Category Archives: Business Planning

Some Posts on Managing During a Crisis

Business Planning, Management

If you’ve noticed a three-month pause on this blog, it’s not because I haven’t been writing. I’ve been focusing on managing during a crisis and posting on the main bplans blog instead of here. These are very tough times, and planning and good management are needed more than ever. Here are some of my related posts of the last three months.

  • Estimating Realistic Startup Costs, earlier this month. What will it cost to start your business? It’s hard to know for sure. And harder in a crisis. Learn how to accurately estimate startup costs and get your business off the ground.
  • The Difference Between Cash and Profits, last month. Profits are not the same as cash, and understanding the difference between them is a vital part of running a successful business. Your cash management has to tighten during a crisis.
  • Should You Start a Business? Test Your Idea First. May 21. Have a business idea you’re sure is a winner? You’ll want to test it first, especially during a crisis. Find out how to test if your idea is viable and if you should start a business.
  • How To Forecast Cash Flow. May 19. Your business may be profitable, but it can still fail if you run out of cash. Learn how to forecast cash flow to avoid unforeseen cash flow problems.
  • How to Conduct a Market Analysis in a Crisis. May 13. Even in a crisis the fundamentals still apply. But you have to adjust some estimates.
  • Turn What-if to What-Now: The Importance of Scenario Analysis. In April. Scenario analysis is looking at what might happen and developing a plan for how to act. Find out why this is so vital and how you can do it your business. It’s especially important during a crisis.

Most of those focus and highlight managing during a crisis. I hope you find them helpful.

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.

10 Common Mistakes with Startup Financial Projections

Business Plan Financials, Starting a Business
Business Plan Financials

I was glad to be asked about common mistakes with financial projections. I read about 100 business plans a year for angel investment and business plan competitions. Most show unrealistic profitability. More people doing business plans should realize that most startups are unprofitable at the beginning; and that high growth correlates with losses, not profits. High projected profits indicate lack of understanding, not reasonable expectations of profitability.

Profitability mistakes

  1. The most common mistake is with profitability. Most of the business plans I see project profits too high, or profits too early. In the real world, startups choose growth or profits, not both. The plans I see are aiming at angel investment. And for that, the investors win on growth, not profitability. Think about it: If a startup is profitable early on, it doesn’t need investors.
  2. The second most common mistake is underestimated marketing expenses. Many successful tech businesses, especially software and web businesses, spend 30% or more of sales on marketing.
  3. Don’t underestimate development expenses, testing, certifications, and expenses of regulations.
  4. If you are selling physical products, don’t underestimate the impact of selling through channels, as distributors and retailers take their margins and often demand admin and co-promotion expenses. And distributors often pay very slowly, like six months or so after receiving the goods.
  5. Never project sales by applying a small percentage to a large market. That doesn’t work. Nobody gets half a percent of a $10 billion market. Instead, sales forecasts should be built on drivers as assumptions. Drivers might be web visits and conversions, emails sent, paid search terms, or, for physical products, channel assumptions such as distributors, chains, stores, and sales per store.
  6. Don’t project big growth in sales with only small increases in headcount. If you are going to sell $100 million in the fifth year, get a clue: you won’t do that with only $2 million in employee expenses. Divide your projected sales by your headcount, and compare that to industry benchmarks. For most industries, $250,000 per employee is really good. If you are getting $2 million per employee, that doesn’t mean you’re going to be that efficient. It means you don’t understand the business.

Cash flow mistakes

  1. Having a profit doesn’t mean you’ll have cash in the bank. Good startup financial projections need to include cash flow. Always. For more on that, see points 4, 6,
  2. Another very common mistake affects cash flow. Businesses selling to businesses (B2B) normally sell on account. A sale generates not money directly, but money owed, to be paid later, which goes on the balance sheet as Accounts Receivable, or AR. Every dollar in AR is a dollar that shows up as sales in the P&L but not in cash.
  3. Many plans underestimate the length of the sales cycle and expenses related to selling directly to enterprises.
  4. Many plans underestimate the cash flow affect of inventory. Every dollar in inventory is a dollar that hasn’t yet shown up in the P&L but may have already affected cash balances.

10 Business Plan Myths That Hurt Your Business

Business Mistakes, business plan,

The need for good business planning is as strong as ever, and the potential benefits are as important as ever. Every business owner ought to have a business plan. But the best strategies for business planning are different than they used to be. And these 10 pervasive business plan myths get in the way, much too often.

This post includes the 8 business plan myths that I listed on my March 2 post on the SBA Industry Word blog, plus two others that weren’t included.

Why does it matter? Because business planning, done right, is a management tool that can help you steer your business.

