. Business plans predict the future. We humans suck at predicting the future.an important warning

Paradox: nonetheless, planning is vital. Planning means starting with the plan and then tracking, reviewing progress, watching plan vs. actual results, correcting the course without losing sight of the long-term destination.

Planning is a process, like walking or steering, that involves constant corrections.

  • The plan sets a marker. Without it we can’t track how we were wrong, in what direction, and when, and with what assumptions.
  • Use this marker to manage the constant conflict between short-term problems and long-term goals. You don’t just implement a plan, no matter what. You work that plan. Use it to maintain your vision of progress towards the horizon, while dealing with the everyday problems, putting out fires.
  • So the plan may be wrong, but the planning process is vital.

The truth is that forecasting is hard. Nobody likes forecasting. But line chart tracking plan v actual one thing harder than forecasting is trying to run a business without a forecast.

A business plan is normally full of holes, but you fill them, after the fact, with the management that follows. That’s what turns planning into management.

Good planning is nine parts implementation for every one part strategy. And you heard that one from me first.

A Simple Cash Flow Spreadsheet Anybody Can Use

Back to Fundamentals, Lean Business Plan, Planning Fundamentals

If there’s just one formal business skill every business owner should have, it’s understanding and forecasting cash flow. It’s not intuitive because it’s not the same as profits; but it’s vital. We spend cash, not profits. It’s one of the most important pieces of every lean business plan.

Here’s my recommendation for a relatively simple way to lay out cash flow in a spreadsheet, so you can see it. It doesn’t take a CPA or an MBA to do it … just knowing your own business. (Note: you can click on the image to see it full size, and you can find more variations with this search on the lean business plan site.)

Simple Cash Flow Spreadsheet

Do Your Numbers

Making Your Estimates

  1. In lines 3 and 4, you forecast the revenue from sales. Yours might be just cash sales, a single line. If you have sales on account, you know it. If you’re not sure (maybe you’re looking at a startup so you don’t have the experience yet), assume you do have sales on account if you sell to other businesses; and probably not if you sell to consumers. Line 4 is your prediction for when the business customers will pay invoices.
  2. The ‘Start’ column reflects the starting balances and starting funding for a startup. With an ongoing business, you might have that balance labeled ‘Dec’ for the ending month of the previous year. In this example, the startup owner borrows $55,000 and gets $25,000 as new investment.
  3. Lines 5 and 6 are important because new money from loans and investments doesn’t show up in your profits, but it’s there.
  4. That whole block of rows 3-6 is a simplification. You know your business. Where else does money come in? Maybe you’re selling assets too? Stay flexible. Take this simple example as just that, an example. Make yours specific to your business.
  5. Rows 9-10 are also simplified. Use as many rows as you want to estimate operating expenses, focusing mainly on fixed costs, rent, utilities, and payroll.
  6. Row 11 is there to make the point that cash flow counts what you spend for inventory and other direct costs of sales, when you spend it – not when it shows up in profit and loss. When a bookstore spends $10,000 in November to buy books to sell, those books might not show up in profits (as cost of goods sold) until December, January, or beyond … but that money leaves your bank in November. So you put it into your cash flow in November. If you don’t sell products, and don’t deal with inventory, then you might have a row for direct costs such as hosting, or customer service.
  7. Row 12 is there because most businesses pay a lot of expenses at the end of the month, or 30-45 days after received. For example, the ad you place might come through as an invoice that you’ll pay later. Row 12 is for all those things you pay later. And, just in case you’re keeping track, these are expenses, including tax and interest. The projected interest on that $55,000 loan is included there.
  8. Rows 13 and 14 show two items that are often forgotten in cash flow planning. Principal payments on debts, and buying new assets, don’t show up in profit and loss. But they cost money that goes out of your bank account.

Simple Calculations

As you can see in the illustration, row 7 sums the money coming in, row 15 sums the money going out, row 16 shows the cash flow for the month, and row 17 shows the projected cash balance. You can see from the illustration how the cash flow is the change in the cash balance, and the cash balance is the equivalent of checking account balance; it’s how much money you have.

They Key is Using it Right

First, tailor your cash plan to match the actual details of your business. This is a very simple example. Be flexible about adjusting it so it matches your business, and your bookkeeping,

Second, using it correctly requires keeping it up to date. Review it every month. Calculate the differences between what you expected and what actually happened, and make adjustments.

You never guess right. And this is all guessing. What matters is watching carefully and updating so you can react to changes in time.

Like all business planning, the value is in the decision. The business value of cash planning is the decisions it causes.

(Ed note: I’m reposting here from my post yesterday on the SBA.gov Industry Word blog: A Simple Cash Flow Spreadsheet Anybody Can Use)

The Value of Business Plan Assumptions

Back to Fundamentals, Business Planning

(This post is an excerpt from my latest book, Lean Business Planning, reprinted here with permission.)

Identifying assumptions is extremely important for getting real business benefits from your business planning. Planning is about managing change, and in today’s world, change happens very fast. Assumptions solve the dilemma about managing consistency over time, without banging your head against a brick wall.

Assumptions might be different for each company. There is no set list. What’s best is to think about those assumptions as you build your twin action plans.

If you can, highlight product-related and marketing-related assumptions. Keep them in separate groups or separate lists.

The key here is to be able to identify and distinguish, later (during your regular reviews and revisions, in Section 3), between changed assumptions and the difference between planned and actual performance. You don’t truly build accountability into a planning process until you have a good list of assumptions that might change.

Some of these assumptions go into a table, with numbers, if you want. For example, you might have a table with interest rates if you’re paying off debt, or tax rates, and so on.

Many assumptions deserve special attention. Maybe in bullet points. Maybe in slides. Maybe just a simple list. Keep them on top of your mind, where they’ll come up quickly at review meetings.

Maybe you’re assuming starting dates of one project or another, and these affect other projects. Contingencies pile up. Maybe you’re assuming product release, or seeking a liquor license, or finding a location, or winning the dealership, or choosing a partner, or finding the missing link on the team.

Maybe you’re assuming some technology coming on line at a certain time. You’re probably assuming some factors in your sales forecast, or your expense budget; if they change, note it, and deal with them as changed assumptions. You may be assuming something about competition. How long do you have before the competition does something unexpected? Do you have that on your assumptions list?

The illustration below shows the simple assumptions in a bicycle shop sample business plan.

assumptions
Sample List of Assumptions