Make no mistake—business plans are critical. You’ll need a well thought out plan for your bankers, investors, and management team. A business plan that carefully explains how you will make money and how you will be able to repay loans and investments. But preparing a business plan for the first time can be a daunting task. How will you know whether you’ve got it right? How can a business plan help your business—especially if you find yourself too busy to write one?
Here are the seven most common business plan mistakes and some tips on how to avoid them:
1. Your Plan Fails to Address the Risks:
We rightly want to be optimistic about the business’s future and therefore assume perfect scenarios unfolding with little friction. Taking some time to identify risks that could have a big impact on business is time well spent. I’ll add that even when a risk section is included, those risks are often very generic and are quickly explained away. Simplified Example: “no one will want our product – but our research suggests this is unlikely.” Carrying this example forward – exploring risks requires identifying and understanding factors that could influence demand. In the plan itself, those factors should be outlined along with the company’s likely response when/if such risks arise. Rather than explain away lack of demand as an unrealistic risk (as in the example provided), the business should identify what could cause lack of demand – and then outline how the business will respond to the cause itself. ”
2. Problems with Pricing Fundamentals:
The business plan’s assumptions about pricing often lack critical overhead detail, frequently leading to overstated income/understated expenses. Pricing must factor in all aspects of overhead plus the margin you need to reinvest in your company’s growth. Often costs are removed from the business plan because they make things look less rosy or the owner did not foresee them.
3. Renovating the whole house at once:
A common mistake is to work on one section and then the next without completing any of the sections. By the time you return to a previous section, you may not remember what the main theme of that section is. When writing your business plan, finish one section before moving on to another. This gives you a feeling of accomplishment and motivates you to keep going.
4. There is just too much information:
The most common problem they see, is that business plans end up too long. The whole point of writing a business plan is to focus in on the most important and relevant business information. If your plan gets over 20-30 pages, you are probably not focused enough. Instead, really make an effort to dial-in and deal with the most important information, such as your product, your competition, the market problem and your solution. If a lending agency or possible investor wants more information, you can always have separate documents ready that are more detailed in each area. But, for the plan itself, keep your information concise, organised, and to-the-point.
5. Not Having a Professional Presentation:
You need your business plan to impress investors when applying for a business loan, a professional business plan presentation is extremely important. Rightly or wrongly if your banker thinks you don’t know how to prepare an articulate business plan you may not be a good risk for the bank. In most cases, putting together a professional presentation on a program is not too difficult. Take your time and seek feedback from your accountant before you declare the plan ready.
6. The plan is too detailed:
Do not get bogged down in technical details! This is especially common with technology-based start-ups. Keep the technical details to a minimum in the main plan–if you want to include them, do so elsewhere, say, in an appendix. One way to do this is to break your plan into three parts: a two- to three-page executive summary, a 10- to 20-page business plan and an appendix that includes as many pages as needed to make it clear that you know what you’re doing. This way, anyone reading the plan can get the amount of detail he or she wants.
7. The plan makes unfounded or unrealistic assumptions:
By their very nature, business plans are full of assumptions. The most important assumption, of course, is that your business will succeed! The best business plans highlight critical assumptions and provide some sort of rationalisation for them. The worst business plans bury assumptions throughout the plan so no one can tell where the assumptions end and the facts begin. Market size, acceptable pricing, customer purchasing behaviour, time to commercialisation–these all involve assumptions. Wherever possible, make sure you check your assumptions against benchmarks from the same industry, a similar industry or some other acceptable standard. Tie your assumptions to facts.
Conclusion
Considering all of the hard work you have put into your business as of today, it would be a shame to not reflect your efforts in a well prepared business plan.
Your lenders, and or investors or partners will expect the same level of clarity from your business plan as they receive when they talk to you. The business plan is the same as any other plan. You would not accept a plan from your architect to build your house if it did not clearly describe the construction process and clearly define the end result.
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