1. A business plan has to be long (false)

Not necessarily so. A business plan can take whatever form is most useful, even if that’s just a few lists and tables.

2. A business plan is hard to make (false)

It doesn’t have to be. List your key strategy points and key tactics, and a few important major milestones (like deadlines, tasks, the new launch or new website, and necessary hires). Include projected sales, costs, expenses, and cash flow. Voila! You have a business plan.

3. Nobody creates business plans anymore (false)

Well-run businesses use business planning the right way. They keep a simple, lean plan up-to-date and refreshed. The review and revise it monthly. In straw polls I’ve taken for years at management workshops, the best 20% or 30% of the companies represented have a management process that includes a lean business plan as well as regular reviews and revisions.

Smart startups use basic business planning to help them see starting costs, projected early sales and spending, cash flow, and key strategy points and milestones before they launch. Then, they review these monthly.

4. Business plans are for only startups (false)

True, well-run startups generally use business planning to help figure out which steps they need to take, and which resources they need. But that doesn’t mean mature businesses can’t use business planning to constantly set milestones, strategy reminders, and forecasts. Mature businesses keep a business plan up-to-date, and review and refresh it often. The more a business grows, the more it can benefit from good business planning.

5. You can’t plan because change comes too fast (false)

In the real world, a good business plan manages change. It isn’t voided by change. You keep the plan current by making revisions as real events unfold.

It’s like dribbling in basketball: if you plan to go a certain direction, and the other team blocks you, then you go a different way. Having a plan means that you’ll have the information you need to make quicker, easier, and more natural revisions.

6. Forecasts are useless (false)

Forecasts are almost never accurate. But having a forecast gives you a tool to instantly compare what you expected to what actually happened (we call that plan vs. actual analysis, or variance analysis). Then you make business decisions to adopt to change.

Are sales better than expected? Then you look at the causes, and adjust marketing and other expenses to take advantage. Not what you expected? Use your plan vs. actual analysis to make the best changes.

7.   Having a plan means you have to follow it (false)

There is no virtue whatsoever in just sticking to a plan because you have a plan. It has to make business sense. Good business planning is about a bare-bones plan and tracking with review and revision to make it useful.

When things change, your plan changes. The benefit is in the tracking and information that serves like a dashboard, helping you manage the change and make adjustments.

8. All business plans need market research (false)

I read and review lots of business plans from mature businesses that don’t include fancy market research. Business owners have to know their market, and taking a step back to review your market is a good idea. But with good planning process in a business, you can stay on top of your market. You don’t need to include market research in every version of your business plan.

Only in special cases will you need market research to prove your market to outsiders. For example, startups looking for investment, or businesses applying for loans, might need market research. Mature businesses know their market and plan without the research requirement.

9. Investors don’t read business plans (only half true)

I was in an angel investment group for eight years. We didn’t read business plans for all the proposals that came in. We rejected many on the basis of summaries alone. For those that interested us, we invited them to present their pitch decks. From there, we narrowed the list down further.

For those that remained, the business plan was a vital part of due diligence. And for all of them, they should have had their bare-bones business plans made before they wrote their summaries and pitch decks. Without the business plan, the pitch and the summary are like movies made without scripts. Ultimately, seeking investors without a plan doesn’t work.

10. Nobody needs a business plan

Does every business need a plan, strictly speaking? No. But every business would benefit from good business planning.

People, even experts, still say nobody needs a business plan, but only because they are locked into the decades-old mentality of the big business plan document. If we redefine the business plan the way it should be, as a flexible record of key strategy points, tactics, milestones, and essential numbers, then all those experts would agree with me – that every business deserves a business plan.

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.

20 Reasons to Write a Business Plan

business plan, Business Planning, Lean Business Plan, Management, Planning Fundamentals, Planning Process

all businesses need a business planQuestion: What are some of the main arguments for writing a business plan?

Here are 20 good reasons to write a business plan. Please note, however, that a business plan is not necessarily a traditional formal business plan. It ought to be a lean business plan that gets reviewed and revised often. It ought not to be static, used once, and then forgotten.

