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Writing a
Business Plan:
Common Mistakes In Business Plans
Your business plan is
typically the first impression potential lenders of investors
get about your business idea. Even with a great product, team,
and customers, and you are unable to convey to properly convey
your image, it could be the last impression if your plan has
some of the following, common mistakes.
Lenders and investors
review hundreds of business plan every year and with every plan,
lenders and investors become more cynical because the same
mistakes pop up with regular frequency. With so much competition
for a limited amount of capital, it is imperative to not make
these mistakes.
1. Financials
Unrealistic Financial
Projections - Simply saying that you are going to do $100,000 in
sales is not enough nor can you simply say there is no way of
knowing. Everyone knows there is no way to accurately come up
with financial projections over the next three years, especially
in a start-up. But, what is required in your plan is that
reasonable assumptions are made and supported with research. By
incorporating a detailed list of assumptions and how you arrived
at your numbers, the lender/investor can judge your analysis and
decision making process. If you are projecting to generate high
sales outside of industry norms, explaining how you arrived at
this conclusion is a must. Lenders and investors have seen many,
many plans that claim sales are going through the roof once
funded and as a result are very jaded at statements like this.
Financial data that is inconsistent with industry averages and
overly aggressive sales figures will raise flags. Explain every
number.
Confusing Cash with Profits
- Revenues do not always equal cash. For example, suppose you
make a sale this month for $100 that cost $50 to produce.
Assuming your buyer doesn't pay for 30-60 and even 90 days if
dealing with state or federal sources (and assuming they all
pay), the effect on your cash flow is significant. Suppliers and
employees still have to be paid for their work while you are
waiting on payment from the buyer.
While you may not have a
significant portion of sales coming from receivables, the timing
of cash flows is critical for developing a financial strategy as
cash flow is much more important than profits. Profits are an
accounting concept while cash is money in the bank. If you don't
believe me try paying your bills with profits.
No Adjustment for
Seasonality - All businesses are seasonal to some extent, some
more significant than others. Seasonality refers to the
percentage of sales that are made in a month. For example, most
retailers have huge November and December sales and lousy
January and February sales. Did you make enough cash during the
good months to cover the slow months to cover salaries, rents
and lights?
If You Build It They Will
Come - Be careful in assuming once your doors open people will
be streaming in to buy. You have a new, relatively unheard of
business. This is a time when your business is particularly
vulnerable as most of new owner's cash reserves have typically
been used to open the store. If sales projections are off during
the first couple of months and you don't have enough working
capital to keep the lights on, you may be quickly going out of
business.
Insufficient financial
projections - Basic financial projections consist of four
elements: Income Statements, Profit & Loss, Balance Sheets, and
Cash Flow Statements.
For most businesses a
three-year projection is sufficient, but if yours is a capital
intensive one and will take longer to show profitability then
use five. Actual figures are a must if you can get them and any
number in the projections needs to be in the business plan
narrative. If you are purchasing an existing business use the
historical financials to show support for your sales figures.
No Quotes - Any significant
expenses should have a quote accompanied in the appendix,
especially for construction or remodeling as this is an area
where most entrepreneurs slip as they do it themselves and
greatly underestimate the costs.
2. Marketing
Failing to relieve the
customer's pain - Businesses are rewarded to make consumer's
pain go away. Pain can include; my car stopped working, my
doggie is sick or my tax returns are too hard to prepare.
If your business plan can't
show how you are relieving the customer's pain, then the chances
for success in the marketplace is extremely limited.
Remember pain equals market
opportunity. The greater the pain, the greater number of
customer's with this pain and the better you can relieve the
pain equals greater market potential.
One Billion Customers
Served - Claiming everyone needs your product/service will send
a strong message to the reviewer that you don't know your market
and remove any credibility to your plan. In the good old days
the shotgun approach to marketing could work as there were
limited channels for advertisement. Today with unlimited outlets
and more narrowly defined markets, this approach does not fly.
While it's true everyone
eats, not everyone will eat at your restaurant, nor could you
effectively advertise to everyone. By researching the segments
that are most likely to use your product/service and showing how
your message will get to them will ultimately make your endeavor
more successful. Having clearly defined target markets will show
you have done your homework and be the cornerstone of a
marketing strategy that can succeed.
We have no competition -
Use this statement if your want your plan rejected. Every
business has competition. While there may not be a direct
competitor, meaning one that offers the same or similar product,
there is always an indirect competitor.
