I’m a lazy guy. Now, sometimes people who know me consider this a ludicrous thing for me to say, but is true in a very real sense. What I mean is that I am completely unmotivated to do many things, unless I see some purpose to it. I do not go into a field and start digging a hole to the water table, just to get some exercise. Before I start doing something, I want some sense of what the outcome is hoped to be, and how it fits into the overall picture. By extension, I also want to make sure that every ounce of my effort is going to be productive - no waste. Not all people are like that. The insanely industrious will go out to do something, just to justify their existence. Now that is bizarre.
So, I am starting this post off by identifying the why of stretching your comfort zone. The answer is – because I said so, OK. Alright, the why for stretching your comfort zone in business planning – dealing with numbers and modelling is because you only have so much time and money to get the job of entrepreneuring done. Modelling is a way to multiply your efficiency. Simulating lets you focus on the high impact areas of your business, and ignore the small stuff.
Oh, and we already contributed the modelling skill, all you probably need is a little bit of informed effort!
Relationships - Time
I have mentioned this several times before – feedback has indicated that people do not really grasp this in the sense that I mean it. Here is the easy one. Remember the cliché ‘ Time is Money’? Yeah, that one. Suppose you are a cook. Suppose you go out on Tuesday, and buy some lettuce for a salad for a dinner party. Now unless you have that dinner party by Saturday, you will fail, because the lettuce is perishable. So unless your purpose is to feed your composter, you better manage time.
- Inventory over time becomes obsolete
- The payables for that inventory come due, so inventory is a consumer of working capital
- Sales credit accounts can go obsolete
- Those uncollected invoices consume working capital (the shipped goods they represent)
- Working capital costs money - -interest, for example
- You invest in market research
- The market research can become obsolete, as the market changes
- You invest in equipment
- Equipment goes obsolete, as new developments improve efficiencies
- Poor efficiencies are a competitive disadvantage
- Equipment and research is a consumer of investment capital
- Investment capital costs money
So. A business plan must model relationships in time.
Relationships – Process
Stand in the middle of your kitchen. You take your lettuce out of the shopping bag. You put it in the cooler. Later, you take it out of the cooler, wash it and let it drain. Later yet, you tear it up and put it in a salad bowl. Then you add some dressing. Lastly you take it and put it on the table for your friends to eat. So do not tell me that you cannot grasp process. Geting out of bed is a process!
All businesses incorporate processes. In fact, almost all human activities use processes. Pick up a pencil and a sheet of paper. Stand in the middle of your operating facility, and look around. Start at the beginning of your operation. On your paper, make a box, and label it receiving. Now follow the material over to the storage rack, and make another box labelled inventory. Draw a line with an arrow from receiving to inventory. In the inventory box write down how many units you received, and what the cost per unit was. Now follow the receiver as they go to accounting and place the receiving papers on the desk. Watch as the bookkeeper staples the receiving slip to the invoice. Draw another box on your paper, down in the corner. Label that box payables. Draw an arrowed line from inventory to payables. Go back to the shop. Watch as the receiver takes part of the material off of the storage rack, and takes it over to a workbench for assembly. Draw another box in the middle of the page, and label it assembly. Draw a line from inventory to assembly. Notice that someone is working, and add another box for labour. Add a line from labour to assembly. Here is what your paper might look like.
Now we could carry on. But … So who does this stuff, anyway? Well, business analysts do it. So do industrial engineers. So do a lot of entrepreneurs. Is it work – sure.
The trick with this is to simply visualise reality (or look directly at it, if you prefer), and diagram it. Follow the real world inputs – material, labour time, equipment, technical know-how, pieces of paper – and describe them on your process chart with their representative numbers.
This is a model of the real world, right there, on your piece of paper. The trick now is to make it dynamic. So that as materials change – so do units, and their costs, and the bills, and the labour input and everything else.
Spreadsheet Simulations – Dynamic Models
So the next step is to copy that process chart you made, into a spreadsheet. Remember I said I was lazy? Well, I put each of those boxes we made on separate spreadsheet pages of the model. Each page takes inputs, and provides outputs.
Spreadsheets have rows and columns. I use the columns (like most modellers) for time. I use rows for input conversions that correspond to real world conversions. The columns might be years, but most often I use months. The conversion might see material inputs on one row, followed by labour inputs on another row. Most often, I push backwards. For instance, I can often say that I need ten units of finished goods. I know that to get those finished goods, I need $10 of materials, and $3 of labour. (How do I know that? From my costing of the product). So if I have a line with finished units required, I can also generate a line saying how much labour in total I need, and how much material. I can now transfer the draw of inventory materials back to the inventory page, and reduce inventory by that quantity.
Now, when I say that I need to ship 100 units of product in month 3, I can equivalently say that I need to make that 100 units the month before that, and so that I need to receive into inventory the materials for that production, the month before that. And back in that month, I also get a bill from my supplier for those materials, which gets added to payables at that time. And on the payables page, those bills are accumulated, and paid 30 days later. So the information gets pulled around the model by the time and process relationships I have created.
Its ALIVE, well, at least its dynamic.
I don’ t have that skill . . .
Can you make a car, all by yourself? No? How about a computer? No? Can you make a soufflé? No? Hmmmm.
Can you drive? Can you Surf? Can you Eat?
So if someone gave you a model to analyse your business, could you input some numbers in a spreadsheet?
I suspect so.
So here is one for you – it will handle a surprising range of businesses. If you need assistance, or you want to tailor the model to your world, ask for assistance.
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