Category Archives: Lean Planning with LivePlan

Budget Your Spending with LivePlan

LivePlan Specific VersionAlong with the revenue forecast, you need to plan and manage spending. Revenue is money coming in, and spending is money going out.

By the way, the word budget, as I use it here, is exactly the same as forecast. The difference between the two is just custom. I could just as easily refer to revenue and spending budgets, or revenue and spending forecasts, as revenue forecast and spending budget.

Most people think of them the way I’m using them here, using the term forecast for revenue and budget for spending.

There are several ways to spend money in the normal course of business. These are the things you write checks for.

  • The first is costs, direct costs, what you spend on what you sell. LivePlan puts those in the Sales Forecast (where they belong). You saw them in the previous section, covering the sales forecast.
  • The second is normal expenses, also called operating expenses, such as rent, utilities, advertising, and payroll. LivePlan handles these very well in its Budget feature, which I’ll show you in this chapter.
  • The third is buying assets, such as vehicles, equipment, buildings, furniture, and so forth. The business dictionary (businessdictionary.com) defines assets as “Something valuable that an entity owns, benefits from, or has use of, in generating income.” LivePlan also handles these in its budget feature, so I’ll show you these in this section as well.
  • The fourth is what you spend to repay debts. The interest you pay on debts is an expense, and is deductible, and impacts your profit and loss. When you have interest expenses, LivePlan includes those automatically as expenses. However, the money you spend to repay those debts, what we call the principal, is not deductible, does not affect profit and loss, but still costs money; so it affects your cash flow. LivePlan handles loans and interest in a separate area, which I’ll show you in a following section.

The LivePlan Budget Functions

The illustration here shows how LivePlan guides you through its four main categories of spending, which includes expenses, major purchase, purchase of other (meaning not major) assets, and taxes.

LivePlan Spending Budget

 

Expenses

Let’s look first at the most common kind of spending, the operating expenses. LivePlan gives you guided input of all major operating expenses, in as much detail as you care to plan. You set the expense categories as you like them, at a level of detail you’ll be able to use. If at all possible, set your expenses in LivePlan to match the categories you use for your accounting and reporting. This will give you an enormous benefit later, as you use the plan to run the business, because as long as you use one of the several major small business accounting software packages, LivePlan will be able to connect your plan to your accounting and give you automatic plan vs. actual charts whenever you want. This is great for regular review and revisions.

All the numbers are educated guesses. Garrett, the bicycle storeowner, knows his business. As he develops his first lean plan he has a good idea of what he pays for rent, marketing expenses, leased equipment, and so on. And if you don’t know these numbers, for your business, find out. If you don’t know rents, talk to a broker, see some locations, and estimate what you’ll end up paying. Do the same for utilities, insurance, and leased equipment: Make a good list, call people, and take a good educated guess.

The illustration here shows how LivePlan manages the estimated expenses. Please notice the “Edit” link for each of the categories.

Editing Expense Budget

 

This next illustration shows what happens when you click on a category to edit the estimates month-by-month and year-by-year. These are the marketing expenses. Garrett chooses to estimate expenses as varying amounts for each period, rather than as a standard amount every month, one-time expense, or percent of revenue. For your case, choose which pattern seems most practical.

Estimating Marketing Expenses in LivePlan

 

Payroll and Payroll Taxes are Operating Expenses

LivePlan gives Payroll, or wages and salaries, or compensation, a list of their own. Payroll is a serious fixed cost and an obligation. Garrett’s LivePlan handling of Payroll includes estimated gross salary, as shown (in part) in this illustration.

Estimating Payroll in LivePlan

LivePlan also includes a simple calculation for payroll taxes, which applies a percentage over and above payroll expenses. Garrett estimates 25% for this, as shown in this illustration:

Estimating Personnel Taxes Etc

Notice that LivePlan includes the totals from the Personnel Plan in the tables it generates for the expense budget. And if you look closely (it may take a calculator) at the expense row “Employee Related Expenses” and compare that amount to the total payroll, you’ll see that it’s the same estimated 25 percent of payroll. LivePlan does this for you automatically.

