15 Things Missing From Business Plan Models

We have seen hundred’s of business plan models in our career, whether for getting ready to raise capital, evaluate an acquisition or complete a budget. Many of these models have come from entrepreneurs who are very sharp about most parts of their business, but struggle with their financial modeling despite the best of intentions. Here is my top 15 list of items that need to be fixed, ranging from cosmetic changes to changes that affect the core of the business. Even experienced users might find some advanced ideas to help them in their next model.

1. No Cash Flow Schedule.

Cash is king. This can be the most important schedule of all. Your P&L may be great but will you have the cash to pull it off?

2. Financials Not Linked Together

Okay, you have a cash flow schedule. But is it linked to the balance sheet and income statement? Does the cash balance on your cash flow schedule link to the cash balance on the balance sheet?

3. Hockey Stick, Rocket Ship Results

The dot.com craze is over. So should plans that take off like a rocket without good reason.

For example, will your margins as a percentage of sales continue to grow? If you are growing that fast, won’t others be attracted to the market, leading to lower margins?

What about plateaus on expenses? Sometimes expenses step up, such as adding more office space, so costs could actually go up faster than revenues for a short period.

Another contributor to hockey stick plans is flat personnel forecasts. Your sales might go up 10x but staff in some departments in the model hardly move. Is that real?

How about from an industry-wide perspective? Can you really capture that much share of market? Is there room for everybody? If not, how will the laggards react and what will happen to the market? Will there be overcapacity?

The odds are growing to a $50 million business from scratch in 3 years with large profits are slim. Can you show nice results in a scaled down plan that would still be very attractive to an investor? It might make you more believable and increase your odds of getting funded. If you don’t think it through now, they will ask about it later.

You could still use sensitivity analysis to show how you would handle the upside and be prepared for faster growth if it comes.

4. Detail in Wrong Places

Check out the relative size in different parts of your model. A common tendency is to have a lot of detail in things you are certain of, but very little detail in more uncertain areas.

Which section is bigger in your model- your support for revenues or your support for G&A? It can feel good to put all that detail in G&A, but is an investor really going to care?

Put more weight in the revenue section. The exercise will be good. Challenge yourself. What will it take to pull off those numbers? Work backward in the sales cycle. How many customers do you need? How many will you visit or visit your site and what percent of them will you close? How many companies or individuals will you market do and what percent of them will turn into the above prospects?

I can’t recall anyone getting turned down by an investor for their G&A. But quite a number stumble on the revenues.

5. Doesn’t Scale Up- Hard Coded Assumptions

What if revenues grow twice as fast? What will the impact be on your numbers? Can you tell quickly with just changing a few assumptions? Or do you have to go back in and change a lot of hard coded numbers?

The great power of a model is to play what if. Build some flex in your model, so you can see how things change with changes in sales or other key factors. Look at each hard coded assumption and ask yourself, is there a way that this could vary with something else already in the model?

6. Long Formulas

You can build some pretty long formulas in the cells of a spreadsheet these days. Can someone grasp your calculations on paper? Don’t assume they will be looking at the electronic copy of your model or even if they are, that they will want to dive in. Break up your formulas into multiple lines so an outsider can see how you get to the numbers.

This makes it a lot easier for you too, when it comes time to update or debug your model.

7. Assumptions Buried in the Model

Are your key assumptions buried in formulas throughout the model?

It’s much better to pull all the assumptions together in a summary section. It will be clearer for your investor. It also will be easier for you, since you know where all the assumptions are. It’s too easy when assumptions are spread around the model to forget to change an important one or two. The result is numbers that don’t stand up. Don’t worry, you will find the error in an assumption 15 minutes after your budget has been locked in by the board!

8. Layout is Hard to Navigate

Is your model buried in one long and wide worksheet that is cumbersome to navigate? Split it up into different worksheets and link them together. For example, each of the financial statements should be in their own worksheet. Also, try to give the sheets a similar look and feel if you can.

Even better is to set up a table of contents sheet. Even more advanced is to link each item on the table of contents to the individual worksheet, so the person who is looking at your model can click on a button and go right to the sheet.

9. Printing Not Set Up

Does your model print properly? Don’t take this for granted. Check it out before you send. That row you added in the last change you made in the model may be just what throws off your printing.

