It’s not for nothing that I always say a business plan has to be your plan and nobody else’s. It can’t be your consultant’s plan. You must know it backwards and forwards and inside out, or it won’t work.

I learned this the hard way, sitting in venture capital offices at 300 Sand Hill Drive, Menlo Park, California (the center of the venture capital world), the business plan consultant on the tail end of the new venture team. I had done the plan, built the financial model, written the text, shepherded the document through the painful coil binding and the whole thing, but I wasn’t part of the team. I didn’t want to be. I was still at grad school, getting my MBA, and my part of this venture was writing the plan, period. I needed the money to pay tuition.

In meeting after meeting, at key moments, the VCs would ask critical questions and all heads would turn to me. I would answer. I knew the plan, backward, forward, and inside out, but unfortunately, I was the only one in the group who did. It was my plan.

It was a good founders team. It included three Silicon Valley veterans; a marketing guy, a technical guy, and a deal maker. They had about 40 years of computer company experience between them. They had a good idea and, much more important, a market window, differentiation, and experience to make it happen.

The three of them never really got into the plan. It was a hurdle they paid me to jump for them. Every meeting generated new changes, so I would go back to the basement computer at the business school, and rerun the financial model. The team of three didn’t include a financial person to learn and manage the model, so it was always me doing the tweaking, which meant I was the only one who knew the plan. I’d rerun my financial model, edit the text, and publish a new version of the plan. They read paragraphs here and there, glanced at the numbers, but they stayed with the strategy, and left the details to me.

Details that, in fact, they didn’t look at. They trusted my faithful recording of their ideas and my financial modeling. They assumed, I guessed at the time, that these were functions that could always be delegated to somebody with special skills while they generated high-level strategy.

They did not get financed. I was disappointed. When you develop the plan and revise it dozens of times and support it and defend it through the long series of meetings with supposedly interested investors, you want it to take flight.

All these years later (that was in 1981), memory of that disappointment is still fresh. I did learn my lesson, though, and I changed my strategy as a business plan consultant. From then on I made sure that any plan I worked on belonged — and I’m talking about intellectual ownership here, conceptual ownership — to the real plan owners, not me the consultant.

If you have the luxury of a budget to pay an outside expert, consultant, or business plan writer, then maybe you should use one. This might be a good use of division of labor, and perhaps you can lever off somebody else’s experience and expertise. However, that will not work for you unless you always remember that it has to be your plan, not the consultant’s plan. Know everything in it, backwards and forwards, and inside out.

Adapted with permission from Planning Startups Stories. All rights reserved

In Chapter Four of his book Blink, Malcolm Gladwell describes how Paul Van Riper, a retired Marine commander, drove the U.S. military to fits in a war exercise called “Millennium Challenge.” It’s a brilliant argument for the plan-as-you-go idea compared with the traditional plan method.

The Millennium Challenge was an exercise designed to test the military’s ability to deal with a simulated war in the Middle East. It pitted a very large team (Blue Team) equipped with a very detailed battle plan , a lot of computer models and simulations, against a very small team (Red Team) led by Van Riper, experienced and self confident and good at making quick decisions.

“Blue Team had their databases and matrixes and methodologies for systematically understanding the intentions of the enemy. Red Team was commanded by a man who looked at a long-haired, unkempt, seat-of-the-pants commodities trader yelling and pushing and making a thousand instant decisions an hour and saw in him a soul mate.”

As you’ve already guessed, Blue Team is the might of the military, and Red Team is essentially one smart guy who starts with a plan and revises it constantly as the battle ensues.

When the game was actually played, Van Riper surprised the Blue Team quickly with a move not in its plans, and as they reacted to that, he surprised them again, and quickly caused considerable unexpected damage to a much larger force. It was all simulated and hypothetical, but the result was that the quick-to-react team with flexible planning beat the pants off the very detailed plan team that couldn’t react to changes.

“Had Millennium Challenge been a real war instead of just an exercise, 20,000 American servicemen and women would have been killed before their own army had even fired a shot.”

