Common Business Plan Mistakes
While including the necessary items in a business plan is important, you also want to make sure you don’t commit any of the following common business plan mistakes:
Putting it off.
Too many businesses make business plans only when they have no choice in the matter. Unless the bank or the investors want a plan, there is no plan.
Don’t wait to write your plan until you think you’ll have enough time. “I can’t plan. I’m too busy getting things done,” business people say. The busier you are, the more you need to plan. If you are always putting out fires, you should build firebreaks or a sprinkler system. You can lose the whole forest for paying too much attention to the individual burning trees.
Cash flow casualness.
Most people think in terms of profits instead of cash. When you imagine a new business, you think of what it would cost to make the product, what you could sell it for, and what the profits per unit might be. We are trained to think of business as sales minus costs and expenses, which equal profits. Unfortunately, we don’t spend the profits in a business. We spend cash. So understanding cash flow is critical. If you have only one table in your business plan, make it the cash flow table.
Idea inflation.
Don’t overestimate the importance of the idea. You don’t need a great idea to start a business; you need time, money, perseverance, and common sense. Few successful businesses are based entirely on new ideas. A new idea is harder to sell than an existing one, because people don’t understand a new idea and they are often unsure if it will work.
Plans don’t sell new business ideas to investors. People do. Investors invest in people, not ideas. The plan, though necessary, is only a way to present information.
Fear and dread.
Doing a business plan isn’t as hard as you might think. You don’t have to write a doctoral thesis or a novel. There are good books to help, many advisors among the Small Business Development Centers (SBDCs), business schools, and there is software available to help you (such as Business Plan Pro, and others).
Spongy, vague goals.
Leave out the vague and the meaningless babble of business phrases (such as ‘being the best’) because they are simply hype. Remember that the objective of a plan is its results, and for results, you need tracking and follow up. You need specific dates, management responsibilities, budgets, and milestones. Then you can follow up. No matter how well thought out or brilliantly presented, it means nothing unless it produces results.
One size fits all.
Tailor your plan to its real business purpose. Business plans can be different things: they are often just sales documents to sell an idea for a new business. They can also be detailed action plans, financial plans, marketing plans, and even personnel plans. They can be used to start a business, or just run a business better.
Diluted priorities.
Remember, strategy is focus. A priority list with 3-4 items is focus. A priority list with 20 items is certainly not strategic, and rarely if ever effective. The more items on the list, the less the importance of each.
Hockey-stick shaped growth projections.
Sales grow slowly at first, but then shoot up boldly with huge growth rates, as soon as ’something’ happens. Have projections that are conservative so you can defend them. When in doubt, be less optimistic.
How Will You Use Your Plan
The classics are seeking investment, applying for a loan. There are also the obvious communications with employees, partners, family members, consultants. And there is valuation, sometimes for tax purposes, sometimes for growth, divorce, estates.
Too many people think of business plans as something you do to start a company, apply for a loan, or find investors. Yes, they are vital for those purposes, but there’s a lot more to it. Preparing a business plan is an organized, logical way to look at all of the important aspects of a business.
First, decide what you will use the plan for, such as to:
• Define and fix objectives, and programs to achieve those objectives.
• Create regular business review and course correction.
• Define a new business.
• Support a loan application.
• Define agreements between partners.
• Set a value on a business for sale or legal purposes.
• Evaluate a new product line, promotion, or expansion.
Start with an Initial Assessment
Start your business plan with a quick assessment. Even for an ongoing business, take the time to step away from the business and look at the basics. Do your business numbers make sense? One of my business school professors used to refer to this process as finding out “is there a there there?”
Objectives
Objectives are business goals. Set your market share objectives, sales objectives, and profit objectives. Companies need to set objectives and plan to achieve them.
Make sure your objectives are concrete and measurable. Be specific, such as achieving a given level of sales or profits, a percentage of gross margin, a growth rate, or a market share. Don’t use generalities like “being the best” or “growing rapidly.”
For example, “being the best” or “maximize customer satisfaction” are not serious business plan objectives because they cannot really be measured. Much better objectives would set measurable goals, such as holding gross margin to 25 percent as a minimum, or selling more than $3 million, or achieving six percent profit on sales and 10 percent return on equity.
If less tangible goals are critical to a plan, find a way to measure them. For example, if image and awareness are vital, then plan for statistically valid surveys to measure the improvements in image and awareness. You can also set goals for market share, and purchase research to measure the actual share. Or, if you want to focus on customer satisfaction, plan for a survey to quantify satisfaction or specify numerical objectives regarding returns or complaints.
Mission Statement
Use the mission statement to define your business concept. A company mission statement should define underlying goals (such as making a profit) and objectives in broad strategic terms, including what market is served and what benefits are offered.
