Making small business planning easier.

Small businesses--those with annual sales of less than $5 million-account for almost 97% of all U.S. businesses and 45% of the gross national product. An estimated 100 million Americans, more than half the labor force, rely directly or indirectly on small companies for their livelihood.

Venturing into a small business is risky. The estimated average mortality rate of U.S. businesses is more than 10,000 a year, with a failure rate of about 70% for small businesses. Most small business failures occur in the first year of operation due to insufficient sales, high operating expenses, receivable difficulties, poor inventory management, inadequate financing and cash flow problems. Timely forecasts and planning can help prevent these problems and allow the company to be prepared when an emergency arises. "Strategic Planning: What CPAs Need to Know" (see page 32 of this issue) deals with comprehensive strategic planning. This article discusses business planning for small companies and reviews five microcomputer software packages that facilitate the planning process.

IMPORTANCE OF PLANNING

Decision-making in the small business environment often is characterized by intuitive, "seat-of-the pants" speculation. Decision-making is thought to be done via crisis management--putting out one fire to move on to the next. But the successful business plans systematically for the future, avoiding or significantly reducing the impact of crises.

Although many studies of small businesses have shown a positive relationship between formal planning and organizational performance, such planning is not practiced often by small companies. This is mainly because smaller companies do not have the staff or time to engage in formal planning. Generally, the top manager in a small business is more concerned with running daily operations than with planning for long-term business success.

The planning process forces a company to look at future business operations. Planning means problems can be anticipated and solutions developed. Plans that are well developed, implemented and controlled contribute significantly to a company's success.

TYPES OF PLANNING

There are two main areas of planning: long-range and short-term, or operational. Both are necessary for the success of any business venture.

Long-range planning includes a company's efforts to monitor, understand and adapt to a changing environment in order to establish and maintain a favorable competitive position. Environmental assessment, internal analysis and the development of goals, objectives and supporting strategies all affect small business success positively. Time horizons for long-range plans can extend from 3 to 20 years; 3 to 5 years is the norm.

Developing a long-range plan helps the small business differentiate itself from its competitors by requiring management to examine its business mission. And companies with established distinctive competencies are most likely to succeed.

Operational planning is a detailed, quantitative plan that specifies both how the goals for the coming year will be attained and the procedures for managing daily operations. The operational plan outlines the spcific steps to accomplishing the long-range plan. It thus plays a major role in implementing business strategies by translating long-range plans into action.

MICROCOMPUTERS AND THE

PLANNING PROCESS

Recent advances in both hardware and software technology capabilities, coupled with price declines, have fueled computer usage in small companies. Microcomputers provide an effective tool for small businesses to carry out the essential tasks of bookkeeping and financial statement preparation. In addition, microcomputers can mold data into many useful forms and carry out analysis of numerous "what if" scenarios. For example, microcomputers can quickly calculate what the effect on financial statement line items will be if the sales projection is changed. Thus, microcomputers facilitate successful small business planning. (The sidebar on page 55 outlines a business plan for a small business.)

There are two ways to use microcomputers for planning. First, the small business planner can use any one of a number of spreadsheet software packages (for example, Lotus 1-2-3, Excel, SuperCalc, Quatro) to build his own business planning and modeling program or template. This requires a knowledge of both business planning and programming the specific software package being used. The second approach couples a microcomputer with an off-the-shelf, or stand-alone, small business planning software package. These preprogrammed packages not only eliminate the need for a detailed understanding of programming but also provide guidance in planning, modeling and forecasting.

Five software packages developed to aid in small business planning were studied. They are designed to meet the needs of a variety of users. Entrepreneurs, managers, CPAs, consultants, venture capitalists and others with financial and/or profit responsibilities would find these packages useful. While their capabilities differ, the hardware requirements for all the packages are fairly standard and all are easy to install. All are relatively easy to use and offer some form of what-if analysis. Each of these packages is discussed briefly below. Exhibit 1 provides information about price, hardware requirements, sources and relevant features of each package.

