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.

Many people can be confused by the accounting distinction between expenses and assets. For example, they would like to record research and development as assets instead of expenses, because those expenses create intellectual property. However, standard accounting and taxation law are both strict on the distinction:

• Expenses are deductible against income, so they reduce taxable income, but expenses cannot be depreciated, ever.
• Assets are not deductible against income, but assets whose value declines over time (usually long-term assets) can be depreciated.

Some people are also confused by the specific definition of start-up expenses, start-up assets, and start-up financing. They would prefer to have a broader, more generic definition that includes, say, expenses incurred during the first year, or the first few months, of the plan. Unfortunately, this would also lead to double counting of expenses and non-standard financial statements. All the expenses incurred during the first year have to appear in the Profit and Loss statement of the first year, and all expenses incurred before that have to appear as start-up expenses.

This treatment is the only way to correctly deal with the tax implications and the proper assigning of expenses to the time periods in which they belong. Tax authorities and accounting standards are clear on this.

What a company spends to acquire assets is not deductible against income. For example, money spent on inventory is not deductible as an expense at the point when you buy it. Only when the inventory is sold, and therefore becomes cost of goods sold or cost of sales, does it reduce income.

Why You Do Not Want to Capitalize Expenses

Sometimes people want to treat expenses as assets. Ironically, that is usually a bad idea, for several reasons:

• Money spent buying assets is not tax deductible. Money spent on expenses is deductible.
• Capitalizing expenses creates the danger of overstating assets.
• If you capitalize the expense, it appears on your books as an asset. Having useless assets on the accounting books is not a good thing.

As you consider your projected Income Statement, I hope you see three of your spending budgets there. Those would be the cost of sales, the payroll, and the expenses. These also contain your fixed vs. variable costs, and your burn rate, which we went over in the previous section. Those are good numbers to keep in mind.

Why do fixed costs matter? They add to the risk. You have to pay them, whether you’re making money or not. Some companies reduce risk by trying to make as much as possible into variable costs, depending on sales, instead of fixed costs. For example, to make programming expenses variable instead of fixed costs, contract the work by milestone, or pay less fixed compensation and more royalty on sales.

The burn rate is the same thing. It’s a sense of risk. If you know you need $10,000 every month to cover your burn rate, then when you watch your sales you have an instant sense of where they have to get.

By the time you have your financial forecast complete, you have numbers available to do some standard business ratios. I can’t say that I’m a big fan of ratios, but they can look good in a full and formal business plan, even though they are projected ratios. Here’s an example.

The real use of ratios, in my opinion, is watching them as they change over time. In the best of the plan-as-you-go business planning idea, you have some key ratios that are important to you. They are in your objectives and you review them in meetings.

Notice in this case that I’ve also added a reference to standard business ratios. This is a good touch in a business plan. They come from available industry data, which I discuss in the next section. Don’t expect your company projections to ever be an exact match. Be prepared to explain why they are different. And they are always different.

The break-even analysis is not my favorite analysis for a business plan. It has lots of problems. First, people often confuse it with payback period, meaning when do you break even on the money spent with money returned to you from a business, as it grows. That’s not break-even. Second, it depends on being able to deal with estimated average numbers that are hard to do. Businesses rarely produce an average revenue per unit, or an average variable cost per revenue unit, or average fixed costs.

Still, it is useful if you take it with a grain of salt. It can help you see the implications of fixed vs. variable costs, and it can give you a basic idea of how much you need to sell to cover costs. If you don’t expect it to be too exact and you don’t put too much stock in it, then it can make sense and be useful.

I have an example here. The standard break-even financial formulas are:

The units break-even point is:

Fixed Cost ÷ Unit Price – Unit Variable Costs

The sales break-even point is: The sales break-even point is:

Fixed Cost ÷ (1-(Unit variable Costs/Unit Price))

This section of the model calculates technical break-even points, based on the assumptions for unit prices, variable costs, and fixed costs.

The break-even analysis depends on assumptions for fixed costs, unit price, and unit variable costs. These are rarely exact assumptions. This is not a true picture of fixed costs by any means, but is quite useful for determining a break-even point.

People often represent break-even a line chart, showing the break-even point as the point at which the line crosses zero as sales increase. The example here shows a break-even analysis that compares unit sales to profits, and assumes:

Fixed costs of $94,035

Average per-unit revenue of $325

Average per-unit variable cost of $248

Start with stories. In your business plan, your presentation, and even your elevator pitch, always start with a story about who needs what you’re selling. Needs and wants are the biggest thing in business, so make that come alive.

Ralph promised his wife Mabel that he’d get new suits before his London trip, but Mabel normally goes with him to the stores and she’s been busy with their daughter and new grandson, and Ralph hates shopping. His solution, for this and his long-term need for a steady supply of good-looking clothes befitting his position as president and founder, is The Trunk Club. He doesn’t have to shop, his clothes will fit, he’ll be able to just call the club and ask for what he needs, whether it’s business casual, office suits, or formal, or even golf and hiking. He’ll be in style and matched and he won’t have to worry about it. And he won’t have to go into a store either. With apologies to Joanna and Brie, founders of the Trunk Club, I just made that story up to illustrate a point. That one paragraph does a decent job, in my opinion, at setting up the market need, the target market, and the business offering. They have one of the more interesting new businesses I’ve seen lately. The plan and the presentation and the elevator pitch could begin with this story.