Expense Budget in LivePlan

Major Purchases

LivePlan has a simple feature for managing the amount and timing of major purchases such as land, plant or facilities, major equipment, vehicles, and so forth. In the illustration that follows here, the bicycle storeowner plans to purchase an outside portable building which will house a new repair and maintenance facility on the back lot contiguous to the store parking.

Estimating Major Purchases in LivePlan

Major purchases are not expenses. They are assets. This is a matter of standard accounting and finance, something that isn’t intuitive for all, but is dictated by tax code and what we call GAAP (for Generally Accepted Accounting Principles). Of course writing a check to buy an asset feels to you, the business owner, very much the same as writing a check to pay an expense. However, purchasing assets is not tax deductible and does not affect the formal Profit and Loss of the company. Since we have to live with the standard accounting on this point, LivePlan handles this correctly. These major purchases do affect cash flow, but they do not show up on Profit and Loss. They do affect the financial position of the company, so of course you estimate the amounts carefully, and include that in plan vs. actual tracking later on. LivePlan includes it as well, in the Scoreboard feature that tracks plan vs. actual by connecting to your accounting.

Other Assets

Not all asset purchases are major purchases. Not all asset purchases are easy to predict ahead of time. Simplifying assumptions are very useful in planning, so LivePlan has an option for planning on money for regular purchase of current assets without having to set each one apart as a major purchase. It is a very simple guided input, a matter of typing in assumptions. Just click the “Add a Current Asset” as shown in this next illustration, and then type your assumptions when the input comes up. LivePlan will guide you through the input, and automatically track the related spending and accounting and cash flow.

Estimating Other Assets in Liveplan

 

Spending Budget Summary

The illustration below shows the bicycle store spending budget as LivePlan shows it in the plan. It includes operating expenses and major purchases. It doesn’t include depreciation expense (which doesn’t cost you any money) or loan repayment (which does); but don’t worry – LivePlan keeps track of those for you where you need it, in Projected Cash Flow and Projected Balance Sheet and Projected Profit and Loss.

Total Spending Budget LivePlan Example

 

Interest and Debt Repayment

As I noted in the introduction to this chapter, LivePlan collects information on debts, including interest rates and repayment schedules, so it can include debt implications in its management of cash flow. Fill in the information here and LivePlan will automatically calculate principle repayments and interest expenses.

Estimating Loan Payments in LivePlan

As you can see in the above illustration, LivePlan guides you through inputs of existing loans, if you have them (with starting balances, as shown in our next subsection); or estimating the timing of new loans. LivePlan does calculations in the background to estimate the details of principle repayment and interest that affect cash flow and the rest of the financial projections.

LivePlan Budgets Your Cash Flow

LivePlan Specific VersionLivePlan does mathematically and financially correct calculations in the background, so that your essential business projections are as accurate as your assumptions. That takes some additional assumptions for cash flow, which you do with LivePlan guided input, as shown below in this section.

LivePlan Cash Flow Assumptions

Setting Starting Balances

For existing companies, LivePlan uses simple settings of starting balances to make calculations and estimate payments and expenses and financial flows. The simple input is shown in the illustration here:

The Vital Cash Flow Metrics

Sales on Credit, Collection Days, Payables, and Payment Days

With LivePlan’s assumptions function you can change critical cash flow assumptions and watch the impact on your projections as you do. Increase your estimated sales on credit, and you decrease your estimated cash balance. Increase the days you wait to get paid, and you decrease your cash balance. And with payments, increase your purchases on credit, and you increase your cash balance. Increase the days you wait to pay, and, there too, you increase your cash balance (and make your vendors unhappy, and possibly hurt your credit rating, but that’s for a different discussion).

