A business plan depends on both words and numbers. You can't describe a business in words alone, and the numbers don't work without the words. In this chapter, we go through the basics of how the numbers come together.
Words and Numbers Make a Complete Plan
Allow me to tell a personal story about words and numbers, and why you need both to make a complete plan.
In 1974, I switched from general journalism, writing for United Press International from Mexico City, to business journalism, writing for Business International and McGraw-Hill World News. With the switch, I found myself covering business and economics instead of general news, writing for (among others) Business Week and Business Latin America. Because I thought it would be nice to have some idea what I was writing about, I went to the local graduate school at night for courses in general economics, accounting, finance, and marketing.
As I learned about macroeconomics, and how to read financial statements, I discovered that the truth in business is almost always a combination of words and numbers, and can't be explained with either one without the other. For example, when a Central American government announced a new federal budget that it said was going to both develop growth and reduce inflation, the numbers said that was a contradiction. You can't do both; you can do one or the other. You could only see that by dealing with both words and numbers.
A business plan is like that, too. You can't describe a plan without both text and tables, both words and numbers. The single most important analysis in a business plan is a cash flow plan, because cash is the most critical element in business. With the way the numbers work, however, you can't do a cash flow plan without looking at the income statement and balance sheet as well.
You really can't do the income statement without looking at sales, cost of sales, personnel expenses and other expenses, so you need those too. And you'd have trouble doing a sales forecast without understanding your market, so a market analysis is recommended.
And then you have the break-even as part of the initial assessment, and tables for business ratios, general assumptions, and other numbers. Step by step, the business plan becomes a collection of tables and charts around the text.
Although cash is critical, people think in terms of profits instead of cash. We all do. When you and your friends imagine a new business, you think of what it would cost to make the product, what you could sell it for, and what the profits per unit might be. We are trained to think of business as sales minus costs and expenses, which results in profits.
Unfortunately, we don't spend the profits in a business. We spend cash. Profitable companies go broke because they had all their money tied up in assets and couldn't pay their expenses. Working capital is critical to business health. Unfortunately, we don't see the cash implications as clearly as we should, which is one of the best reasons for proper business planning. We have to manage cash, as well as profits.
Copyright © Timothy J. Berry, 2006. All rights reserved.