These apply to all businesses, startup or not:

Key elements of a lean business plan

  1. Manage the money. Plan and manage cash flow. Will you need working capital to finance inventory purchase, or waiting for business customers to pay? To service debt, or buy assets? To finance the deficit spending that generates growth? Are sales enough to cover costs and expenses? That’s planning.
  2. Break larger uncertainties into meaningful parts. Go from big vague objectives to specific numbers, lists, and tables. It’s compatible with the way most humans think. A plan makes it easier to estimate and visualize needs, possibilities, and so forth
  3. Set strategy. Strategy is focus. It’s what you concentrate on, and why. It’s who is in your market, and who isn’t; and why and why not. It’s what you sell, to whom. You need to set it and then refer back to it, frequently, as things change. You can’t revise something you don’t have.
  4. Set tactics to align with strategy. Tactics like pricing, messaging, distribution, marketing, promotion have to work and they have to align with strategy. You can’t manage a high-end strategy with low-end pricing.
  5. Set major milestones. Concretely, what is supposed to happen, when? who is responsible? Humans work better towards specific milestones than they do moving in general directions. New product launch, website, new versions, new hires. Put it into milestones.
  6. Establish meaningful metrics. Of course that includes money in sales, spending, and capital needed. But useful metrics might also include traffic, conversion rates, cost of customer acquisition, lifetime customer value, or calls, emails, ads, trips, updates, hires, even likes, follows, and retweet. Good planning includes methods to track.

Dealing with business decisions

  1. Set specific objectives for managers. People work better with specific objectives, especially when the come within a process that includes tracking and following up. The business plan is the perfect tool for making this happen. Don’t settle for having it in your head. Organize and plan better, and communicate the priorities better.
  2. Share your strategy selectively. Let other people involved with your business know what you’re trying to do. Share portions of your plan with key team leaders, partners, spouse, bankers, allies. Don’t you want them to know.
  3. Deal with displacement. You have to choose, in business; particularly in small business; because of displacement “Whatever you do is something else you don’t do.” Displacement lives at the heart of all small-business strategy.
  4. Decisions on space and locations. Rent is a new obligation, usually a fixed cost. Do your growth prospects and plans justify taking on this increased fixed cost? Shouldn’t that be in your business plan?
  5. Hire new people or not. Who to hire, why, and how many. Each new hire is another new obligation (a fixed cost) that increases your risk. How will new people help your business grow and prosper? What exactly are they supposed to be doing? The rationale for hiring should be in your business plan.
  6. Make asset decisions and asset purchase or lease. Use your business plan to help decide what’s going to happen in the long term, which should be an important input to the classic make vs. buy. How long will this important purchase last in your plan?

More on sharing information

  1. Onboarding for new hires. Make selected portions of your business plan part of your new employee training.
  2. Manage business alliances. Use your plan to set targets for new alliances, and selected portions of your plan to communicate with those alliances.
  3. Lawyers, accountants, consultants. Share selected highlights or your plans with your attorneys and accountants, and, if this is relevant to you, consultants.
  4. When you want to sell your business. Usually the business plan is a very important part of selling the business. Help buyers understand what you have, what it’s worth and why they want it.
  5. Valuation of the business for formal transactions related to divorce, inheritance, estate planning and tax issues. Valuation is the term for establishing how much your business is worth. Usually that takes a business plan, as well as a professional with experience. The plan tells the valuation expert what your business is doing, when, why and how much that will cost and how much it will produce.

The standard arguments that apply more to startups

  1. Create a new business. Use a plan to establish the right steps to starting a new business, including what you need to do, what resources will be required, and what you expect to happen.
  2. Estimate starting costs. Aside from the general in the point above, there’s the specific estimates that list assets you need to have, and expenses you need to incur, in order to start a new business.
  3. Seek investment for a business, whether it’s a startup or not. Investors need to see a business plan before they decide whether or not to invest. They’ll expect the plan to cover all the main points.
  4. Back up a business loan application. Like investors, lenders want to see the plan and will expect the plan to cover the main points.
  5. Vital for your business pitch and summaries. You can’t really do a good business pitch without knowing already the key parameters you estimate in your business plan, for headcount, starting costs, and of course milestones and key strategy and tactics.

 

Why Do We Need Financial Forecasts?

Business Plan Financials, Management

Business owners and managers do financial forecasting to enhance  management. Anticipate essential flows of money to manage them better. Forecasting is a necessary first step towards managing plan vs. actual results, which means course corrections. It’s like steering a business.

A Quick Example

Consider this simple illustration:

financial forecasting variance
You can’t identify changes in flow if you don’t have a forecast to refer back to as you review and revises according to changes.

Real management is a matter of minding the details while working towards the right long-term directions. Step by step. Forecasting is part of the management process. When sales are different from planned, you look at the connected spending, and adjust. Change the resource allocation when things are going well or poorly. Identify problems with execution, and opportunities that result from the unexpected.

You should note also that the value of the forecast isn’t a matter of accurately predicting the future. We’re human. We don’t do that well. Instead, it’s a matter of identifying the connections between sales and spending, and managing the ongoing interaction involved. In the example above, bike unit sales were less than planned, but the dollar sales were higher.  Is that good news or bad? It’s not necessarily either one, right? And it is also quite possibly highlighting a market trend that management should be aware of.

