154 CHAPTER 7 ABOUT THESE NUMBERS
WHAT IF …?
Producing a single financial forecast is not the end of it. Most business people – and all
solid business plans – require at least a second pass through the forecasting exercise
to produce a worst-case projection. This will show you the amount of funding that you
would need if a doomsday scenario plays out. Sometimes even most likely and worst-case
forecasts are not enough. It may be that you want to produce a best-case as well to please
the boss, or to encourage an investor or banker to pour money into your business. You
sometimes hear this referred to as ‘scenario planning’.
If you make one or two assumptions about your business there is a neat way to show
the degree of confidence that you attach to various outcomes. This is also discussed in
Chapter 11.
Software tools
The way to tame your numbers and keep them under control is to use a computer spread-
sheet, such as MS Excel or OpenOffice Calc. These give you worksheets – tables with blank
cells, or boxes, into which you type information – that collect together into workbooks.
You do not need to be a spreadsheet wizard. It is enough to know how to:
format a cell so that the layout is pleasing;
enter simple formulas that add, multiply or simply repeat other values.
If you can use the facility to draw charts you are in a strong position. If you are not familiar
with spreadsheets, you are certain to have a colleague, friend or relative who loves their
computer and will be only too pleased to set this up for you, explain the basic principles
and guide you through the groundwork. If not you might consider a short training course.
In fact, the second and subsequent forecasts are the result of common
sense what-if analysis. What if your competitor introduces a superior
product at half the price? What if there is an economic disaster? What if it
takes you twice as long to fix the bugs in the new software? If you want to make
it sound deep and meaningful, you can refer to what-if using the term sensitivity
analysis. It is a very important part of your business plan, because it shows that you
have thought about all eventualities. You might not think that these extremes will
happen. Your readers probably do expect them. We will return to this in Chapter 11.
SOFTWARE TOOLS 155
SPREADSHEET TECHNIQUES
You should set up a workbook that essentially contains six tables, one for each of sales,
capital outlays, operating costs, profit and loss, the balance sheet and cash flow. These
can be six separate worksheets – or you could combine, say, the three financial state-
ments on one page. You might also decide to include worksheets for any additional tables
that you produce in pursuit of your analysis and forecasts. Here are four useful tips.
1 Minimise data entry. Make sure that you never enter the same information
more than once. For example, if you key in the months across the top of one
spreadsheet, ensure that all other instances of the dates pick up the values from
the first row. Then, if you change the coverage period of the financial statements,
you only have to make one amendment and the changes will ripple through
all the spreadsheet. The same goes for numerical amounts such as number of
employees or spending on salaries.
2 Automate. Try to automate data entry further. For example, if you key a month-
year (e.g. Jan-2012) into cell one, the next 11 cells could be set as formulas that
calculate the value of the previous cell plus one month. Changing the value in the
first cell will cause all 12 months to be updated automatically. Again, the same
applies to numerical data. If you project that rent will rise in period two, put a
formula in the second cell that displays 110% of the first cell.
Which is the first month?
Overheard in a corporate finance department: Look at the age of this business plan. It
shows that the project should have started two months ago. It’s still not funded. Maybe
20 other people have seen it and rejected it already?
Business plans date rapidly – and when they do, they convey a bad impression.
This is especially true of plans for new projects or business start-ups. When you
start to write the plan in January, you might think that a July launch date is entirely
feasible. Corporate bosses and capital providers are rarely so accommodating.
In my experience, new ventures nearly always start later than expected. It might
take longer to raise capital, maybe other activities cause delays, or perhaps you
underestimated the amount of time required for cutting through all the red tape.
To avoid having to revise and reprint business plans, consider replacing dates
with numbers. The extracts from sample business plans shown here (for example,
see Figure 8.9 later) use month 1, month 2, month 3, etc. in the detailed financial
projections. These plans will never look out of date
t
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