An excellent example of assumptions underlying a business plan is provided in the People Express financials. Here we find a list of 12 assumptions that help clarify the projections that follow. Most have to do with revenues and expenses associated with flying the company’s expected three plane fleet. Thus, we learn in points 7, 8, and 9 that revenues don’t include certain items that could become important later, like excess baggage and charter fees. And we learn in points 4 and 5 how the aircraft lease and personnel costs are figured in.
Following the stated assumptions, the plan provides further detail in table form about what it calls its “Preliminary Operating Plan”. The reader learns what expectations are about the number of miles flown each month, the number of passengers to be carried, and so on. Someone familiar with the airline industry can easily determine how realistic the assumptions are and thereby decide whether or not to invest or become a supplier or otherwise become involved.
Next comes the company’s cash flow statement, which is labeled “Preliminary Statement of Results”. It becomes apparent that the statement is done on a monthly basis, which is appropriate for a start-up company. Because cash flow is so important, it’s necessary to project on a monthly basis for at least the first year; some would suggest it should be shown monthly for three years and thereafter on a quarterly basis.
An interesting twist in the People Express cash flow statement is the incorporation of expected financing. The bottom of the statement shows the effect of $6 million of investment funds on the company’s cash flow. This is usually preferable to showing results without investment or loan funds, leading to, negative cash flow.
As should be clear by now, financial statements serve a much larger purpose than impressing bankers or venture capitalists. They are an important monitoring and planning tool. Almost like an X-ray or EKG enables a doctor to get an important view of a patient’s condition, so a cash flow or income statement provides special insights into a business’s condition. And even more than a crystal ball or palm-reading, these statements provide a basis for projecting into the future. The more history that exists, the more accurate the projections are likely to be. Indeed, it’s even possible to take components of the cash flow results – promotion or direct labor, for instance – and track them separately to determine correlations with overall cash flow or profits.
Finance may not be your favorite subject, but it should rank among your highest priorities.
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