VENTURE

Venture is designed to lead the user through many aspects of planning from a feasibility plan--from which the user determines if a business idea is profitable--to completion of a business plan, which more specifically guides management in financing and running a business. It is a menu-driven, stand-along package and therefore requires no additional software.

Venture is a collection of five microcomputer tools: a planning module, a spreadsheet, a file manager, a general ledger and a word processor. The planning module interactively leads the user through developing both a feasibility plan and a business plan. That is, the user responds to questions, prompted by the system, regarding his business situation. Venture then will print out a completed and formatted feasibility or business plan, using the information from the user's responses.

Venture provides 11 preprogrammed models, which can be called into its spreadsheet and filled in with user-specific information. These models include a loan amortization schedule, pro forma income statement and balance sheet, ratio analysis and weekly expense report. Venture's file manager is a simple database for sorting and retrieving inventory, customer, employee or other records. The file manager has both sorting and search capabilities.

Venture's general ledger is a double-entry bookkeeping system, which allows the user to set up a charte of accounts and enter transactions in a general journal. Venture then produces a trial balance, income statement and balance sheet. The ledger also prints checks for cash disbursements.

Venture also has available a general purpose word processor with features such as spell check and search/replace. Samples of 18 standard-language business documents come with Venture and can be edited to meet user-specific needs. These documents include employment contracts, partnership agreements, stock subscription agreements and several variations of employee noncompete agreements.

BOTTOMLINE V

Bottomline V is a spreadsheet template program that works with most electronic spreadsheets including Lotus 1-2-3 (Release 1A or higher), Symphony, Excel, SuperCalc and The SMART Spreadsheet. The publisher plans to release a new stand-alone version of this software in the fall. It will be menu-driven, easier to use than the original and will not require a separate spreadsheet package.

The original Bottomline V software is a set of preprogrammed spreadsheet templates that are usable within a spreadsheet package. It therefore requires the user to have available one of the common spreadsheet packages mentioned above and to know how to use it.

Eleven templates are included in the Bottomline V package. In addition, to illustrate how the software is used, example data for two fictitious companies are provided. The templates can be adapted easily for any business application simply by entering the user's business specific information into the preformatted templates. Applications for bottomline V include:

* Budgets and cash flows. Cover a 12-month period, with financial statement templates provided for single revenue sources and multiple products.

* Performance reporting. Based on a company's historical data through a ratio analysis statement. This includes 23 ratios for overall performance, profitability, investment use, financial condition, financial leverage and company valuation.

* Long-range planning. Projects five years into the future from five years of historical data. All financial statements are generated.

* Pro forma financial statements. For service- or production-oriented companies.

One advantage of the Bottomline V spreadsheet templates is their ability to be modified by the experienced spreadsheet user to meet the needs of a particular situation. While all the planning software packages reported in this article provide some modification capabilities, with Bottomline V, it is possible to perform major transformations of the template formats within a spreadsheet program.

3D PLANNER

3D PLANNER is a set of preprogrammed spreadsheet templates that are usable within a running spreadsheet package. 3D PLANNER is different from Bottomline V in two respects. First, it works only with the Lucid 3D spreadsheet package (included in the cost of 3D PLANNER). However, no knowledge of the Lucid 3D spreadsheet is necessary. Second, the templates in 3D PLANNER are integrated. That is, figures calculated in one template are carried through to all other templates that use them. 3D PLANNER is, therefore, more like a stand-alone software package than a series of spreadsheet templates that are usable only with knowledge of the host spreadsheet.

3D PLANNER menus guide the user through the business model-building process. A business model is developed from the bottom up. The user starts by inputting product line information, including initial monthly forecast of sales, desired mark-up, raw materials, direct labor requirements and so on. Up to six products or groups of products with the same gross margin percentage can be accommodated. Next, initial monthly operating expense items are entered and the user can specify an index to increase each expense for the successive months. Other model components, including information on salaries, loans and assets, are entered as directed by the interactive menu system. When all model components have been entered, 3D PLANNER generates a 24-month forecast of cash flow, balance sheet and income. Supplementary reports, including product summaries, operating expense schedules and ratio calculations, also are generated.