That was pretty hard for the military to explain. They analyzed it a lot.

“There were numerous explanations from the analysts at JFCOM (Joint Forces Command Center) about exactly what happened that day in July. Some would say that it was an artifact of the particular way war games are run. Others would say that in real life, the ships would never have been as vulnerable as they were in the game. But none of the explanations change the fact that Blue Team suffered a catastrophic failure. The rogue commander did what rogue commanders do. He fought back, yet somehow this fact caught Blue Team by surprise.”

Implicitly, the problem was the big team full of computers and data trusted a static plan, while the other team didn’t.

Red Team’s powers of rapid cognition were intact — and Blue Team’s were not.

So relate that to the planning we want: planning that responds to rapidly changing reality. Not just “Duh, I can’t plan, I don’t know the future,” and not just “Why plan? Why bother” and not “We have to follow the plan,” but planning as you go.

You probably know this already, but this quick section is here just in case. I recommend using Business Plan Pro software so you don’t have to do this, but it’s good to know anyhow, and you can certainly do everything in this book without that software, so here’s a bit about spreadsheets.

Spreadsheets are normally arranged in rows and columns, with rows numbered from 1 to whatever, and columns labeled from A to whatever. Simple mathematical formulas refer to the cells that are identified by row and column. For example:

So what we see here is a simple formula that adds the 34 in cell B2 to the 45 in cell C2 to get the sum of those two, which is 79. That number is in cell D2, so you see the formula showing in D2. You can also see that it’s D2 whose formula is showing.

Here’s another simple example:

In this case the cell named B4 is highlighted, and its formula says to sum up all the cells from B2 to B4. That’s three cells, and the numbers they contain sum up to 128.

There are lots of books and websites and different instructions and tutorials available for spreadsheets. This is enough for now, here, so you can understand my simple forecast examples.

This is a true story, although the names and places have been changed. Everything ended up OK, but there was a lot of unnecessary stress–all of which could have been easily prevented by just a minimum of business planning. This kind of problem happens all the time, and it’s so easily preventable, it’s a shame it happens at all. The lesson: Don’t be a victim of unplanned growth.

The story takes place in a midsize university town on the West Coast, during the mid ’90s, as the internet boom took off and most everybody in business and education was getting connected. The main players are Leslie and Terry, co-owners of a consulting business offering computer and network services mostly to local businesses.

At the beginning of this story, Leslie and Terry had a small but comfortable office a few blocks off Main Street, near the university, and a comfortable business, averaging about $20,000 in sales per month with a few steady clients and not a lot of seasonal variations in sales. They had one employee who did the bookkeeping and general administration tasks, maintained office hours and made appointments.

Then came the big, wonderful new job–a contract with a large and fast-growing company to install new internet facilities in offices on its corporate campus, 10 miles up the freeway. This was a $200,000 contract that had to be delivered quickly and opened up an important new relationship with a potential business-changing client. There was great celebration. Leslie and Terry and their spouses started with a fancy dinner in the best restaurant in the area.

Both partners readily got going on fulfilling the contract, delivering the network, connecting the systems, making good on their promises. To make sure the new relationship would be a permanent increase in business, they took on five contractor consultants to deal with the needs of installation, training and the general increase in business demands.

Within two months, it seemed clear to both partners that they’d made the leap. Systems were being installed, clients were happy, and they were on the road to doubling their business volume in a very short period of time. The contractors were doing good work, and four of the five were happy to consider becoming permanent employees. Leslie and Terry decided they could celebrate more, so they both went to the local car dealer and leased new Mercedes sedans.

Then things started going bad. Like a television loosing its connection, things got fuzzy, then blank. Though sales and profits were way up, jobs were done and invoicing was underway, Leslie and Terry had no money. The contractors–good people who Leslie and Terry wanted to keep–needed to be paid, but there was no money. They rushed to their local bank, waving their increased sales and profits, but banks need time. The business suffered the classic problems of unplanned growth. Just as the accounting reports looked brightest, the coffers were empty. People were barely done celebrating, and suddenly they were looking at the disaster of unpaid bills and, much worse, unpaid people.

