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The Latest in Business Plans-Interview with Tim Berry, CEO of Palo Alto Software|
by Anita Campbell
Tim Berry, CEO of Palo Alto Software (www.paloalto.com), knows as much about business plans as anyone today. After all, his company’s main product is Business Plan Pro, the popular business planning software. He is a renowned planning expert.
Recently, he talked about the latest trends in business plans with trend spotter, futurist and serial entrepreneur Anita Campbell. That interview is reproduced here.. . . . . . . . . .
Anita Campbell: What’s changed since you started in the field of business planning and business plan software?
Tim Berry: There is a notable return to fundamentals.
During the dotcom days, business plans were being used to gain funding. They are still used that way today to a degree.
But proportionately more business people recognize a business plan as a tool for doing business better. Companies are using business plans for internal purposes, and not just for a single event such as getting a small business loan or securing venture funding.
They realize the value of a business plan.
Anita Campbell: Many businesses today are service businesses or technology businesses – almost two thirds of the US GDP is attributable to service businesses. Most of their assets are intangible and hard to value under traditional accounting rules. How do you capture and quantify the value of such a business in a business plan?
Tim Berry: Valuing certain kinds of intangibles in business has always been a challenge.
Entrepreneurs can be tempted to “push” the financials to show more value than can be supported. That’s especially true in service and technology businesses.
For example, Internet entrepreneurs have a hard time valuing Internet traffic in a business plan. During the days of the dotcom boom, traffic tended to be overvalued. Today at least the overvaluation is gone. But even today there’s still no good way to place a value on Internet traffic per se.
The same is true for a service company with a strong name and reputation. Capturing the value of “brand” is a challenge. One high profile example I can think of is LLBean’s accumulated relations with customers -- its brand reputation. There is tremendous value in LLBean’s brand reputation. Yet, LLBean’s brand value is not something than can be captured adequately in the company financials.
Here’s another example: a high tech company may believe they can show value in software they’ve developed by showing it as an asset. However, under accounting rules it has to be reported as just the opposite. It’s an expense on the balance sheet.
The place to capture the value of intangible assets like these is in the narrative of a business plan, instead of the financials.
In the Executive Summary, in the description of the business and in the sales forecast narratives, intangibles can be thoroughly linked to the reason for the business’s success. The intangibles can be used to justify future sales forecasts. They can be used to convey the business’s strong competitive advantage. By describing intangibles like customer loyalty and brand recognition in the written portion of the plan, a business can paint a very persuasive picture of how valuable and attractive it is.
Anita Campbell: Entrepreneurs and business people talk about business plans more these days than ever before. After all this time in the business planning software space, are you surprised by how much attention is placed on business plans today?
Tim Berry: I’m surprised by how many businesses don’t do a business plan, not by how many do.
Part of the reason that businesses don’t plan is folklore. They’ve heard how hard a business plan is to do -- or so they think. They believe it takes a lot of time. So they are scared off. Of course, that’s just a fallacy.
We have about 60% of the market for business planning software, and we’ve grown every year except one since we started in 1993. We’ve grown from one employee to 35 employees today.
That should give you some idea of the growth in business planning software. Yet we estimate that only 10% of startup entrepreneurs use business planning software.
Anita Campbell: What are the latest trends you are seeing in business plans?
Tim Berry: I see the concept of the business plan being diluted and watered down. I’m concerned by it.
I see businesses doing a 5-page summary and calling it a business plan. They aren’t going through the necessary steps to understand their business, especially the financials.
Doing the financials is essential. Without good financials, they won’t have a true picture of where their future business is going to come from, how they can improve profits, how much cash they need to survive, and so on.
Another trend I am seeing is that some entrepreneurs are falling prey to sales gimmicks. As the Internet grows and people are becoming more familiar with business plans, solid planning can give way to buying a quick fix. I’ve seen sites that advertise “business plans ready for venture capital.” Supposedly you can buy a business plan, just change the name and a few minor details, and you are good to go. Well, that’s not going to give you a business plan worth anything.
Anita Campbell: What is the single biggest mistake people make with business plans?
Tim Berry: Many people don’t bother with the cash flow analysis, and don’t do the work on it. Then they run out of money.
People tend to think profits and cash are the same thing. They haven’t laid out the numbers to see whether the cash will outlast them.
A company could be doing fine if all sales are in cash, but what about if customers take 60 days to pay? B-to-B sales in particular can blindside a small business, because they are done on the basis of submitting invoices and there is a delay between the time the sale is made and payment received.
Doing a thorough, well thought-out cash flow analysis is the most important thing that a startup or emerging growth business can do. Even established companies can find cash flow a challenge if circumstances change or if they are making heavy capital investments and other expenditures.
Anita Campbell: What are the differences between business plans in different countries? With different accounting treatment, they must vary quite a bit from country to country?
Tim Berry: The big surprise is how much the business planning process is similar between countries, not how much it is different.
I’ve given business plan seminars in 14 countries, including Europe, Asia, and South America. Even though the accounting rules are different, those differences are not very important in planning.
Why? Because you are looking forward and aggregating numbers in a business plan.
At first glance the financials in a business plan may look the same as a company’s actual financials. For instance, they have similar looking tables and formats such as the P&L statement. But they are two different animals. Actual financials look backward. Business plan financials – proformas as they are called -- start today and go into the future.
That’s a very important distinction. It makes the differences in accounting rules between countries almost irrelevant.
Take this example: differences in treatment of depreciation become irrelevant when you are estimating and summarizing for the future. For the actuals, differences in depreciation treatment are extremely important. In a business plan where you simply need to capture the main points, you summarize a depreciation calculation. You don’t worry about the depreciation details.http://www.smbtrends.com, where she spots trends in the small business market.