A few years ago a friend -- a venture capitalist -- asked me to join the board of directors of a start-up that had developed an innovative printer attachment. The company had just exhausted its initial financing and was looking for another $4 million. Before accepting the board seat, I wanted to have a look at the company firsthand, so I paid it a visit.
The chief engineer demonstrated a nicely functioning device; the manufacturing setup was neat and well organized; and the president gave me a copy of one of the most thorough financial plans I'd ever seen. Manufacturing costs and overhead expenses were itemized in monthly detail for the next four years. The following year's profits were projected to be very good. The price of the attachment was 40% below anything you could buy from the competition. And the management team was knowledgeable and dedicated. Yet 14 months after I signed on, this venture declared bankruptcy.
What went wrong? Was there a way of foreseeing -- and preventing -- what happened? I am convinced now that the fatal flaw occurred at the company's conception. The financial plan, which was put together largely to please the venture capitalists, was driving the business, and it was defective. I don't mean in its math, which was flawless, but in the inconsistencies of its assumptions. The elaborate and pretentiously precise spreadsheet printouts I had seen masked the incongruity between the lofty marketing aspirations and the limitations of the product design. This company suffered from the curse of the spreadsheet: an emphasis on the generation of consistent numbers instead of on the examination of critical assumptions.
If the company had followed Robert Ronstadt's methods, its chances of surviving would have been better. Ronstadt's Financials -- The Entrepreneur's Professional Guide to Sound Financial Decisions is a milestone in the availability of high-quality business advice at a low cost ($199 plus shipping, Lord Publishing Inc., One Apple Hill, Natick MA 01760; 800-525-5673; in Massachusetts, 508-651-9955). The difference between this software and other business-plan programs lies in Ronstadt's approach, which is to provide a sort of tutorial based on the know-how he has accumulated as an entrepreneur, researcher, and teacher.
Recently I was describing Ronstadt's package to the chief financial officer of a good-sized and long-established retailer, who asked if the software was applicable only to start-ups. As I told him, there is so much sensible advice packaged in the collection that I would not hesitate to use it as a standard budgeting method for a company of any size.
I agree with Ronstadt that most existing planning packages encourage you to rush into cranking out the numbers for bankers and investors before you understand exactly what you are trying to accomplish with your venture. That is not Ronstadt's approach. His package includes a 198-page textbook, Entrepreneurial Finance (also available separately from Lord Publishing for $32.95 in hardcover and $16.95 in paperback). He wants you to have thought through the ingredients that will be essential for your business to succeed before you open the Ronstadt's Financials software manual and certainly before you turn on your computer (any DOS machine will do).
Should you need even more explicit guidance, Ronstadt also offers two workbooks that are worth their price even if you are forever allergic to computers. Most important is the Venture Feasibility Planning Guide -- Your First Step Before Writing a Business Plan (Lord Publishing, $19.95, 127 pages). It looks like the sort of workbook my kids used to fill out in grade school to make sure they completed their homework. But the guide takes you, step-by-step, through 118 tough questions that ought to be asked by all who place their careers or other people's money behind a risky business proposition. I particularly like the 4-page section called "Reality Check." This is where you have to confront 10 potential problem areas and ask yourself whether you have enough information to begin to write your business or operations plan.
One of the appendixes of the Venture Feasibility Planning Guide contains schedules called assumption statements. You fill in your assumptions about revenue forecasts, income statements, balance sheet, cash flow, and projected breakeven, which you can later enter directly into the computer program. It will then make the computations you'll need to prepare financials for your investors and to run your company. (The schedules are in plain English, in contrast to the hard-to-follow mathematical expressions that plague most spreadsheet programs.)
The other workbook is The Business Plan -- A State-of-the-Art Guide (Lord Publishing, $29.95, 175 pages), a set of commonsense exercises in planning. Even if you do not go on to the computer analyses, these exercises are filled with very valuable consulting advice. In this respect, Rondstadt does much more than simply provide another clever software solution to speed up a task that maybe you shouldn't be doing at all. He delivers a do-it-yourself consulting and an M.B.A.-level tutorial product that helps you plan more intelligently.