Remember please that these are simple assumptions. Don’t sweat the details. You may be tempted to try to divide your receivables flow into categories of customers, or make allowances for special customers, but on the long term that doesn’t work well. This is planning, not accounting. Don’t expect your estimates to be exactly right for every month, and remember the goal is to set assumptions you can track during your monthly review and revision session.

If you have no idea, go back to fundamentals. Sales on credit are the rule with business-to-business sales, so if you sell to businesses, play it safe and put 100% sales on credit. If you sell to a mix of business and consumers, or you sell to some consumers on credit, then think it through. One easy way to estimate, if you have some past history, is to divide your average balance of Accounts Receivable for the last year by your average total monthly sales for the year, and use that percentage as a guide.

For collection days, you can calculate your average collection days from past results by using a simple formula (thanks to investopedia.com):

Definition of Collection Period

If you’re not sure, or you have no past results to go on, estimate 60 days unless you are in a particularly slow paying area of industry (you should know), in which case you should estimate 90 days.

Dealing with Inventory

You might notice in the illustration above the switch at the bottom of the LivePlan cash assumptions, for inventory. Service companies don’t typically have to manage inventory, so this is a switch that is either on (for product businesses) or off (for service businesses). When switched on, it gives you two additional assumptions needed to add the impact of buying and managing inventory into the projected cash flow.

LivePlan Cash Flow

LivePlan automatically takes your assumptions for sales, spending, and the three critical cash flow assumptions for sales on credit, payments, and inventory; and gives you month-by-month estimated cash flow. The result is in the illustration here:

Obviously cash is vital to business, and cash flow is vital, so this is a critical component of every lean business plan.

LivePlan Reality Check

Just as it did with the Gross Margin for the sales forecast direct expenses, the LivePlan Benchmarks view also helps you compare your cash assumptions to industry standards:

Sporting Goods Sample Benchmarks

Cash Flow Takes Constant Attention

Don’t think the cash flow comes out fine the first time you do your LivePlan projections. More often than not, and especially with startups, after the first round of assumptions, the estimated cash balance is negative.

That’s really important information. It tells you that you need to plan for working capital. If your projected cash balance is negative, then you’re not done with your projections. Welcome to the real world. You can’t have a negative cash balance. The spreadsheets don’t care, but the bank will, and your payees will, because your checks will be bouncing. So you have some classic options to deal with:

  1. Go back to your projections and figure out how to sell more or spend less; or
  2. invest more money as capital: yours, or some other investor’s; or
  3. borrow money to make up the difference.

With LivePlan, as you decide how to handle your working capital problems, you go back into your assumptions and revise them. Use the Loans and Investment feature to add money from either source. Use the sales forecast and spending budget to estimate how you will increase sales or cut spending.

Remember, though, that there is no use for unrealistic assumptions. Make it happen in the real world, not just in the plan. Lean business planning is about running your business better, not just managing projections to look good.

 

 

Chapter 8: Monthly Review Session

LivePlan Specific Version“It is a bad plan that admits of no modification.”

– Publilius Syrus

Scheduling the monthly review was the first of the concrete specifics of your plan. I suggested a set schedule such as the third Thursday of every month, so you can set the meeting into your calendar ahead of time. Make sure you get that meeting onto the schedules of every person on the team who should attend. Make sure it’s a relatively short but also extremely useful meeting.

Expect resistance when you introduce good planning process into an existing organization. I have several decades of first-hand experience with this. It takes leadership. Some people mistrust planning process because they fear you will use accountability – tracking performance metrics and results – against them. Others mistrust it because of the myth that having a plan means you have to follow it, no matter what.

They Call it Variance Analysis

First, though, here’s some simple vocabulary: In accounting and financial analysis, the difference between plan and actual is called variance. It’s a good word to know. Furthermore, you can have positive (good) or negative (bad) variance.

Positive Variance:

  • It comes out as a positive number.
  • If you sell more than planned, that’s good. If profits are higher than planned, that’s good too. So for sales and profits, variance is actual results less planned results (subtract plan from actual).
  • For costs and expenses, spending less than planned is good, so positive variance means the actual amount is less than the planned amount. To calculate, subtract actual costs (or expenses) from planned costs.

