Three questions came up after the last bootcamp session. The first is regarding P&L’s and their role in business plans and operational plans.
P&L is a set of financials that are required for both the business plan and the operations plan. However they serve fundamentally different purposes in each plan.
In a business plan, the P&L is a 5-year overview of revenue and expenses. The goal is to create a financial picture for investment and exit valuations, and determine cash/investment needs. It’s a very much top-down approach, and I’m perfectly happy seeing it driven from market share acquisition rates. I’m also perfectly happy to see expenses “bucketed” in general accounting categories; like R&D, Marketing, Sales, and G&A and be derived as a percentage of revenue. To do this with credibility, it’s essential to have previous (and possibly extensive) experience with actual business operations to get really comfortable with operating expense percentages. Lacking that experience, an excellent proxy would be to look at the annual reports of your three closest competitors, or companies in the same industry space, and use *their* operating expense percentages as plugs for these values.
Just as a note, that exactly what I look at in due digence anyway.
On the other hand the P&L in an operations plan *is* a real budget!!! It’s bottoms-up from the actual level you care about. Personally, I don’t care to breakout paper clips or pencils, but rather just lump those things into a general account of “Office Supplies”. And if that is less than 5% of you operating expense budget roll it up into a higher level category until it reaches that percentage. That gives you ~20 expense categories to manage, and ensures you are not majoring in minors.
BTW. Once you have a budget for four quarters, roll that into your business plan, and use it as a base to roll forward your projections for the next four years.
