Golden Numbers
Having been forced to write out her whole business plan, Elise is finding the experience less painful than anticipated.
It is really just a series of questions and answers.
Sole-Proprietorship, Partnership, or S Corporation? How much will the business cost to start? How much to operate? How much money will be invested? How much loaned? What will be her assets verses her liabilities?
This last concept, assets and liabilities, seems almost deceptively easy.
“Wait a minute, wait a minute, wait a minute,” she demands, cutting off her mentor, David, mid-sentence. “Everything boils down to assets and liabilities, right? I mean, basically, that is the golden equation. The gap between the two is where all the magic happens?”
“Yeah…” David nods, drawing out the word dubiously.
“But this number, assets, is basically made up. I mean, we know how much money I am theoretically paying out for the lease, and how much money I am theoretically paying for stock and furniture and stuff, but…but once the money is paid it’s gone. The real value of that furniture isn’t a dollar value any more. One display rack isn’t really worth fifty-four dollars once it’s in my store. It’s worth…it’s worth…I don’t know. It’s just a rack at that point.”
David smiles and shrugs. “You are thinking like a consumer. To normal people, the world is a rich, complicated place full of clothes and paper cups and sunrises. You have to learn to be a businessperson. To a businessperson, everything is money. From carpeting to ‘goodwill’, everything must, one way or another, be reducible to a series of numbers starting with a dollar sign.”
“But it’s silly,” Elise insists indignantly. “We don’t really know how many dollars of extra profit a chrome rack will generate as opposed to a wooden one. We don’t really know how many customers will come in on the first month, or how many on the second. It seems like every other column on this darn sheet is the result of a guess.”
David nods again, “That’s how it works. You make your best guess, then do your best to prove or disprove that guess using the math on the spreadsheet. A retail business, even using traded and donated stock like yours, is a pretty well understood game. There are certain constants and predictable ratios that will keep your sheet from going totally out of whack, I promise.”
“But you said that people really care about this sheet. That people will look at this sheet and make important decisions about my business based upon what it says. Do they know that it’s half guesses?”
David laughs. “Yup. They know. They are actually less interested in the numbers on the sheet. Their real interest lies in the ratios—in the balances between the numbers. The remainders and percentages are the key, not the actual values.”
Elise frowns as she thinks this over. “So, what do we do once we get this whole sheet filled out?”
David grins. “This is only year one, kiddo. Then we do two and three, then a totally different sheet for your five year projection.”
“I’m taking a smoke break,” Elise growls.
David laughs and follows her out.
Keep up with Elise and her story of becoming a successful entrepreneur:
Next week: Real Money
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