Negative Variance:

  • The opposite. When sales or profits are less than planned, that’s bad. You calculate variance on sales and profits by subtracting plan from actual.
  • When costs or expenses are more than planned, that’s also bad. Once again, you subtract actual results from the planned results.

The Liveplan Scoreboard gives you visual variance analysis when you connect to your accounting. That means you can see plan vs. actual results in the charts in the Scoreboard. For example, here’s plan vs. actual for sales:

LivePlan Sales Variance

This is where the management begins. These are not just numbers. These are performance indicators. The bike storeowner and the team get together and review the changes. They go beyond the numbers, into the causes of the changes, looking for identifying management items that should be changed.

In the data shown here, for example, sales of and accessories and parts are way up from the previous year. Does this tip management off to marketing activities that worked? To a change in competition, or market conditions? And sales of clothing are up month-to-month and year-to-year, but down compared to the forecast. Was this just an error in the forecast? Was there a promotion in play with this?

Please don’t settle for narrowing the plan vs. actual analysis to focus only on the accounting data that LivePlan shows you in the Scorecard. Make sure you check the other performance metrics as suggested in the next chapter. The lean planning principle of accountability suggests that the planning process includes suggested metrics for as many factors in the business as possible. And for each of them, the plan review process is the right format for identifying good and bad performance and dealing with that in management.

For example, consider practical milestone items like social media updates or website conversions. Plan vs. actual is a natural lead-in to managing people based on numbers. It doesn’t happen automatically. It takes management attention to track those numbers like LivePlan tracks the accounting.

For example, assume the conversion rate is up. That’s kudos for the web team, but is it the result of their improving the landing pages, or simply a lowered price? And if leads from trade shows are down, is that a problem with the person managing trade shows, or the free gift offered, or maybe that an important trade show was cancelled.

Review and Revise

What’s important is not the accounting, the calculations, but rather the management that results. Garrett, the bike storeowner, watches the variance every month. He looks for indications of problems, or unexpected positives, so he can react. In this picture, with this example, the variance is negligible. The forecast was remarkably close to actual results. Still, Garrett should investigate why he’s selling fewer accessories and parts than planned, and whether the up and down of repair and service is worth reviewing.

The point is the management. Lean business planning is about the management, not the hard numbers. What should be done, given the variance, to make the company better?

Gathering the Team

Make sure your review sessions include the right people.

Even if it’s just you, a one-person company, you should still do your monthly review sessions. Plan ahead and take the time to actually step away from the daily routine and review your plan, assumptions, and results. And revise your plan as needed.

In a business, the review session should include everybody in the company who has responsibility for executing the plan. Use your judgment. In a startup with just a few people, review sessions might include the whole team. By the time you have 20 people, review sessions probably include five or six. Being at the review session should be both an obligation and a privilege. Don’t include so many people that your meeting is unmanageable. Match your organization structure and your culture.

Take the review session schedule very seriously. You’re the leader. You set priorities. You give it importance. You can use the review schedule to set meetings months in advance, so team members can plan around it and be present. And make sure you’re present too. If you don’t show up, or if you allow others to miss it, then it’s not that important.

The need for leadership is especially important in the beginning. After you have years of history with monthly review sessions, then maybe you can miss an occasional session and trust your team to do it well. But the early meetings are essential.

Use the LivePlan Scoreboard

I hope you’ll forgive me, as author, to add a personal note at this point, a reflection on the LivePlan Scoreboard and where it came from. I’ve been writing about the benefits of plan vs. actual analysis for 20 years. I built the plan vs. actual analysis into Business Plan Pro, my first Windows application for business planning, originally released in 1995. But until LivePlan, doing the plan vs. actual analysis to make planning process real was always a matter of data input. Now, with LivePlan, finally, I can recommend and use an application that connects to the accounting and does automatic plan vs. actual analysis.

