(Part two of a two-part series)
Last month, I proffered how a well-thought-out computer model can help you plan, budget and fund your business.
The model will have no value if you force the numbers to yield results you want instead of entering real data and letting the model generate valid results. Growth is driven by many things, but not by a number entered into a formula in an Excel spreadsheet.
If you really know your way around a spreadsheet, consider constructing your own model from scratch. It can be laborious but you will get a great feel for the economics of your business.
Use current revenue streams and account charts to reflect your business practices. If you are modeling a start-up company, develop your chart of accounts by picking the applicable ones from widely available sources.
Keep it simple
To a great degree, simple is better than detailed. I have seen expenses so detailed that travel was broken down into bus, train, airplane, breakfast, lunch, snack, dinner, etc.
No one should care what the total breakfast expense for the year is. Such detail makes understanding your model nearly impossible. If travel expense is an important component, then account for it carefully, but not to the point of tracking how much a glass of orange juice costs.
Justify the numbers
While I warn about using formulas that arbitrarily increment certain values, a model’s ability to automate calculations is what makes it so powerful. If you know the cost of supporting a salesperson, use that cost in a formula to automatically calculate those costs as the number of salespeople changes.
The same concept applies to sales generated per salesperson. If you know that each salesperson will generate $100,000 per month in sales, put it in a formula. You can then calculate both total sales and total sales support cost by simply entering the number of salespeople.
But, don’t fool yourself by arbitrarily starting with 1,000 salespeople to justify $100,000,000 of sales per month. The formula will certainly yield that number, but the formula doesn’t know that you might have a total working capital of only $150,000 and no support staff, warehouse or office.
Formulas are great, but they have no knowledge on their own. You supply that.
Construct conditions
Conditional formulas are linked to prior events and trigger further actions. They are a key feature of modeling. For example, in determining your rent cost, you might base your space needs at 250 square feet of office space per person.
Link the number of office workers into a formula that includes the cost per square foot for office space.
Keep in mind that unless this formula has a fixed starting point and a trigger conditional on when you would need to increase your office space, the formula would change your rent expense every time you increased or decreased staff.
In practice, rent expense does not vary month to month, so the formula must reflect your actual beginning rent expense and hold it constant until a condition triggers an increase. This condition should reflect when you would logically rent more space.
Account for the variables
Once these conditional formulas are constructed, they obviate your need to constantly adjust many variables. Merely changing the number of employees can recalculate sales, rent, payroll and anything else dependent on the number of employees.
Or, you might want the number of sales personnel to be dependent on the amount of sales. In that case, determine sales, and the formulas will calculate the number of salespeople, sales payroll, sales support costs and rent.
Adapt for your business needs
A commercial modeling program will do all the math correctly, but consider its applicability to your company. Adapt your company to its structure instead of adapting the model to your needs.
Commercial programs also almost always have automatic incrementing formulas, so when you disable that feature, make certain you are not crippling any other part of the model.
If you need a robust model but don’t have the modeling skills or time to prepare your own, have your professionals prepare it to your needs. The model is for your benefit, so be involved in developing and using it.
Try out a variety of scenarios to see how they flow through the model to optimize your business and to determine your capital needs. Erwin Bruder ([email protected]) is president of The Gordian Organization, which provides business planning and structuring services to startup and growing companies. He can be reached at (216) 292-2271.