Most advanced, but rarely done is to program the printing and set up a print button on your table of contents.

10. What’s Your Cost of Acquisition? Cost of Retention?

Very rarely do models show the cost of acquiring customers. This can be a great reality check on your marketing efforts. How does the cost change over time? Is it doing a free fall, leading to a hockey stick plan? Or is it staying flat, implying you are not getting more productive with your marketing costs?

Your cost of acquisition should include your marketing, sales, customer service and related costs that are part of attracting and bringing in new customers.

How does your cost of acquisition match up with the expected lifetime value of a customer? Put this in your model and you show you have thought through a key area.

An additional great step is to think through the cost of retaining a customer each year and factoring that into the lifetime value analysis.

11. No Summary

Have you put all your key numbers together in one section? Make it easy for the investor to get a quick handle on your results, what you want and how you are using the money. You may only have 15 seconds or if you are lucky, a couple minutes of fame. Use the time wisely.

12. No Charts

The model is a sales document and nothing gets the word across like good graphs. In addition, building graphs is good quality assurance. Especially good are charts that tie together two related areas to show their correlation, such as number of customers and revenues. Almost always something jumps out at you and you realize you need to tweak the model.

13. Not Tied In With Financial System

There is the saying that what gets tracked gets done. Are the assumptions and calculations in your model things that will get measured through your financial or other systems? Have you set up a mechanism to tie the model in with your reporting?

The model should be a starting point, not an end. Tie this together with your results and you will be much better off later in the year when you update the model.

14. No Sensitivity Analysis

The only thing certain about your plan is that it won’t turn out the way you expect. In most cases, it takes much longer to get the business off the ground than expected. Then when revenues do come in, it costs more to attract or service the customer. You might also experience explosive growth and growing pains once word gets out.

I think it was Mark Twain who said there are two tragedies in life, not getting what you want and getting what you want. Are you prepared either way? Can you finance a longer incubation? On the other hand, do you have the resources if orders take off?

Sensitivity analysis is a great way to think through a range of possibilities. If you have put flexibility in your formulas, staying away from hard coded assumptions as much as possible as mentioned above, this will be easier for you.

One way to do this is have different versions of your model. This does not require as much technical skill but can take up a lot of time, especially if you have to go back and now make changes to multiple models.

Another way is to have a sensitivity analysis section in the model and stick with one model. Excel offers a Scenario Manager, where you can change certain assumptions and then store results in a table. There are limitations in how this can be used, though.

For many models, it would be better to use the programming language behind Excel. This is an advanced area. The key is how the variables are set up and integrated into the model. Keep it to a few key variables. A good sensitivity section should be able to tie in to the entire rest of the model and be able to update the results for a number of different scenarios in under a minute.

15. No Thoughts From Investor Perspective

Another advanced area is to think through the rounds of financing that you need. Sure the model shows you need $x million capital now and additional in another round or two in the next couple years. But how does it look from the investor perspective. While you might not put this in the published part of your model, it is something that you want to think through ahead of time.

Basically this involves:

• The value you expect your firm to be worth in the future.

• Calculating the future value and discount it to the present. Use a high discount rate (like 50%) to be conservative.

• The value you are putting on your firm now (how much money you are raising divided by the percent you expect the investor to get).

• Comparing your value with the discounted value. Since the investor is likely to cut your model numbers down and therefore the discounted value, to be safe your value should be a fraction of the discounted value. For example, if your value is 50% of the discounted value, you can still be attractive even if the investor cuts your model numbers in half.

This approach is even more important and can be used if you anticipate additional rounds of financing later. You need to look at what the investor in this current round will end up with post dilution. A valuation that might appear to make sense may not fly based on the expected future dilution. You can also use this to see if the expected step-up in valuation between this round and the next round makes sense. You want it work for both investors.

Summary A well done financial model can challenge your thinking. It can bring insights and perspectives you had not thought of. You can see how to change your strategy and your execution. It also can give you a process to revisit your business going forward.

While nobody gets approved just on a model, you can get knocked out early. When done right, a financial model can increase your odds of getting in the door and getting funded, getting your budget approved or making the right decision on an acquisition or divestiture.

With the techniques covered in this article, you can take your model further in some ways or realize that there is a value in getting outside help in taking your model to the next level. A good consultant will go beyond just the mechanics of building the model.