If that seems like me selling – because I own the company that publishes LivePlan – I apologize. If it helps at all, this note is not in the generic version of this book, only in this LivePlan-specific version. It’s a huge relief for me to be able to recommend software that does this automatically; it’s a real leap forward for lean planning and business planning.

LivePlan isn’t magic. It works with several specific accounting packages. Happily, one of them is QuickBooks, which is used by way more small businesses than any other. And there are other packages as well. The team is working to broaden the possibilities, so I won’t list them here.

Connecting isn’t automatic because accounting isn’t standardized. Each company has its own unique chart of accounts. So it takes a session to go through the chart of accounts and reconcile what the accounting has with what the business plan has. In practical use, that’s often a matter of telling LivePlan how to summarize items that are kept separate and in more detail in the accounting. For example, the real-life bicycle store has multiple lines of new bicycles, but in the LivePlan connection, the storeowner sets it to sum all bicycle sales into a single line.

For example, the line chart in the illustration here below connects the planning with the accounting and shows several important lines to look at: Sales by month compared to the plan and to actual results of the previous year. LivePlan does this automatically – once the accounting is connected – without any data entry or massaging.

lp-scorecard-sales-lines

LivePlan includes dozens of possible views, business charts and diagrams, to show sales, sales breakdown, direct costs, expenses, profits, gross margin, cash flow, and key cash factors, among other items, all with just click and choose.

In this next illustration, LivePlan breaks down the sales into the different lines of sales, comparing each to the forecast and actual results and previous year’s results:

LivePlan Scoreboard Sales Breakdown

This following illustration looks specifically at the performance compared to the plan and to past results in the critical function of getting paid. Average collection days is shown over time. You can image how valuable this view is when it’s time for the monthly review session.

LivePlan Scoreboard Days to Get Paid

And finally, one last example, this is the LivePlan overview, showing the revenue and expenses for a given month compared to the forecast for that month. This is the last I’ll show here, but there are many other views possible. I hope you can see how all of them can lead to effective plan review and revision.

lp-scoreboard-summary

Standard Review Meeting Agenda

Review sessions become second nature in time, but as you start with your planning process, the more detail in the agenda, the better. Here are some things to include.

Review Assumptions

Start every review session with your list of assumptions. That’s why you list them in the plan. Assumptions change often. You don’t build a plan on a set of assumptions and then forget about them, because they are probably changing. So once a month you review assumptions.

Assumptions lead to a key decision. You always deal with the question of when to revise the plan and when to stick to it. If assumptions have changed, then the plan should change. If not, then you look further. Maybe you need to stay the course and maybe not.

Review Milestones

You can set some of the main agenda points of the review sessions in advance. Your plan includes milestones, that is, dates and deadlines. Use them to set review session agendas. For example, if your plan includes a milestone for product launch in September, then even in January (several months ahead), you can add that item to the August, September, and October review sessions. In August you check the last details, in September you go over the launch as it’s happening, and in October you review the results and execution.

Review Performance Against Planned Metrics

Reap the benefits of good planning and accountability. Use the review session to share performance metrics, track results, and identify problems, opportunities, and threats. Let there be some peer pressure as key managers share their results.

The most obvious and standard review is the plan vs. actual analysis of financial results. In accounting and finance, the difference between the plan and actual results is called variance, and the exploring it is called variance analysis. This is a very important monthly process. Look at key financial metrics including sales, sales by product or line, direct costs, expenses, profits, balance sheet including assets and liabilities, and of course the cash balance and cash flow.

Remember that performance metrics, accountability, and peer pressure require leadership. You want this to be about good decisions, productivity, and collaboration, not threats or fear. Make sure your managers feel safe bringing up expectations and revising metrics. Encourage them to evaluate metrics often and to bring up problems with metrics ahead of time, not after the fact.

