"Not again,” I tell John LaMarche, Vice-President of Emerging Growth Group, a business development and venture fund management company in Des Moines, as we look at another business plan. But, sure enough, you can see it: The extrapolated efforts and results of a business plan’s financials, all thanks to the invaluable Microsoft “tool we all use, called Excel.”

We see 2-3 business plans a week come through our doors. Some are thorough on the business concept; some are not. Most are missing at least one of the key 4M’s that we look for in a viable and invest- able venture: Money, Management, Marketing and/or Model.

Most frequently, it’s Marketing.

So, in an inch of paperwork that goes through the business idea and concept, we see every possible way to look at how this venture will make money. Page after page of financial modeling and proforma statements, all driven by some spreadsheet formula that is usually tied back to capturing one percent of the market. We typically hear, “We are using conservative numbers in our financials, and our assumptions are based on only obtaining 1% of this billion dollar market.” This percent method is usually used in their spreadsheet to also calculate marketing budgets, “We start off aggressively with our marketing efforts to introduce ourselves to the marketplace. We have allocated 6% of estimated revenues in year one for marketing to penetrate the market.” Wow, that calculates to a lot of money, but how was it derived?

When we dig deeper into the plan, into this inch-thick document,

we usually find only a couple of pages truly devoted to marketing.

Missing items: Cost of Acquisition, Customer Lifecycle, Customer Retention Costs, Channel Costs, Lead-time, Barriers to Change, and Competitor Response, are typical.

Usually, we find a single number that starts it all. Some small, innocent looking number, that by itself, looks harmless and acceptable. But, once it is included in the dark, hidden, workings of a formula—that then is extrapolated throughout the company’s financials, growing to a very impressive number—it becomes a demon.

This number can start by the statement, “Well, we sold one product at 70% gross profit.” Which by itself may just be an innocent statement of fact, but when then followed by, “So, if we sell a million of these at 70% gross profit…”, you can see where we are going here.

The cost of growing a business, or its revenues, is never linear. There are economies of scale once a company hits “critical mass,” but never at start-up. The costs associated with the founder selling to a colleague, is not the same as creating market coverage and going to a “cold call” marketplace. Spreadsheets are not programmed to take into account “methods to market,” “channel players,” or the dependency of having a good sales force.

Furthermore, allocations of marketing expenses by a percentage of

revenue or other top-down approaches are easy, but not meaningful.

To truly be representative and meaningful, we need to take an “objective approach.” Based on what you want to achieve, build a bottom-up model that uses objectives and outcomes based on specific investments in marketing tactics and strategies. This requires marketing knowledge and expertise.

And, please don’t tell me that some of you are still doing cost plus pricing…

Using a spreadsheet formula to build your projections is very easy, but is not how you run a business.

Jim Goodman is the president of Customer Ease, a marketing consulting and research company in Des Moines. Jim founded the CEO Center (Creative Entrepreneur Organization) for assisting in the growth of Iowa businesses. Jim is also an adjunct professor for Drake University teaching Entrepreneurship and Marketing Research. To reach Jim: jimg@customer-ease.com or 515-471-1301.