Sunday, March 04, 2012

Avoiding Parkinson's Law of Triviality in your financial plan

In the last few years I've seen a lot of financial plans, and since we started Point Nine in the middle of last year that volume has been skyrocketing. I've seen everything from just a few numbers in an email to extremely sophisticated Excel spreadsheets with dozens of tabs and tens of thousands of cells, and I thought I'd offer some advice on what I think a good financial plan looks like.

To begin with, among the worst financial plans are those that you get if you take a template from a business plan competition or a bank in Germany and don't customize it to your particular business. These templates are usually very detailed on the costs side, listing everything from magazine subscriptions to stationary and postage, but the revenue projection is just one line – a pure estimate that is coming out of nowhere. Parkinson's Law of Triviality comes to mind!

The best financial plans of early-stage Internet startups in my opinion:
  • are relatively simple – just one Excel tab or a few at most (a later-stage company will often require a more complex plan but in the beginning you can keep it simple)
  • are based on the key drivers of your business (your conversion funnel, your projected ARPU, churn etc.)
  • make your assumptions transparent and easy to change
  • contain very few hard-coded numbers which would make the plan hard to revise (an exception to this are historic numbers, of course)
  • avoid Parkinson's Law of Triviality – spend more effort on what really matters and lump together stuff like tiny expense categories
  • contain a few extra lines for sanity checks (anyone who will seriously review your plan will perform them anyway, so why not make their lives a little easier?)
If anyone is interested in further details, please let me know in the comments section, email me or send me a tweet and I can add some more color and post an example.


Lydia said...

Hey Christoph,
Hey all,

that exactly describes the feeling I constantly have when working on our financials. Things you can prospect (costs) get a lot of attention and space, the "rest" feels unsatisfactorily blurry.

The result ist complexity, which makes it hard for anybody else than me to check and challenge.

Any tipps for good information scources on this?


Nils said...

Hey Christoph,

some textbooks on financial modelling recommend an integrated financial planning, consisting of a cash flow statement, a profit & loss statement and a balance sheet. So at least three spreadsheets.

What is your opinion on this for early stage Internet startups?

...P&L obviously gets pretty relevant when it comes to taxes.

A XLS-example would be much appreciated!


Yorgenmeister said...

Hey Christoph,

Post an example please .. to take it as a reference of a good one for you! ;)

Yorgenmeister said...

Hey Christoph,

please show us a reference of a good one or the bad ones so it can be much more explicit!


Christoph Janz said...

Hi Yorgenmeister,

I can't share any of the plans that we've received but I created an example/template here:

Best regards


money said...

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