How a simple business plan can be more advantageous than a complex model.
For all the good that computers have wrought, in at least one way they've set back American management thinking by decades, says entrepreneurial hall of famer Ken Olsen. Do digitally aided company builders understand the real mathematics of business anymore?
The spreadsheet is one of the worst things that ever happened to business. Twenty years ago, spreadsheets held nothing but promise: they took the tedium out of planning, and they made possible the game of "what if." But over time they have brought much harm to business, because they teach managers to produce paper rather than think.
Too often the spreadsheet becomes the goal. Understanding the business, the problems, the staff, the products, the customer, the economy, and all the other factors that contribute to a company's fate can get lost in a spreadsheet.
Spreadsheets should help us run our companies, but all too often they end up replacing a true grasp of the business with a simulated model. It becomes too simple to make projections, and easier to believe in the numbers a spreadsheet contains than in your company's actual results -- the dollars and cents that come through the cash register. Wrongly founded assumptions about what should happen replace accurate assessments of what is happening. That beautiful spreadsheet can convince you -- falsely -- that you and your business are under control. And that inaccurate picture of reality breeds bad managerial decisions.
Instead of a spreadsheet, the smartest businesspeople keep a very simple model of their businesses in their heads at all times. Details -- often in spreadsheets -- support the model but don't replace it. A Chinese manager once told me that the difference between American managers and Chinese managers lies in the way they construct their business plans. American managers are taught to create a plan that includes all the details they can imagine -- dozens and dozens of income and expense lines that read like code. Soon they lose all feeling for the plan -- it doesn't help them understand or control the business. Chinese managers look at three lines: how much they spend on the product, how much they get for the product, and what the difference, or profit, is. Details support rather than confuse the model.
Think about home budgeting. At some point, most families sit down and try to write out a budget. And they usually stick to it for about two days; like a spreadsheet, it doesn't work because of the detail. The families that succeed in the financial management of their households do it with a model so simple they would be embarrassed to call it a budget.
A manager operating a business should have such simple rules of thumb. I have a friend whose business is based on a commodity. I once asked him if he gets nervous because the price of that commodity keeps changing. He replied, "Oh no, in our model the commodity price is calculated at one and a half times the normal price. So if it varies below our assumed price, we don't care." His simple model keeps him in control at all times. He understands the business. And now he owns more than half the market he's in.
A budget, or a plan, is the secret to freedom. When you know what you need to do, and how you're actually doing, you're liberated. You can deviate from the plan and still be in control -- in fact, the freedom to deviate without losing control is one of the great benefits of having a clear plan in the first place.
For instance, every year I try to take a two-week canoe trip in Canada. I plan for the trip -- but not in too much detail. I don't plan exactly what food I'll eat each day; I plan how much to take. Freedom comes from knowing I have enough and that I can be flexible.
Your plan, which is essentially your profit-and-loss statement, should be so simple you can meditate on it, modify it, adjust it, and correct it while lying awake in the dark at night, driving in a car, leaning back with your eyes closed on an airplane, or keeping yourself occupied during a dull meeting.
The way to love your business is to love that simple, clear model -- the true mathematics of business, and every manager's real source of control.
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Kenneth H. Olsen is the founder, and now president emeritus, of Digital Equipment Corp.