3D PLANNER uses all the capabilities of the Lucid 3D spreadsheet, including a pop-up notepad word processor for the user to add documentation to the model and preprogrammed menu graphs of key financial relationships. As with Bottomline V, the experienced spreadsheet user can modify 3D PLANNER templates substantially to meet unique modeling needs.

UP YOUR CASH FLOW

Although all of the packages described in this article are easy to use, Up Your Cash Flow is the easiest. A stand-alone menu-driven package, all installation and general instructions are provided on one side of a 6" X 8 1/2" card. The publisher claims no manual or training is necessary. While this is true, the program does presume a familiarity with profit and loss statements and cash flow projections.

Up Your Cash Flow focuses primarily on operational planning but also comes with a business guide paperback book that discusses many areas of small business planning and operations. The main menu guides the user through 20 steps of data entry by asking key questions to prompt data input. Beginning with the company name and forecast plan starting date, Up Your Cash Flow directs the user to enter current sales and expense figures. The program provides formulas to help predict future expenses and asks which months the expenses will be paid.

Up Your Cash Flow automatically plugs user data into various reports, which either can be viewed on screen or printed off line. The core of the anslysis is the following 12-month forecast reports:

* A profit and loss forecast.

* A cashflow forecast.

* A projected balance sheet.

Other reports available include a payroll analysis (by employee) and product sales and cost analysis.

STRATEGIC PLANNER

Strategic Planner is being developed and has a scheduled release date through the AICPA this fall. It is a stand-alone, menu-driven package that focuses on the development of a 5-year business plan projection. Once the 5-year plan has been completed, the user can produce an operational plan.

By following the existing structure of the company's accounting model, Strategic Planner eliminates the need for new account structures or report formats. It has a chart-of-accounts structure like that of most general ledger systems.

Strategic Planner requires the user to enter three forms of variable data to develop a 5-year projection. First, the user's current account structure and base year account balances are entered. Base year account balances can be entered as dollar amounts or as formulas written in the same structure as a Lotus 1-2-3 formula. Next, financial indicators that allow the user to set the future annual rate of change for a given account are entered. For example, if the user believes sales will increase at the same rate as inflation, the sales account can be linked to an inflation indicator such as the consumer price index. This indicator can be a fixed rate or produced through a formula written in the same structure as a Lotus 1-2-3 formula. Finally, the user enters cash flow statement variable data. These set the order of the accounts in the cash flow statement, the format of the statement and the method for calculating cash from operations (the direct method or the indirect method).

Once all data and variables have been entered, Strategic Planner will generate 5-year forecasted income statements, balance sheets and cash flow statements. In addition, it will summarize the user's chart on accounts and provide a list of both the indicators and the formulas used.

ENHANCED PLANNING

The success of small businesses is crucial to the stability of the U.S. economy. The prospects of high interest rates, foreign competition and inflation have changed the conditions under which small business will operate in the years ahead. To succeed in such an environment, a small business must plan more effectively.

Small business planning software packages can enhance planning efforts greatly. Such packages provide an effective starting point and can lead the planner through the process of generating an effective business plan. The software planning packages described in this article are easy to install in standard hardware. They are easy to use and provide some capabilities to carry out what-if analysis, which is useful in forecasting. In addition, they offer an effective alternative to programming a business planning model from scratch.

TAREK S. AMER, CPA, PhD, assistant professor of accounting at the University of Florida, Gainesville, is a member of the American Accounting Association. CRAIG E. BAIN, CPA, PhD, is assistant professor of accounting at Boise State University, Boise, Idaho. He is a member of the American Accounting Association and the Institute of Internal Auditors.