Linda’s been dreaming about and thinking about the business she wants to start. Sometimes she can’t sleep at night for thinking about it. Will people want what she’s selling, she asks herself? How many? How much will they pay? What’s the right equipment to start? Can I afford it? What will I need to spend to get going, then what will I need to spend on people, rent, and so on as I start? How much will it cost me to build what I’m delivering? Can I make an offering that will be attractive to outside investors? Finally Linda gets Business Plan Pro and starts working, building the plan. She takes it a topic at a time, a step at a time, she jumps around the different projections and concepts. Now when she wakes up in the middle of the night thinking about it, she has a plan underway, somewhere to put those thoughts down. Now she has a much better idea of what she needs, how long it might take, what the key points are.

Leslie and Terry both work, and they also both care very much about creating the right home life for their two children, three and one years old. When they shop for groceries they always go to the more health-oriented grocery store. They buy organic, they cook organic, but they don’t always have the time to cook. They hate giving their kids the foods they can get delivered, and they hate giving their kids the meals they can pick up. Then they discover a new business that prepares healthy family meals and sells a subscription plan. Terry stops by several days a week to pick up the family dinner on the way home from work. What business is this story for? You tell me; I’m just thinking here about a problem that needs solving. It’s about telling the story. That makes a business plan come alive.

One final example, this one a true story:

I spent most of Thursday and Friday last week at the University of Notre Dame with seven other people reviewing more than 60 executive summaries submitted to the two Notre Dame venture competitions – the McCloskey Business Plan Competition and the newer Sustainable Social Venture Competition. As part of this we reviewed two otherwise equal executive summaries. One starts with the founder’s story of how he had this problem nobody could solve. That one scored significantly higher than the other one, which was relatively similar on all other noticeable points.

This story idea isn’t new. For more on how to do it, try reading Made to Stick or All Marketers are Liars. What’s new here is that I’ve experienced another example of how much difference this tactic can make. Turn your core marketing strategy into a story, and then tell that story first.

(reprinted with permission from Planning Startups Stories)

This headline caught you because you’re planning something new. If you’re planning something that’s been around for a while, then you do know, or somebody knows, what you’ve been spending. Jump over to tkref.

So, for you newbies, first you should know that you’re not the first. Everybody who plans something new has to go through that first stage when you don’t have past results as a base. So you estimate.

I get that a lot. “I don’t know what my costs are.” Or, the interestingly naive alternative to that, “what will my costs be?’ The answer is, you better know. Here again, if you’re never going to get this and don’t want to, but you believe in the business, then you either already have somebody who does this or you better find somebody and get them on the team. Teams, remember? Businesses don’t have to be teams but then most of them are, and that’s because people are different.

One way or another, if you’re going to run your business you’re going to have to plan the ebb and flow of money. Deal with it. It’s not that hard. Just break it down into pieces. Guess your rent first, or maybe your salaries. Utilities are fairly easy. Health insurance. Don’t try to globally guess how much it will be all together, break it into pieces. Your car. Gasoline and insurance. Maintenance.

And then follow up. Check your plan once a month, compare the plan to the actual results, and improve the plan. Nobody’s supposed to know everything, and nobody knows the future; but you can keep making your projections better. The hardest is the first, before    you have any results. From there, things improve.

Consider the Trunk Club, Joanna Van Vleck’s interesting startup described in reftk. How important is it that she understands who isn’t her customer? She told me this herself.

• “I realized that although I thought my target was women, women are normally closer to style. In general. So they aren’t as likely to pay money for style consulting.
• Men have less ego invested. Some, in fact, pride themselves on not knowing style. In general.
• The metrosexual man is not my customer. He loves his own style and spends his own time and effort finding it.
• The man whose partner in a relationship likes to shop for his clothes is not my customer. She wants to do it. She doesn’t want me to.
• The younger men on a budget aren’t my customer. They can’t afford me.

Notice how the “isn’t my customer” routine helps define and position your marketing better.

A fast foods restaurant knows that the relatively well to do baby boomer empty nesters with comfortable incomes aren’t their customers. On average. The sushi restaurant knows that the construction worker driving a pickup truck who eats at the Texas barbecue drive-through isn’t their customer.

Consider Jolt cola. Twice the sugar and twice the caffeine. How important is understanding who isn’t the customer.

Your blog, if you’re doing a blog as a business, needs a focus. People don’t care about your inner angst, but there are specialty niche areas all over the place. Old Volkswagen maintenance. Arranging dry flowers. The narrower you cut it the better. Sure there are some general blogs that work, but they started years before you did. Nowadays you need to focus.