Saying there is no
competition tells the reviewer that you have either not done any
market research or there is not a market for your product.
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3. Organization
Writing For The Wrong
Audience - A plan for a lender should be written differently
than one for an investor. Banks are interested in seeing the
likelihood that debts be repaid and investors are interested in
the upside profit potential. Be sure to write your plan to your
audience. For both, keep to the facts, keep it clear and keep it
simple. If you don't feel you have the writing abilities to make
your plan shine, then get help.
Poor spelling and grammar -
Leaving spelling and grammatical errors in your plan only tells
the reviewer that you are not paying attention to details and
may not pay enough attention to the business. Use spelling and
grammar checkers and let others review your plan to make sure
there are no errors.
Too repetitive - Many
times, plans will cover the same points over and over. A
well-written plan should cover key points only twice: once in
the executive summary then again in greater detail in the
narrative of the plan.
Remove the Jargon - Using
simple language is imperative to getting a technical business
funded. Don't think that by using complex terms that
lenders/investors will be so impressed with your knowledge that
they will whip open the checkbook. Businesses that can't be
understood don't get funded. If you can't explain your business
to a sixth grader your chances of funding are in jeopardy.
Investors are really only
interested in your technology if it solves a problem that people
will pay for, is better than the competition, can be protected
through patents and can reasonably go to market without spending
a lot of money.
Keep the technical details
out of the business plan and in the white papers.
Appearance matters - Make
sure your plan looks professional. Use professional printing,
binding, keeping fonts consistent and easy to read. The more
money being requested means investing more time in making sure
your plan will stand out from the crowd. Be careful that you
don't go overboard and give the impression that the plan is all
style and no substance.
Length - A long business
plan does not make a better business plan. All of the industry
and marketing research won't save a flawed plan. Too many plans
have been immediately rejected because they are too long.
Lenders and investors favor entrepreneurs who can efficiently
demonstrate the ability to efficiently get to the point.
An executive summary should
be no more than 1-3 pages. Ideally it should only be one page
but some complex plans require more. An ideal business plan is
20-30 pages, including financials. Remember less is more!
Use operating plans, white
papers and marketing plans for the in-depth details.
Fluffing - Using phrases
like "unmatched in the industry;" "narrow window of
opportunity;" or "ground floor" are empty phrases filled with
hype. If anything, the cynical reviewer will be turned off by
the hype and trash your plan. Stick with laying out the facts -
what is the problem, how will you solve the problem, how big is
the market, how will consumers buy it and what is your
competitive advantage. If the opportunity is there the
lender/investor will be able to make the decision for
themselves.
Overvaluing the business
idea - What gives a business value is not the idea but the
execution of the idea. A great idea is a start, but almost
everyone has had a great idea at some point in their lives. How
you will execute this idea is what sets apart a real business
from the dreamers.
4. Execution Mistakes
Waiting too long - Funding
a business takes a long time. Expect three months at a minimum
after finishing your business plan to get funding. Unless you
have sufficient capital, other sources of income and can be
funded in-house at a bank, this number may be reduced. Bank
financing for business with less than two years of operating
history are typically funded through an SBA guarantee, which
requires additional time, patience and paperwork. Financing
through investors is usually an even longer process as they have
a lot of people competing for their money and they tend to do
significant due diligence to secure their investment. Waiting
until you need the money is a sure way to keep your business
from launching.
Unreasonable time lines -
Many business owners underestimate the timelines for completing
milestones. Its human nature to think we can do things faster
than is possible. When getting a business started there will be
several tasks you could not have anticipated and the some tasks
you think will be easy which will end up taking much longer. It
is best to overestimate and finish early, rather than scramble
and execute your opening poorly.
Failing to seek outside
review - When preparing your plan, be sure that you have at
least a few people review it before sending it out. Preferably
look for people in your industry or who have a specialization in
sales, distribution, etc that could lend a fresh set of eyes and
find any flaws in the plan. Being so close to the action can
keep you from being objective and this additional scrutiny may
save you countless headaches and money down the road.
Perfecting - It can be easy
to spend countless hours perfecting your plan and ultimately
never launching. Remember, your plan will never be perfect and
in practice should be continually updated as you learn more
about the business, market and customers. Don't make your plan
an academic practice, finish it and get in front of investors
and lenders. Use this feedback to see if your plan really needs
the additional perfection.
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