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On this subject, here is an article about how to create a great business plan. 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 10 of the most common mistakes that occur in business plans.
While the business-planning process is in itself a very worthwhile pursuit, 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 seeking to secure a million-pound investment will differ considerably from those of a local bank manager who needs a plan to support a small-loan application. While the former will be primarily looking for capital growth, the latter will be more concerned with security. Regardless of the specific purpose of the plan, these following business plan lessons will apply.
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 plausible and 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. Lack of a viable opportunity
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.
4. Overestimation of revenues
Another key element of the plan will relate to the size and value of the opportunity. Does the business plan describe a small local business-to-business opportunity with limited scalability/ return or is it a concept with widespread or even potentially global consumer appeal? While the description of the market opportunity will undoubtedly be couched in positive terms, an obvious danger relates to the innate optimism of entrepreneurs and their tendency to exaggerate every business opportunity. Hence the general interpretation of sales forecasts is that they will be optimistic but not excessively optimistic. Admittedly what constitutes ‘excessive’ is subjective, but the numbers will need to be justified and if it emerges that the figures are mere fantasy, the author will lose all credibility and it will significantly undermine any confidence the potential investor might have in the plan.
It is important to guard against this by use of proxies and conservatism when it comes to sales projections. Placing some rigor around the process of deriving credible revenue figures also serves the entrepreneur well by enhancing their awareness of some of the key drivers for revenue growth in their business. It will also help them to produce a more plausible business plan and will ensure that the author is confidently able to answer questions regarding the market opportunity – questions that will top the list of any prospective investor or bank manager. Statements like “the Market is worth £10 billion and growing and we are focusing on capturing just 1% of it” set off alarm bells in the minds of prospective investors.
A more appropriate method is to calculate the number of customers the business intends to capture and their average revenues. These two inputs are easier to calculate and also to justify in a wider discussion. For example, a restaurant can easily use comparables from other restaurants as reference points to calculate average spend per person. Hence the focus turns to predicting the number of covers likely per week which can then be scaled up to obtain projected monthly revenue figures.
5. Lack of appreciation of the importance of good cash flow management
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