Guy Kawasaki and Glenn Kelman have combined for a pair of very important posts related to reality in planning and financial projections. In the first, Glenn shares the plan vs. actual results of his successful startup Redfin. In the second, he shares the Microsoft Excel model he and others used to build that initial plan.

The first of these two is Two Years of the Real Numbers of a Startup. It’s an excellent reminder of how planning works with reality. Your numbers aren’t going to be right, nobody’s numbers are, and this post opens the numbers up and tells a simple story of how some were way off, some close, some too high, and some too low. Importantly, the startup is successful, and the planning helped.

Glenn draws some excellent lessons, a list of 10, that everybody involved in startup business planning should read. The first three:

  • Focus on headcount. Outside of marketing programs, the basis for all cost in Internet software is headcount. Just figure out whom you’ll hire and how much you’ll pay and you can’t go far wrong.
  • Plan slow, run fast. The most likely scenario is that you won’t be able to hire engineers fast enough, and that revenues will come more slowly too. Investors expect their money to drive artificially accelerated growth rates, but signing up for that sometimes just blows a company up before you’ve had a chance to figure everything out. At least in the financial model, give yourself as much time to grow as you can.
  • Run top-down sanity-checks. To estimate what a company is likely to spend each year, try doubling the average salary and multiplying it by the number of employees. A 100-person company might spend as much as $15 million per year.

And then number 8 of 10, which I think is the most important:

  • Flag your assumptions. Rather than burying your assumptions in Excel formulae, call them out in a separate tab of the workbook, so that you have a control panel for adjusting the model. This is especially important if you plan to share your model with potential investors.

The second post came a couple weeks later, when Glenn and Guy posted Glenn Kelman’s Financial Model, which has the actual Microsoft Excel file available for download. Guy says:

Glenn’s point isn’t to make a statement one way or the other about Redfin’s business or to even give you a crystal ball for seeing whether you’ll succeed. A model, after all, doesn’t drive demand or serve customers; it only helps you count up the beans if you do. We’re posting this model because its basic structure might help other entrepreneurs who don’t know where to start.

I say Guy and Glenn have done the world more good than they realize. It really helps make an important point: Excel financial modeling, undocumented and unproductized, is extremely hard to share.  Spreadsheets are an amazing programming application language, incredibly useful, but mainly as a user’s tool. The more detailed the model, the harder for anybody but the author to use.Chartsanddataistock_000004114584sma

Too many otherwise business-literate people think financial models are a combination of black magic and paint by numbers. Too many people who can do financial modeling in Excel think that their way to do it is the only correct way to do it. Too bad.

Disclosure: I am biased, I am the principal author of Business Plan Pro®. The difference between Glenn’s model and Business Plan Pro is that Business Plan Pro has a standard, correct financial model that is also productized, locked up in an application to prevent accidental errors, and documented. Unlike all those Excel authors who think theirs is the only way to do it, this one doesn’t claim to be “more” correct; but it is, in fact, correct, error checked, productized, and documented. So it’s not the only way, but it’s a valid way, and it comes inside a full product.

And I want to make it clear that I am not criticizing Glenn or Guy here, because neither of them in any way implies that they think their model is “right” for others. It comes up because through the years of dealing with Business Plan Pro, which has been sold to more than a million users, we still get people insisting that their detailed, specific-to-their-case model is “more right.” And we have people who should be in a position to know, like accountants and consultants, telling their poor unsuspecting clients that there is something “not right” about anybody’s model but their own. That condemns their victims to not using a correct and productized model.

Is it worth saving $99 by using somebody else’s raw Excel? How many extra hours of work, not to mention frustration and annoyance, will that cost you. Divide the $99 that Business Plan Pro costs by the number of extra hours, and you’ll get your equivalent hourly rate. Was it worth it?

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Tim BerryTim Berry
Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Follow him on Twitter @Timberry.