0:01

So, I realize we went through a lot of material the last time we spoke about

Discovery Driven Planning.

So, it's actually a very straightforward process, but it can seem very confusing.

The best way to learn it is to actually work through an example.

So, we spent our time last time talking about John and

Joanne's spreadsheet that they built to discover their own plan.

We've created a sample one for you to use.

And you could find that spreadsheet available to you as part of the course and

take a look at the better desk case.

So, if you look at that, you'll notice that there a series of five tabs.

The first is the Better Desk story that outlines for you the details

of the case that we discussed last time, so you can see the story of Jon and

Joanne and why they're launching Better Desk, what their venture idea is.

The second tab you'll see is the Reverse Income Statement.

That's where most of the action is happening.

In this particular Discovery Driven Plan and we'll talk about that in more detail.

There's a list of assumptions, which again, we discussed.

The list of milestones, and

then that assumption milestone chart that combines the two together.

What I'd like you to do is look at the Reverse Income Statement.

If you remember,

the first step in Discovery Driven Planning is to start with their goal.

So if you look at the top of the Reverse Income Statement,

you'll see that we've done exactly that.

So Mr. and Mrs. Smith have a current income of $120,000.

Their goal, they're not willing to launch their company unless they can make 15%

over that.

So you see that 115% there, so you see the total acquired profits.

So that is the first step, and when you look at the rest of our income statement

as we discuss in the last class, you'll see that using the steps 2 and 3,

of the discovery driven process worked backwards from our goal,

thinking about the key activities in our business, and outlining those in detail.

So that service income statement, again take a little time to look at that.

And I want to ask you a couple of questions and this will work best if you

pause the video, seriously and take a few minutes to go through the model because

really the only way to understand this is to play with this a bit.

And I can't guarantee it's error-free.

We did our best job to build it out.

But go through the model and consider the following.

And think about what are the key assumptions of a business?

And again, we discussed about ways of finding key assumptions in

the previous lecture.

And are there any missing costs or line items?

So, please take a few minutes pause, go through this,

come with your own answer about what the key subs the business are and

whether obvious missing lines are cause.

When I do this for my students, we actually do this in class and

we actually do pause for 15 minutes to do this.

So take a few minutes to do that, and then continue the video when you're ready

2:38

Okay, I'll trust that you did not cheat yourself by skipping ahead.

This isn't graded, so you can do it however you want.

But if you had a chance to look through this, there are some missing costs that

I noticed when we were putting this together,

we don't have any information about rent.

We don't have any information about taxes.

There's no line item, the marketing line item is pretty weird because we're taking

a percentage of sales for marketing.

But don't you usually want to spend marketing dollars up front

to stimulate sales?

We don't have any information from website.

There's no general and administrative expenses.

And a sales model seems a little bit odd in terms of how it was built.

This is very realistic, these sets of missing assumptions.

It's very common to build a model and not have thought about certain key issues.

So by spending time going through it, and especially if you're able to do that with

somebody else, it lets you find these key missing issues, right.

And I may have missed them, or maybe some of them are different than the ones that

you have, but this gives you a very powerful method

of thinking about what you're missing when you're doing your assumption planning.

3:38

So, we've talked about missing costs and missing line items.

What about the key assumptions, the other question I asked?

And you may have tried a bunch of different techniques but the idea

of how you service key assumptions is the same as we discussed in the last lecture.

The first thing you do [COUGH] is you can move the numbers in ranges.

What I mean by move in ranges, I mean think about what the highest and

lowest possible number for each assumption is.

And try putting in that highest and lowest number into the model.

So one thing that we had in the model, for

example, was the average number of desks per order.

So if we think that number could range from 2 to a 100, put 2 end and

put a 100 and see how much it affects your outcomes.

And in terms of figuring out how big those number changes could be,

how big the range of possible assumption numbers could be,

you want to think about what Jon and Joanne actually know.

So, we're already expecting it in the most and

therefore they're going to be the least uncertainty.

In this case I would imagine that would be around the production and

manufacturing of desk.

Because John and Joanne are carpenters, they know that market really well.

So maybe the cost per desk which I think they have is $120 could be between $115

a $125 but it's unlikely they were so bad at pricing from talking to suppliers that

it could be somewhere between $5 and $1000.

On the other hand, sales is something that we know from the case that Jon and

Joanne know much less about.

So, it's much more possible that the range for

things like the number of sales calls per day could be much larger both minimum and

maximum than what Jon and Joanne discussed.

And you get more information by looking at the quality of the sources.

What information do they have?

Where is the data for the assumptions coming from?

If you want to get fancy,

you can do the sensitivity analysis by moving all of the numbers simultaneously.

Or you can just move them individually.

What you see on the side of your screen, that staircase chart,

also called a tornado chart when done vertically, is a sensitivity analysis.

How much do the profits and the numbers change if we move those numbers up and

down in their ranges?

And this is just one example.

I'm not saying these are the exact numbers,

because again, we made up this case.

But you could generate a similar chart by moving those numbers in the ranges and

then seeing which one has the largest possible effect.

If you're familiar with more advanced techniques like Monte Carlo simulations,

which would let you run all the numbers and move them simultaneously.

This is a chance to do that, as well.

But again, if you don't know what that is or if you don't have experience with it,

you don't need to do a Monte Carlo simulation to get answers.

The simple sensitivity analysis where you move the numbers in each range,

use the highest and lowest figures and

see what effect it has on your outcome is a very powerful in and of itself.

So the next step in the business would be to match these key assumptions to

milestones.

So you've just surfaced assumptions that might be large.

Perhaps that's the direct sales price per desk, that might be a very big assumption.

So we now have the list of milestones that they're hoping to achieve.

And we have this assumption that we would now identify our key assumptions.

We're going to fill in this chart and this is something that you should take sometime

to do now, to think about when something to excel price per desk could be tested.

In this case we'd certainly contested the market study and

we could probably test it in the mock up of the sample desk for

troops in the simulation of sales and marketing.

So, is that where we want to test this, we have to think about that.

And you're going to figure out your key assumptions and

key milestones by thinking about which milestones test the most assumptions.

And how early or late this is in the process of starting our business.

So if our big concern is about sales calls and whether or

not how many sales calls per day can be made or how many desks per order...

You'll notice that if we look at the milestone chart,

we don't really test that until fairly later in the business.

So perhaps we need to think about a way of preselling our product earlier.

Maybe we could do this by launching a kickstarter campaign to see if people will

support this desk, maybe we go out, and try and

pre-sell to couple architect shops and see how many desks we get per order.

But there isn't milestone there to test then very late in the process so

this gives us the idea that maybe we're not testing key assumptions early enough.

So that Better Desk example, is a great way to start building your own model.

And again I've heard from many students who found this a very useful technique for

thinking through their business desk.

So even it's not as complex as the Better Desk model,

you'll still find this be useful.

So I strongly recommend building and discovering your own plan.

And it will take you a couple hours of your time, but

can save you a thousand of dollars and

how many of these numbers makes it big different in your long term business.

At the same time the problem with the discoverage of your model is at steady

state right?

And your business is hopefully growing overtime.

This is not a good way to model future sales for us,

it's a good way to look at a steady state model that can give you some insights at

your business is not necessarily a representation of all the cost and

issues that you will be dealing with.

So just remember the model it's just a model, it's a tool for you to use,

it's not a religious scripture.

So thinking about using this in that kind of way as one of the tools informing you

about your assumptions, the next steps in your business, future plans.

And spend some time looking through the Better Desk example to understand how

everything is connected and how it works together.