What happened? Unplanned cash flow problems happened. The new, larger client had a slow process when it came to paying bills, so the jump in sales didn’t mean an immediate jump in cash in the bank. Leslie and Terry were more concerned about delivering good service than delivering necessary paperwork, so their own invoicing process was slow. They were owed about $85,000, but they couldn’t go straight to their new client to get the money–she said she’d already authorized payment and sent them to the company’s finance department for answers. The people in the finance department were slow to respond and not particularly concerned about vendors getting paid quickly; their job was to pay slowly, but not so slowly as to get a bad credit rating.

Leslie and Terry had a bad case of “receivables starvation”–money that was owed to them was already showing in sales and profits, but not in the bank. It would have been predictable, and preventable, with a good plan.

In this case, fortunately, the two partners had enough house equity to get a quick loan and pay their contractors. The business was saved and grew, but not without a great deal of stress and strain, and even second mortgages.

The worst moment is worth remembering: One of the partners’ spouses was particularly eloquent about the irony of taking on a new mortgage while driving that “[profanity omitted] Mercedes.”

The moral of the story: Always have a good cash flow plan. Never get caught not knowing the impact of a sudden rush of new business. Get to the bank early, as soon as you know about new business, and start processing a credit line on receivables. And never lease a Mercedes until you’re sure you won’t have to take out a new mortgage a few weeks later.

(from Tim Berry entrepreneur.com column, January 10, 2007)

The most important problem is getting people who haven’t been running companies to believe that cash flow and profits are different. That’s so vitally important because, on the surface, it doesn’t add up. It isn’t believable.

I developed business planning software originally as templates for business planning clients to deal with the following amazingly typical exchange:

Me: So if you grow faster, then you’ll need to get more financing.
They: No, that can’t be true, because we’re profitable. We make money with each sale, so the more we sell, the more we can fund ourselves.
Me: Bingo! Please sit down here for a few minutes and deal with these numbers.

And so it would go. As soon as you’re managing inventory or selling on credit — which means just about any sale you make to a business — then your cash flow is waiting on the wings, a silent killer, to foul you up.

I learned this first in business school and then forgot about it. I learned it later again, the hard way, when Palo Alto Software sales tripled in 1995 and that nearly killed the company. Why? How? Well, the huge sales increase was selling software product through traditional channels of distribution, meaning stores, and that means selling to distributors who then resell to stores, and that means that it can take five months between selling the product and being paid for the product. In the meantime, you’ve got to make payroll and pay your vendors.

Yes, it’s a good problem to have, we all want to increase our sales and profits, but it’s a whole lot easier to deal with if you plan the cash implications well.

Often in presentations I use one of my favorite metaphors, the Willamette River as it runs through Eugene , Oregon, where I live. The river slows down coming out of the Cascade Mountains and into Eugene, and it looks deep, slow, and peaceful; but it’s much more dangerous there than when it’s throwing up white water through the rapids. Why? Because it seems so calm and welcoming. People disrespect its currents, get caught in weeds, branches, or rocks, and … well that’s a good metaphor for the way cash flow hits small business when things are good, when sales are growing.

What’s particularly painful about the cash flow problems that come with growth is that, precisely because there is growth, these problems can be prevented by planning.

You can see how the sales are growing, then determine what your cost of sales will be, and look at what you have to pay, to who, and when. See how your checking account will balance go down, and down. Next, chart out when your customers will pay you. It will be obvious if you will run out of money before those profits actually reach your hands. You can then plan how to find the financing to float your boat before you actually hit the snag and sink.

We’ve had growth spurts since then that were far less painful because we understood the dangers of cash flow, planned for the cash implications of growth, and worked with our bank ahead of time to make sure the working capital was there.

(originally published on blog.timberry.com. All rights reserved.)