Good planning encourages collaboration. Managers should know that it’s better to bring problems up ahead of time than hide them until after the fact. If the various factors that influence total sales show problems over the summer, you want to know about it, and deal with it promptly. You don’t want to wait until results are bad in October, and then react in November. Instead, in good planning process, managers bring up problems before they happen. Problems are discussed, solutions put in place where possible, and expectations revised. You want to know ahead of time if sales are going to slip, so you can adjust expenses accordingly. That happens in an atmosphere of collaboration, not criticism.

That collaboration should extend to other metrics, beyond just the financials. For example, suppose a plan includes leads generated through an online webinar program. It’s set to generate 500 new leads in October. However, the marketing team learns in July that some unforeseen development – not something the team could control – will really hurt the attendance of the October webinar, and decrease the expected leads. With good planning process, the problem comes up in the July or August plan review session. The team adjusts both performance metrics and related marketing activities ahead of time. What you don’t want, of course, is the problem being hidden or avoided with no actions taken, and then performance metrics are disappointing for October.

Leadership sets the tone. Problems are supposed to come up. Good management wants to get bad news fast. And collaboration is the rule.

Stick to the plan or change it?

As you work with your lean planning, when you get to reviewing and revising, these questions will come up:

Do I stick to the plan, or change it? If I change it, then is my plan vs. actual valid? Doesn’t it take consistent execution to make strategy work?

These are valid questions. And there are no easy answers. You won’t find some set of best practices to make this easy for you. You’ll end up deciding on a case-by-case basis.

The Arguments for Staying the Course

In one of my earlier books on business planning, I wrote this about consistency and planning:

It’s better to have a mediocre strategy consistently applied over three or more years than a series of brilliant strategies, each applied for six months or so.

This is frustrating, because people get bored with consistency, and almost always the people running a strategy are bored with it long before the market understands it.

Consider this true story. I was consulting with Apple Computer during the 1980s when the Macintosh platform became the foundation for what we now call “desktop publishing.” We take it for granted today, but back in 1985 when the first laser printers came out, it was like magic. Suddenly a single person in a home office could produce documents that looked professional.

What I saw in Apple at that time was smart young managers getting bored with desktop publishing long before the market even understood what it was. They started looking at multimedia instead. They were attracted to new technologies and innovation. As a result, they lost the concentration on desktop publishing, and lost a lot of market potential as Windows vendors moved in with competitive products.

That argues for staying the course. Strategy takes time.

The Arguments for Revising the Plan

On the other hand, there is no virtue in sticking to the plan for its own stake. Nobody wants the futility of trying to implement a flawed plan.

You’ve probably dealt with the problem of people doing something “because that’s the plan” when in fact it just isn’t working. I certainly have. That kind of thinking has something to do with why some Web companies survived the first dotcom boom and others didn’t. It also explains why some business experts question the value of the business plan. That’s sloppy thinking, in my opinion: confusing the value of the planning with the mistake of implementing a plan without change or review, just because it’s the plan.

How to Decide: Stay the Course or Revise the Plan

This consistency vs. revision dilemma is one of the best and most obvious reasons for having people — owners and managers — run the business planning, rather than algorithms or artificial intelligence. It takes people to deal with this critical judgment.

One good way to deal with it is by focusing on the assumptions. Identify the key assumptions and whether or not they’ve changed. When assumptions have changed there is no virtue whatsoever in sticking to the plan you built on top of them. Use your common sense. Were you wrong about the whole thing, or just about timing? Has something else happened, like market problems or disruptive technology, or competition, to change your basic assumptions?

Do not revise your plan glibly. Remember that some of the best strategies take longer to implement. Remember also that you’re living with it every day; it is naturally going to seem old to you, and boring, long before the target audience gets it.

Years and Months in Financial Projections

LivePlan Specific VersionFor any normal planning purposes, for any normal company, you should have at least 12 months detailed month by month for business plan forecasts. That would be for sales forecast, cost of sales, your burn rate, and eventually the complete financial forecast, if you’re going to do it. Then have another two years beyond that, for three years total, as annual projections.