• What Business You Are In. Ask yourself what business you are in, and don’t narrow yourself down. One of the classic business examples is the railroads, which lost a chance to expand in the twentieth century because they misdefined themselves. They thought they were in the business of running trains on tracks. They didn’t understand they were in the business of transporting goods and people. When trucks and buses and highways grew, the railroads were left behind.
My company, Palo Alto Software, is not in the business of software development. It is in the business of helping people do business plans by themselves, providing business know-how through software and documentation. The broader definition helps us understand what we’re up to.
• Customer Satisfaction Leading experts in developing customer satisfaction look to a mission statement to define customer satisfaction goals. Developing customer care programs depends on spreading the idea and importance within a company. That should normally start with a statement included in your mission statement.
• Workplace Philosophy. Some mission statements also define internal goals, such as maintaining a creative work environment and building respect for diversity. Experts in employee relations look immediately to a mission statement for a definition of a company’s stand on some of these fundamental issues.
• Value-Based Marketing Experts developed the value-based marketing framework to help companies understand their business better. This framework starts with a business value proposition, which states what benefits a business offers, to whom, and at what relative price level.
For example:
o This automobile manufacturer offers reliable, safe automobiles for families at a relative price premium.
o This fast food restaurant offers quick and consistent lunches at a low price.
Keys to Success
Focusing on what I call “keys to success” is a good idea for getting a better view of the priorities in your business. Just about any business imaginable is going to depend a lot on three or four most important factors. In a retail business, for example, the classic joke is that the keys to success are “location, location, and location.” In truth, that might be location, convenient parking, and low prices. A computer store’s keys to success might be knowledgeable salespeople, major brands, and newspaper advertising.
Focus is very important, and the keys to success framework helps you develop focus. There is what I call a law of inverse focus. I can’t prove it with detailed research but I’ve seen it many times. Beyond three or four key items, the more items on a priority list, the less chance of implementation. Thinking about keys to success is a great way to focus on the main elements that make your business work.
Break-even Analysis
Next comes a simple Break-even Analysis table, as shown in the next illustration, where you estimate when your business will actually begin to make money. The Break-even Analysis table calculates a break-even point based on fixed costs, variable costs per unit of sales, and revenue per unit of sales.
Make the following three simple assumptions:
1. Average per-unit sales price (per-unit revenue): The price that you charge per unit. Take into account sales discounts and special offers. For non-unit based businesses, make the per-unit revenue $1 and enter your costs as a percent of a dollar.
2. Average per-unit cost: The incremental cost of each unit of sale. If you are using a Units-Based Sales Forecast table (for manufacturing and mixed business types), you can project unit costs from the Sales Forecast table. If you are using the basic Sales Forecast table for retail, service and distribution businesses, use a percentage estimate. For example, a retail store running a 50% margin would have a per-unit cost of .5, and a per-unit revenue of 1.
3. Monthly fixed costs: Technically, a break-even analysis defines fixed costs as costs that would continue even if you went broke. Instead, you may want to use your regular running fixed costs, including payroll and normal expenses. This will give you a better insight on financial realities.
This next illustration shows a Break-even chart. As sales increase, the profit line passes through the zero or break-even line at the break-even point. In the illustration the Break-even chart shows that the company needs to sell almost 1,200 units per month to break even.
This is a classic business chart that helps you consider your bottom-line financial realities. Can you sell enough to make your break-even volume? Of course, the break-even analysis depends on assumptions made for average per-unit revenue, average per-unit cost, and fixed costs, and these are rarely exact assumptions.
Market Analysis
Determine if there is a sufficient market to support your business. You don’t need to do major market research for this initial market analysis. You may want to, and even need to, do real research later on. For now, however, you want to get a good educated guess about how many potential customers you might have.
What you want at this point is a reality check. You’ve already developed a quick break-even analysis that ties your initial business numbers to your required sales. Now you’re going to look at how many customers you might have so you can think about the importance of breaking even.
Develop a basic Market Analysis table. This table gives you a simple list of market segments. Each segment is a group of customers. Define the groups according to what needs you supply, demographic characteristics, buying habits, preferences, or whatever other classification system works for your plan. Fill in the total potential customers estimated and the annual growth rate expected for each segment.
The following illustration shows a Market Analysis table. You can also use a Market Analysis chart as a visual guide to your market segments.
Pause for Reflection
Now it’s time to give your planning an objective appraisal. At this point, you’ve defined your business, your financial break-even point, and your total potential market. How does your business look from this viewpoint? Does it make sense? Can you make the sales you need to break even? Is the market big enough? Are your projections realistic? Can you bring together the keys to success?
Especially for potential start-up companies, a moment of reflection is critical. Many people dream of starting a business, but that dream turns into a nightmare if the new business isn’t successful. If you think you can make your break-even numbers work and you believe you have enough customers to make it, then go on to develop the plan. If not, either do more research and revise the idea, or give up and try something else.