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by Tim Berry, President, Palo Alto Software, Inc.
One: Introduction
Business Plan Pro Financial Analysis
Business Plan Pro
™
is built around a very powerful financialforecasting tool: a set of linked financial tables. All you do is type your assumptions in the green cells, avoid the black cells, and you don’t have to program anything. Sales, personnel, income, cash, balance, ratios, andother tables are linked together already, so a change in one flows logicallyto all the others. This financial tool has been developed for more than 18years now, it has been used with hundreds of thousands of successful business plans, and it works. It is financially and mathematically correct.However, like all business models, any projection of the future is, at best, a very good educated guess. It depends on assumptions. It is ageneral tool that can be applied to millions of specific cases. It can always be improved, tailored, and customized. The objective of this white paper isto take that basic model and make it better, so it works exactly as you’dlike, for your business.
Business Plan Pro
, in fact gives you extensive spreadsheet-like programmability for your financial tables. Your financials, although theydon’t need to be programmed, are built into a very powerful spreadsheettool that includes a complete
Microsoft-Excel
™
-compatible spreadsheet. Itsupports financial functions that calculate your loan payments,depreciation, and investment analysis. All of this power is available evenwhile working within the financial analysis.
About This White Paper
This white paper is about the spreadsheets in
Business Plan Pro
. Itcovers some of the critical assumptions and complex formulas so you canunderstand how they work. Receivables, for example, is based on acomplex formula and is also critical to cash flow. Payables and inventoryare critical and relatively complex as well. This white paper will explainhow these formulas work, and why; it will also cover how you mightchange them, when you ought to, and what you might change them to. It’salso about spreadsheet formulas you can use, and how to use them. Itcovers many common formulas people use to calculate cost of sales, for
example, or sales commissions, or loan repayments. It shows you how toadd common formulas and how to create your own. It’s about how to use built-in functions to supercharge your analysis.The best way to learn this is by doing it. Therefore, this white paper takes you through a series of examples. It starts with simple examples thatoffer practical tips. It also includes details of more complex formulas, and practical explanations of formulas you might want to add or change.
Using the Tool Well
Use
Business Plan Pro
for what it does well. There is a solid, tested,robust financial model at its core, linking all of the key financial viewsinto a complete system. Change any one element and all the others changeautomatically. Use it to develop your business financials. Use its “what-if”facilities. Work with your business plan financials to understand the keyassumptions and think about how they might change. What happens if yousell more or less than planned, and what if you spend more than planned?What if utilities double, or rent increases? You have to at least consider these possibilities, and use your business plan to anticipate theimplications. That’s a lot of what
Business Plan Pro
is about.Remember, however, that the software is a tool. It is only as good asthe assumptions you put into it. Furthermore, it depends on mathematicalmodeling to project some critical elements--receivables, for example--intothe future-based on assumptions. These projections are just projections,and the math behind them is complex and elegant, but is still subject tosome important assumptions. This white paper will point out some of those assumptions; it will show you in detail how to work with them, andhow to change them when you think you should. For example:
•
For the first three months of the plan, the formula that projectsreceivables depends on the assumption that sales are steady,that the present month’s sales is a good estimate of previousmonths.
•
For the first 12 months of the plan, the inventory projectionassumes each month’s cost of goods sold is 1/12 of the totalyear’s cost of goods sold.
•
Taxes are simple math, so unless you make adjustments asteady loss situation could overestimate your cash by assuminga negative tax.
•
Depreciation depends on simple input, not formulas.
•
Loan repayment depends on simple input, not formulas.
Within this white paper we’ll be looking at these points and showingyou how to adjust and perfect your specific plan, using the knowledgeof
Business Plan Pro’s
programmability.
Planning with Computers
Computers don’t think, they just do the numbers. Computers are verydumb contraptions that can be downright dangerous when you expectthem to think for you. They are absurdly literal, and, worse still, literal intheir own very narrowly defined language. Tell a computer to tell you that2+2=5 and it will swear that 2+2=5 if you want.Use your financial projections but don’t believe them-- especiallywhen dealing with computers and software. Because there is somethingmagical about neatly ordered rows and columns of numbers shining at youthrough a computer screen or marching from the printer, you may forgethow meaningless they really are.So use the dumb thing for what it does well. You do the thinking, letthe computer do the numbers, and the division of labor will work wonders.Remember the origins of the spreadsheet, back with the pencils and greenlined paper, and think in those terms; you’re still in that realm, now you’vegot a team of tireless workers to change your numbers instantly. Nowthat’s power.The best analyst uses human judgment to guide the number crunching.If you accept the great split between rational, analytic thinking, andintuitive, creative thinking, then you probably realize the best work requires a little of both. Use your head to guide the analysis.How do you get the right combination? The simplest way is by doingthe numbers running the spreadsheet models. Change factors repeatedly.Each new version is another go at understanding a problem, each isanother possibility to be considered. The world is far too complex for simple answers. Solving problems is akin to recording stereo albums: theartist sings multiple tracks into a single tape, then magnifies and multipliesthe voice and voice effects. The more angles considered, the better theunderstanding of the final product and its alternatives. Look at your business plan at many different volumes, at many different prices, at manydifferent kinds and levels of expense, and the set of numbers you finallyaccept will be a better representation of the full range of possibility.There is an irony here. The best market forecasters use a lot of computer models, but they don’t believe them. Output from differentmodels stimulates thinking about alternatives, causes and effects, anddifferent outcomes, but output is not to be believed, just considered.
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