That doesn’t mean you don’t think in longer terms. Think about what you want for your business for 5, 10, 20 years. I’m all in favor of that. But I don’t think you should plan for very long time periods in the detail of financial forecasts. The larger numbers — sales, for example, involve so much uncertainty that the time you spend trying to project more detail isn’t worth it. At least not in normal cases. If you’re farming lumber from tree farms, maybe.

Months and Years in Projections

Be forewarned. You’ll run into experts who will say you need more than 24 months, or more than five years in detail. They will be very sure of themselves. Sometimes what they mean is that they know more than you do, so they want you to suffer more. Or they want you to pay them to do the financials instead. Or they don’t like you or your business plan and they’re embarrassed to tell you. So instead, they say you need to forecast in more detail. If they are investors, what they mean is they don’t want to invest and they don’t want to tell you why. If they are loan managers, they don’t want to make the loan. And they don’t want to tell you the real reason.

My advice to you, when that comes up, is that unless you are a special case (if you are, you know who you are), look for another expert.

 

 

 

Profit and Loss (with LivePlan)

“Business is all about solving people’s problems – at a profit.”

― Paul Marsden

The Standard Profit and Loss (Income Statement)

LivePlan Specific VersionThe Profit and Loss, also called Income Statement, is probably the most standard of all financial statements. And the projected profit and loss, or projected income (or pro-forma profit and loss or pro-forma income) is also the most standard of the financial projections in a business plan.

Either way, the format is standard, as shown here on the right.Simple Profit and Loss

  • It starts with Sales, which is why business people who like buzzwords will sometimes refer to sales as “the top line.”
  • It then shows Direct Costs (or COGS, or Unit Costs).
  • Then Gross Margin, Sales less Direct Costs.
  • Then operating expenses.
  • Gross margin less operating expenses in gross profit, also called EBITDA for “earnings before interest, taxes, depreciation and amortization.” I use EBITDA instead of the more traditional EBIT (earnings before interest and taxes). I explained that choice and depreciation and amortization as well in Financial Projection Tips and Traps, in the previous section.
  • Then it shows depreciation, interest expenses, and then taxes…
  • Then, at the very bottom, Net Profit; this is why so many people refer to net profit as “the bottom line,” which has also come to mean the conclusion, or main point, in a discussion.

The following illustration shows a simple Projected Profit and Loss that LivePlan does for the bicycle store I’ve been using as an example. At this point you’ve already done all the inputs for the formal projection. LivePlan gathers the information it already has, and puts it into a formal projection matching normal standards.

This example doesn’t divide operating expenses into categories. The format and math start with sales at the top. You’ll find that same basic layout in everything from small business accounting statements to the financial disclosures of large enterprises whose stock is traded on public markets. Companies vary widely on how much detail they include. And projections are always different from statements, because of Planning not accounting. But still this is standard.

 

LivePlan Projected Profit

LivePlan also puts the formal Projected Profit and Loss as an annual summary into your plan, as shown in the illustration below; and a monthly version into the appendices.

LivePlan Profit and Loss

LivePlan will also automatically draw charts to insert in a plan along with the Projected Profit and Loss. The following illustration shows a LivePlan chart of Projected Net Profits.

LivePlan Chart Net Profit

 

 

Projected Balance Sheet (with LivePlan)

“Think of it as your business dashboard, providing a snapshot of the financial health of your company at a specific moment in time. The purpose is simple: balance sheets list assets, LivePlan Specific Versionliabilities and owner equity, typically in order from shortest- to longest-term assets and liabilities divided on either side of the balance sheet.”

– Financial Post

The Balance Sheet includes spending and income that isn’t in the Profit and Loss. For example, the money you spend to repay a loan or buy new assets doesn’t show up in the Profit and Loss. And the money you take in as a new loan or a new investment doesn’t show up in the Profit and Loss either. The money you are waiting to receive from customers’ outstanding invoices shows up in the Balance Sheet, not the Profit and Loss. The Balance Sheet shows many reasons why profits are not cash, and why cash flow isn’t intuitive. It’s all related to the those cash flow traps.