A LivePlan Example

Another example, from LivePlan: Monthly sales are below the plan, but above the previous year. Accessories and clothing are better than the previous year, but bicycles sales are below the previous year. Is that a trend to manage? The numbers don’t say, but the people should know. The numbers are there to begin the discussion.

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.

What Do Business Plan Financials Look Like

Business Plan Financials, Planning Fundamentals

People often ask: What do business plan financials look like? You can get away with a sales forecast, spending budget, and cash flow plan. That’s enough for actually running your startup. It’s the essential numbers in a lean business plan.

If you want to do it right you take it further and present projected (also called Pro Forma) versions of the three main business plan financial statements: Income Statement (also called Profit & Loss), Balance Sheet, and Cash Flow. Here’s how they are related to each other:

And here’s another view:

Projected Profit and Loss (also called Income)

This is where you project sales, costs, and expenses; and what’s left over is profits. Here is a general summary, and you might also check out Your Profits are Way Too High, How to Forecast Sales and Profits Without Just Guessing.  Profits are the performance of the business over a specified period of time, like a month, quarter, or year. You project sales, direct costs, and expenses.

Here’s what it looks like in a plan.

Projected Balance Sheet

 The balance sheet shows your financial position at a specific time. That means assets and liabilities. For more on that, in detail, this post on how to do a projected balance sheet. And here’s what it looks like in a business plan:

Projected Cash Flow

The cash flow is the most important, because your business lives on cash, not profits. You can project cash flow using the direct method, or the indirect method. Either way works if you do it right. Here’s an example of what an indirect cash flow projection looks like in a business plan.

Do It Right?

As I suggested in my opening, if you just want the bare minimum to run your business, you can get away with projected sales, spending, and cash flow, without the formal projections. But for a business plan that passes muster when you show it to outsiders, better to have the formal projected Profit and Loss, Balance Sheet, and Cash Flow, the way analysts expect to see them.

Are There Statistics on Inaccurate Forecasts?

Planning Fundamentals,

How often do forecasts fail? How many business forecasts are accurate? Are there statistics on inaccurate forecasts? It’s a good question. It relates nicely to my view that all business plans are wrong, with the addendum, but vital. While I almost never host guest posts on this blog – opinions here are mine – but I liked this one enough to post it here.

It’s a Quora answer, by Hubertus Hofkirchner, to the question Are there any statistics available on forecasting failures?

Here’s what he wrote:

This is a dangerously simplifying question in a highly complex subject. Let’s forget crystal balls, Gandalf, and Harry Potter for a moment. Let’s use Prediction Science. There are three hidden levels to this question.

Level 1 – Simple Prediction

  1. A forecast impacted by human action can never be 100% certain, because humans will react to forecasts with unforeseen actions which in turn can change the future dramatically, in accordance with chaos theory.
  2. We can only measure the accuracy level and forecast bias of a specific method for multiple predictions – not a single one – with regards to specific forecast topics.

So: What level of unavoidable inaccuracy or bias do we chose to call a failure? What is the commercial worth of more accuracy compared to the cost of producing it with a more expensive method?

Level 2 – Decision Making

Human decisions combine forecasts with their subjective (and never known) purpose and value judgements. This brings the next level: every human action has a purpose. The decision maker can act on an inaccurate or biased forecast but still achieve the actual purpose successfully.

So: Do we chose to call a success then a prediction failure?

Level 3 – Deception Intent

Also, the question assumes a one-way causality, that politicians act on forecasts, implying that bad forecasts will cause bad decisions.

However, politicians often work the other way round. Let’s assume that a politician (or the lobbyist paying him) wants to trigger a war. He produces a forecast by which the citizens’ purpose will support the liberation (politically correct word for war) of some country, somewhere. For example, the politician might predict the existence of unspeakable weapons. The public diaspproves the weapons, thus approves the war.

Of course, when the fabricated prediction fails to materialise, the public purpose is frustrated.

So: Do we chose to call this a forecasting failure? After all the politician’s real intent did work out perfectly fine.

The Riddle’s Answer

The big answer is not “42”. It is “50%”.

Explanation: There is no such thing as a forecast failure (see 1. above). There are right and wrong decisions (see 2. above), and “failure” is but the non-achievement of the decision maker’s purpose (see 3. above).

For economics, let’s assume that the investor wants to make a return in line with benchmark. On the stock exchange, it is obvious by tautology, that 50% of investors will perform above benchmark and 50% below. This very tautology is of course exactly valid for economic and political decisions. So the answer is 50% of forecasts fail.

Nice job.