The manual for running the software is different from what you are used to if you already own computer software. Most manuals concentrate on codes, instructions, and procedures to make the computer do the work the designers intend it to do. How to actually apply the software to a specific business problem is always left to someone else to figure out. The manual for Ronstadt's Financials, on the other hand, is an easy-to-understand book that also emphasizes how to apply the computing power. Its accounting structure is standardized (revenue statement, profit-and-loss statement, balance sheet, and cash flow), although there are options for adding items that may apply to your particular business. Ronstadt's Financials also computes 33 standard measures, such as return-on-equity, interest coverage ratio, contribution margin, and break- even sales price, which should be valuable guideposts in running your business.
If you have any computer experience, you can pick up this package and get it working on your company's plan in less than 15 minutes. This is possible because the package comes with predefined industry templates covering contract services, manufacturing, real estate, retailing, personal finance, professional services, and wholesale/distribution. And if you have never used a financial-planning program before, you can get a Ronstadt's Financials Trial Pack ($9.95) to help you decide if the program is one that will be useful to your company.
Well-laid plans may sometimes falter because implementation is poor. But even the best of plans will surely be destroyed by an enterprise that is conceived in error. If I could travel back in time, I would recommend to my venture capitalist friend that we grind the proposal for the printer-attachment company through the tough scrutiny of Ronstadt's Financials. The business might have failed anyway, but at least it wouldn't have failed because of conflicting planning assumptions.* * *
Paul A. Strassmann managed the computerized information systems for General Foods, Kraft, and Xerox from 1960 to 1977. From 1977 until his retirement in 1985, he was vice-president of strategic planning at Xerox. His home office is in New Canaan, Conn.
THE BEST OF THE REST
Other planning packages on the market
To simplify the uses of the software and to enhance the quality of the planning process, Robert Ronstadt has not included features that are found in other entrepreneurial-planning packages. Some of these, which I have tested, are described below:
* Venture -- The Entrepreneur's Handbook ($349 plus shipping, Star Software Systems, 363 Van Ness Way, Torrance CA 90501; 800-242-7827; in California, 213-533-1190). In addition to its Business Plan Builder, the system includes a word processor, spreadsheet, file manager, and a general ledger with check writer, all running under DOS. The package does not provide business guidance, but compensates by including lots of software. Venture is best for publishing a presentable business plan quickly, whereas Ronstadt's Financials can be characterized as a method for thinking through the planning process, then using whatever word-processing or accounting software is handy.
* Tim Barry's Business Plan Toolkit ($99.95 plus shipping; Palo Alto Software Inc., 260 Sheridan Avenue, Palo Alto CA 94306; 800-336-5544; in California, 415-325-3190) comes in two DOS versions (one requires Lotus 1-2-3 or compatible software; the other, Microsoft Excel) and a Macintosh version (requiring Microsoft Excel or compatibles). Business Plan Toolkit is a simple way to generate projections and could save you a lot of time if you are already an avid spreadsheet user. Documentation includes a sample business plan, which helps if you have no experience with developing a proposal.
* The Pro Forma 1 -- Planning the Business Venture software takes a similar approach by building its business planning tool on top of Lotus 1-2-3 and Microsoft Excel spreadsheets ($199 for either the DOS or Macintosh version; The Company Co., 333 North 425 East, Alpine UT 84004; 800-433-7792; in Utah, 801-756-2774). The documentation includes some advice on how to format a business proposal.
* The IFPS/Personal Business Modeling System ($895 plus shipping, Execucom Systems Corp., Austin TX; 512-346-4980) for DOS computers is tops in sheer number-crunching power. IFPS brings the modeling power of the mainframe to the microcomputer and allows you to build customized financial models of great complexity without many of the problems you find when using conventional spreadsheets. The advantage of IFPS is that it defines financial equations in reasonably intelligible English. IFPS also addresses my aversion to large spreadsheets. Execucom has a Macintosh version of IFPS, MindSight ($295 plus shipping), which would be my preferred tool if I had to build an intricate business plan for an ongoing business.
The added advantage of MindSight is that it comes with templates for a number of business conditions. Chunks of predefined logic make it easier to build a business plan. Such convenience, however, would be of little use to a lone entrepreneur who doesn't have time to learn all the intricacies of business modeling.