The Balance Sheet shows your financial picture – assets, liabilities, and capital – at some specific moment. It helps to understand that the Profit and Loss shows financial performance over a length of time, like a month, quarter, or year. The Balance, in contrast, is a moment. Usually it’s the end of the month, quarter, or year. Sometimes it’s the end of the business day.

Balancing is a common term associated with bookkeeping, accounting, and finance. We “balance the books.” It’s a lot like reconciling a checkbook: if it isn’t right down to the last penny, then it’s wrong. Assets have to equal liabilities plus capital. Always.

LivePlan generates a standard Projected Balance Sheet using the assumptions you’ve given it for Profit and Loss and the Cash Flow Assumptions:

 

LivePlan Projected Balance Sheet

The balance sheet involves the other three of the six key financial terms (the ones that aren’t on the Profit and Loss: Assets, Liabilities, and Capital).

  • Assets. Cash, accounts receivable, inventory, land, buildings, vehicles, furniture, and other things the company owns. Assets can usually be sold to somebody else. One definition is “anything with monetary value that a business owns.”
  • Liabilities. Debts, notes payable, accounts payable, amounts of money owed to be paid back.
  • Capital (also called equity). Ownership, stock, investment, retained earnings. Actually there’s an iron-clad and never-broken rule of accounting: Assets = Liabilities + Capital. That means you can subtract liabilities from assets to calculate capital.

Although traditional printed balance sheet statements are usually arranged horizontally, as in the illustration above, balance sheets in financial projections are usually arranged vertically, showing the assets first, then the liabilities, and then the capital.

This is planning, not accounting. It’s one of the primary principles of the lean business plan. To make a powerful and useful cash flow projection, you need to summarize and aggregate the rows of the balance sheet. Resist the temptation to break it down into detail the way you would with a tax report after the fact. This is a tool to help you forecast your cash.

The Link Between Balance and Profit

The balance sheet is so different from the Profit and Loss that there is only one direct link between the two, a vital one that connects them so that when the books are right, the balance balances: That is the direct line from profits (Net Profits) on the Profit and Loss to Earnings and Retained Earnings on the Balance Sheet. The illustration here shows the link with the bicycle store sample:

LivePlan Links Balance and Profit

Projected Cash Flow (with LivePlan)

LivePlan Specific Version

“The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality.”

– Chris Chocola

A good cash flow analysis might be the most important single piece of a business plan. All the strategy, tactics, and ongoing business activities mean nothing if there isn’t enough money to pay the bills. And that’s what a cash flow projection is about – predicting your money needs in advance.

profits-vs-cash-small

The Projected Cash Flow is what links the other two of the three essential projections, the Projected Profit and Loss and Projected Balance Sheet, together. The cash flow completes the system. It reconciles the Profit and Loss with the Balance.

Happily, LivePlan does your cash flow automatically, using your inputs from the sales forecast, spending budget, cash assumptions, loans and investment, and starting balances. You already did that with LivePlan in Chapter 7, LivePlan Budgets Your Cash Flow.

 

Cash Flow is About Management

Reminder: you should be able to project cash flow using competent educated guesses based on an understanding of the flow in your business of sales, sales on credit, receivables, inventory, and payables. These are useful projections. But real management is minding the projections every month with plan vs. actual analysis so you can catch changes in time to manage them. The illustration here shows projected cash balance for the bicycle store compared to the projected cash flow, using the projections presented in this chapter.

LivePlan Cash Flow Chart

I worry most about cash flow because it’s so insidious. Like the old saying about rivers, “still waters run deep.” Cash is frequently hardest to manage when businesses are growing. It is the least intuitive of the financial projections, but the most important.

I hope you’ve read through the This Takes Constant Attention in the earlier discussion in Chapter 7. It’s good for you. Planning the cash flow is vital. Having a negative cash flow every so often, for a month, isn’t a big problem. You should never have a negative cash balance. That’s the same as bouncing checks.