The Spreadsheet That Lies to You

If you’ve started a business, or have thought about starting a business, then you’ve probably created a very specific spreadsheet. It’s the one that tells you how much profit you’re going to make. It is, I suspect, lying to you.

If you’ve started already then chances are you’ve worked out that your spreadsheet lied, and it was probably a dispiriting moment, a frustrating or one that felt like a blow to the stomach.

I hated writing a business plan. I hated it all the more knowing that the people who read them mostly don’t care, they just want to see that you’ve done the work. It is very easy, in the nascent stages of a business idea, to create this spreadsheet. You’ll start by working out roughly what revenue you’ll make. You’ll factor in costs, and find yourself with a reasonable gross margin, you’ll add some staff, rent, rates and the rest. Likely there’ll be a nice little sum of net profit to show for your future hard work. If there isn’t much profit at the bottom of the sheet you’ll do something we’ve all done: slowly massage the numbers to work out how you could maybe make a healthy profit. It goes from being a prediction (which is how you’ll continue to think about it) to being a near-impossible challenge (you won’t think about it this way).

One can write a sensible looking spreadsheet for just about any business model. Revenue will seem realistic, costs fair and the outcome very positive. This is the spreadsheet that lies to you.

The most successful operators don’t trust this spreadsheet. They bring it to meetings before they open their business, to have people try and work out where the spreadsheet is lying to them. They want to find out where the realistic goals actually lie. They don’t trust it, even a little. These people are few and far between because, to many people, a realistic prediction is very difficult to work towards at the early stages.

I’ve said often that there has never been a better time than right now for speciality coffee. It has never been better – as a raw product, a roasted product or a drink. I’ll also say this: there has never been a more challenging time to open a speciality coffee shop or roastery. There has never been more competition than there is right now for the customers that you want, those people your spreadsheet assumes will immediately, and happily, stop buying coffee where they usually do and switch straight over to you.

I still have spreadsheets that lie to me. I can’t help it, I’m an optimist. Over the years they’ve morphed into budgets and have been refined and tested regularly against the real world. I believe the world of accounting, especially cloud-based accounting, has changed enough that every business should be benchmarking their deceitful spreadsheets against quarterly management accounts. The model must be updated, and the numbers you want to massage to fix the profit problem actually tested in the real world. That’s how the little lies of the numbers may come true.