Here's an example of how VisiCalc, the best-selling financial-analysis program, works when you sit down to use it on a personal business computer. The example, a kid's roadside cookie stand, is terrifically simplified so we can fit the explanation on one page. But VisiCalc is capable of more complex analyses. At the Boston office of Laventhol & Horwath, an accounting firm, I saw accountants create five-year income and cash-flow statements for a proposed 300-room hotel: The statements were based on 43 revenue and cost assumptions. I also saw them working up 10-year projections for tourism revenues for Grand Cayman island, that were based on hundreds of assumptions.
Anyway, we've got this 14-year-old kid who wants to make some spending money selling chocolate chip cookies to homebound commuters on a four-lane road near his house. In the Printout #1 (below), you can see that he's gotten traffic forecasts from his town's engineering department and cost estimates from his mother, who's his exclusive distributor. He's decided that he will get an increasing percentage of cars to stop despite the uneven traffic count, and that he will have a constant average sale to each car of six cookies. He's put a price of 15? on each cookie and has decided that he will need his younger brother to help 12 1/2 hours a week for $1.25 an hour.
KID'S COOKIE BUSINESS ASSUMPTIONS
WEEK 1 WEEK 2 WEEK 3 WEEK 4
# CARS/HR 825 900 875 750
STOP % .025 .03 .0325 .04
AV. SALE 6 6 6 6
#/BATCH 36 36 36 36
UNIT LE .15 .15 .15 .15
HRS/WEEK 12.5 12.5 12.5 12.5
LABOR/HR 1.25 1.25 1.25 1.25
PKG CHIPS 2.16 2.16 2.16 2.16
BUTTER 0.85 0.85 0.85 0.85
EGGS 0.16 0.16 0.16 0.16
BROTH BAG .12 .12 .12 .12
OTHER 1.23 1.23 1.23 1.23
TOTAL 4.52 4.52 4.52 4.52
In Printout #2 (below), you can see the profit and loss forecast the kid constructed based on his assumptions. (It took him about two hours to create the whole format.) Each position on the P&L uses a formula based on the assumptions in order to come up with the figure. For instance, the formula for NET SALES under WEEK 1 is [# CARS multiplied by STOP %) multiplied by (AV. SALE multiplied by UNIT SALE) multiplied by HRS/WEEK. To enter that formula, the kid typed (B5*B6)*(B7*B9)*B10 (registered) into the computer. The letter-and-number combination identifies the position of each assumption; the asterisk signifies the multiply function; the parentheses group the functions; and hitting the return key tells the machine to calculate the formula.
KID'S COOKIE BUSINESS P&L PROJECTION
WEEK 1 WEEK 2 WEEK 3 WEEK 4
NET SALES 232.03 303.75 319.92 337.50
CHIPS 92.81 121.50 127.97 135.00
BUTTER 36.31 47.53 50.06 52.81
EGGS 6.95 9.09 9.58 10.10
PACKAGE 5.16 6.75 7.11 7.50
OTHER 52.85 69.19 72.87 76.88
MFG COSTS 194.08 254.06 267.59 282.29
G. PROFIT 37.96 49.69 52.33 55.21
OVERHEAD 15.63 15.63 15.63 15.63
N. PROFIT 22.33 34.06 36.71 39.58
As you can see, in order to use VisiCalc, you have to learn which keys stand for different functions or commands.
The program, for example, is able to "replicate" the formula we just detailed into the next three columns. In order to start the replicating process, you have to know that the slash [/] key tells the machine that you're about to enter a command and that the R key after the slash tells the machine to start the replicate command. But it's fairly easy to remember the right keys, because it's usually the first letter of the word that identifies the command (R for replicate, for example).
Back to the kid's cookie stand. As you can see from the bottom line (labeled N. PROFIT), his forecast shows that he can make from $22.33 to $39.58 a week, depending on the traffic count and his ability to get more cars to stop. Suppose, though, that there is a major frost in the cocoa-producing regions of South America, and the price of chocolate chips goes through the roof in WEEK 3. The kid enters 2.73 (up from 2.16) for BATCH COSTS: PKG CHIPS in WEEK 3 and 4, and discovers that his bottom line goes to hell (to $2.94 and 3.96, respectively) because the program automatically recalculates manufacturing costs, of which chocolate chips are a part (see Screen #1 below).
In response to this dramatic change, the kid decides not to reduce the quality of his cookies by using fewer chips. But he does think the market will bear a price increase, so he raises UNIT SALE by two cents to.17 (see Screen #2). The program recalculates his P&L, because the unit price is part of the formula for NET SALES, and the kid discovers that he can actually make more money at the higher price, as long as the market doesn't start buying fewer cookies.
I could go on and on about how the kid adjusted his forecast for such events as his younger brother striking for higher wages or a construction project near his stand cutting traffic by half. Either of these recalculations would take seconds. But the point is that, once the format for a projection is set up and the data entered, you can change your assumptions and almost instantly see what effect the changes will have on the bottom line. And you can keep changing assumptions until you're satisfied that you understand which ones are truly critical to your operation.
What becomes clear from using VisiCalc is that the assumptions you thought were important, such as price or materials cost, aren't really crucial, and that the variables you thought were minor, such as overhead as a percent of gross profit, are absolutely critical. To get that kind of sophisticated understanding about your company's financial picture can be worth a lot of money.