The importance of business planning is widely documented; however, guidance as to what constitutes good business planning is less clearly defined. This article aims to redress that imbalance by describing 5 of the most common mistakes that occur in business plans.
While the business-planning process is in itself a very worthwhile exercise, most business plans are produced for a specific purpose. The plan is used as a means to convey an idea with a view to achieving a specific goal, e.g. securing funding.
Hence the plan needs to be tailored with the audience in mind, and good knowledge of their requirements will help shape a winning plan.
For example, the requirements a Venture Capitalist will have in assessing a plan where the author of it is seeking to secure a million-pound investment will differ considerably from those of a local bank manager who reviews a plan in support of a small-loan application.
While the former will be primarily looking for capital growth, the latter will be more concerned with security. To ensure you give yourself the best chance of being successful with your business plan it is important that the following common mistakes are avoided.
1. Incredible financial projections
One of the key areas business plan readers will focus on will be ‘the numbers’. Specifically, they will concentrate on the projected Income Statement or Profit & Loss.
The fact that numbers are projected does not mean that those figures can be included without due rigour or process. They need to be credible, defensible and consistent.
Of course forecasting is not an exact science, and the use of proxies can help the author ensure that the figures included are consistent with the story being told in the other areas of the business plan.
The figures must also show an ability of the company to generate free cash flows so that the business can be run profitably while satisfactorily servicing their debts at the same time.
All costs should be recorded including salaries to owner managers who run the company. It is not credible to generate P&L projections where expenses such as salaries are omitted to demonstrate managerial commitment or to artificially reduce losses, etc.
By the same token, no investor will be prepared to fund a business where the projected salary payments are excessive. While dealing with finances is not everyone’s strong point, there has to be someone on the management team who is cognizant with the maths.
A business plan will need to include everything from break-even projections to proposed return on investments to cash flow forecasts, and one of the key players will have to converse on these subjects in a convincing manner. They will also need to justify the numbers.
2. Not writing a clear business plan
A business plan needs to not only describe an opportunity, it must also detail how the opportunity can be exploited profitably and demonstrate the company’s ability to deliver what is required.
In recent years there has been a significant increase in plans that are inaccessible to the average reader because they are couched in technical jargon and unfamiliar terms.
If the reader of the plan cannot fully grasp who the prospective customer is, how that customer will be targeted, and the prospective benefits from the proposed solution, the reader will not invest. In an increasingly time-pressed world, people crave simplicity.
Many business plan recipients will only scrutinize the Executive Summary and the financials, using these as the decision points as to whether to read further or not. Hence it is of paramount importance that both the executive summary and the wider plan describes the opportunity in readily understood terms, such as:
- What is the issue or pain point?
- What is the proposed solution?
- What are the benefits of the solution?
- Why are these benefits compelling?
- Who will benefit the most from these?
Once these are detailed, there will be greater transparency regarding the viability, or otherwise, of the proposed opportunity in terms of the company’s ability to profitably serve the target market.
3. No clear route to market
All opportunities are only ‘prospective ones’ without evidence that the target market can be accessed profitably. Many entrepreneurs are inherently product focused, concentrating their energies on ‘the idea’ to the exclusion of many other important elements such as how they intend to access their customer base.
The growth in popularity of the Internet has certainly helped niche producers find geographically dispersed customers, making many more ideas commercially viable. However, it does not come without its challenges, as creating awareness online is both costly and intensely competitive.
The business plan must include a comprehensive and credible analysis of how the company intends to secure access to their target market in a cost-effective manner. The low cost and barriers to entry for websites have resulted in the creation of hundreds of thousands of sites.
Ensuring that a site stands out from the crowd is easier said than done. Knowledge of who the customer is and how they buy is very important, but identifying them and accessing them on an individual basis is much more challenging and costly.
Your business plan needs a detailed marketing plan which identifies who your customers are and how you intend to market and sell to them in a cost effective manner.
4. No clear objective
What is the main purpose of the plan? If it is to seek investment in the business, it is important to clearly describe the investment opportunity and set out what you require up front. As mentioned previously there is a tendency amongst entrepreneurs to focus myopically on ‘the product‘ or ‘the idea‘.
This is where they expend most energy but alas that is only one part of the process. While the plan describes the concept in detail, it must also address the purpose of the plan. If it is to secure investment, one needs to recognize that investing is the investor’s area of expertise and they will be seeking an appropriate risk/ return for their investment.
Their primary interest will quickly shift from the product once they ‘get it‘ and ‘like it‘ to assessing the ability of the company (including management) to generate free cash flows to enable the business to grow while also returning cash to them. They will also seek to understand:
- Why they would be better off investing in this business rather than leaving money in other asset classes?
- When will they recoup their initial investment?
- What is their expected return on investment?
- Is the investment merely cash or do they need to bring additional things to the table?
Once the primary objective of the plan is clear, the author will be able to ensure that the key requirements of
the reader are met. Hence you need to state explicitly what you want and what the investor will get in return (typically stated as ‘I need £1 million in return for X% of my business’).
5. No evidence of real demand
Another main area of interest when planning is justifying the sales forecast or demand levels for the product or service.
There are two main elements to forecasting – the use of facts and the use of subjective assessment/ judgment.
However, no matter how unique a concept is, if the market is defined widely enough, it is likely that figures from alternative offerings (facts) can be used to help assess likely demand levels (judgment).
The aim of sales forecasting is to come up with some revenue figures that can be considered to be credible in the wider context. While earlier we countenanced against excessively optimistic estimates, here we are delving deeper to ensure there is, in fact, real demand for the offering.
Prospective investors will not want to invest at the very start where the risk is highest. Is there poof of concept in the guise of sales or firm orders? Have some sales occurred already? If not, why not?
Unless there is verifiable demand for the idea, the risks grow out of all proportion, particularly if the initial start-up or investment costs are high. Is it possible to test the idea in real time, either by identifying comparables in other geographic areas or analyzing Google search logs or selling via eBay?
Again the business plan has to convincingly address the issue of demand rather than concentrate in isolation on ‘the idea’.
For some investors, firm orders or evidence of sales will be the level of proof required and allusions to proxies or comparables will not be sufficient. Conversely if there are already strong sales volumes of the product and the company is facing financing or resource constraints which have forced them to seek investment, then the power shifts from the investor to the plan author.
Summary and conclusion
In summary, business plans generally have a purpose of communicating a course of action so as to garner support for the plan. Support inevitably means resources, with the primary aim of the plan often being to secure financial investment.
With this comes a certain obligation on the business plan author to ensure that the plan is prepared in as thorough a manner as is possible. By ensuring the above mistakes are avoided, the chances of the plan objectives being met increase substantially.
About the Author
This is a guest post by Alan Gleeson, Managing Director of Palo Alto Software Ltd, creators of Business Plan Pro. He holds an MBA from Oxford University and an MSc from University College, Cork, Ireland and has been writing on entrepreneurship and business planning for a number of years.
This article originally appeared on BPlans.co.uk