Business planning is often talked about as a challenging process to go through. Both to start a new business, or as the essential process of taking ownership of an existing business. Many business plans fail to achieve their objective, not because they represent a bad idea but because they fall into classic business planning pitfalls or fall over blinding obvious credibility cliffs. Here are the top 12 business planning mistakes, and more importantly how to avoid them.
The business-planning process is in itself a very worthwhile pursuit, they take a lot of effort and resource. A business plan’s primary purpose is to convey an idea with a view to achieving a specific goal, most typically in securing funding.
What makes a good business plan is less clearly defined.
Always remember that a business plan needs to be tailored to its target audience. If you have different audiences you will need to be able to flex your plan to that audiences specific needs. That means shaping it, edit it and amending it to achieve your objective.
If you would like to know how to avoid these top ten pitfalls and credibility cliff edges then click on the subject titles which are links at any time to see my step-by-step videos on how to avoid these pitfalls and credibility cliff edges.
Business planning is a vital activity for any business to succeed.
Here’s the top twelve business planning mistakes I come across most frequently:-
Every business plan needs to describe the opportunity in detail. It must also detail how that opportunity can, and will by this plan, be exploited profitably, effectively and successfully. A good business plan can visualise the opportunity and articulate the company’s ability to reach a viable opportunity, this is a credibility cliff.
Tomorrow is a difficult place to plan for, but being able to identify and make that opportunity viable is the most critical test any business plan has. It is also the most common reason they fail. Your executive summary and the wider plan describes the viability of the opportunity in terms such as:-
- What is the problem which people will pay to have solved?
- Does your solution solve this issue for a specific target market?
- Why would someone buy your solution over someone else’s?
- Why are the benefits of your offering so compelling?
- Can you reach that target market with a compelling message quickly and directly?
Where any assessment of a business starts and often finishes is at the numbers, specifically on the projected Income Statement or Profit & Loss. Projections are just that, but they are vital and must be based upon clearly stated assumptions. Many business plans are written with numbers which just do not stand up even to a first glance.
Dream numbers: in overestimating income and understating costs.
Your numbers have to make sense and be realistic, if you are a new start-up then they must grow rationally from nothing, but costs will be incurred before turnover is generated, these need to be realised and recognised in your financials.
The financials must also make sense and be presented in a format which presents a clear case for the investment and the return you will deliver. Ultimately, they need to be credible, defensible and consistent.
All opportunities are only prospective ones without evidence that the target market can be accessed profitably, this is a big cliff to fall over.
Entrepreneurs are inherently product focused, concentrating their energies on ‘the winning idea’ to the exclusion of many other important elements such as how they intend to access their customer base, a classic cliff edge for any plan.
“Built and they will come” is a great dream but a poor plan.
A business plan must include a comprehensive, credible and costed analysis of how the company is going to access their target market in a cost effective manner. Too many plans focus on the product not the market opportunity, they focus on teh solution not the problem they are solving.
For that to happen your plan needs to really understand the target customers, their needs, and purchasing priorities. Turning historical data into information and drawing knowledge from it ascertain insight into their future purchasing habits. Only then can you demonstrate cost effective routes to market within a business plan.
4. Executive Summaries Which Aren’t
Somewhere between a pitfall and a cliff edge, is the failure of the Executive Summary, to be either a summary or aimed at executives. The only part of any plan that will certainly be read is the Executive Summary and yet they rarely provide an effective summary of the business plan. A good plan highlights the key proposition of the plan and sells the proposal.
Too many Executive Summaries either throw everything down in a jumbled mess, making them pages long and randomly pulling facts together, or they are so bland they say nothing!What’s a good Executive Summary, one that states the proposition clearly and succinctly, a page is sufficient for any plan.
The Executive Summary should clearly explain the whole picture including what investment is required and what it will deliver. The point of an Executive Summary is to inform the executives, so many it punchy, outcome focused and only ever write it at the end.
Another associated key element of the plan which relates to this element is the estimations of projected turnover.
While every business plan talks in positive terms (hopefully). The obvious and persistent danger is that the innate optimism of all entrepreneurs and their tendency to exaggerate every business opportunity. If you have no established routes to market then you need to identify the start-up period within your turnover and cost model. This has major implications for cashflow and on where investment will be needed. Experienced investors will expect that you have taken into account.
This pitfall is most easily managed using a realistic method for estimating income is to calculate the number of customers the business intends to capture and the average revenues. These two averaged inputs are easier to calculate and also to justify within a business plan.
I could have put this pitfall at number one very easily. What is the main purpose of the plan?
If the plan’s objective is to seek funding then it is vitally important to clearly describe the investment opportunity. While the plan describes the concept in detail, it must also address the primary purpose of the plan. So many plans fail to make it explicitly clear what the company’s needs to be successful or what the investment will mean to the company.
A good business plan answers the following key business planning questions:
- Why investors should investing in this business rather than anywhere else?
- When will they recoup their initial investment and how and when it can be realised?
- What is their expected return on investment?
- How the company has managed all aspects of risk?
- Is the investment merely cash or do they need to bring other assets such as expertise to the table?
If you can answer these key questions, the intended audience will feel comfortable and be able to recognise that they fit the brief.
7. Non-Existent Cashflow Management
Particularly relevant to a new business, this is often an invisible cliff edge which business plans fall over on, is the ability of the business to articulate the differences between cash and profit. Running out of cash is the highest risk any new business or re-engineered business faces.
Good, positive, and conservative cash flow management is vital when businesses pursue investment opportunities where there are significant cash flows out, in advance of the cash flows coming in. This is the classic business plan cliff, which sends potential investors running.
If a business plan’s financial model is based upon selling on credit, then they receive the cash in the future, but need cask to pay expenses before that income hits their account, then they have a cashflow risk. This outflow of cash is the single biggest reason companies fail, its not margin, its rarely the product, it is invariably that they run out of cash.
8. Non existent Management Teams
Throwing a few CV’s into a business plan does not create a delivery team. Likewise a generic organisational chart with missing pieces and To Be Confirmed (TBC) is not going to inspire confidence with investors to part with their cash.
Entrepreneurs can often sell an idea but they do not always inspire they can select a balanced team of people with the right skill mix, from the financial management to key leadership roles and the right operational team to deliver your ambitious plan.
Having a structured management team with operational structures is essential for success. Track records matter, as much as having clear roles and responsibilities laid out in delivering the operational plan which underpins the business plan.
9. Poor Evidence of Demand
A significant area of concern when planning is justifying the sales forecast or demand levels for a product or service. This breaks down into the two main elements used in forecasting: the use of historical facts and the dependency of subjective assessment.
Sales forecasting, is the vital tool to identify the basis of all projected revenue figures that can be considered credible in the wider context of the plan. 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.
Minimising risk in a business plan is all about gaining an understanding the potential demand and how the company will with this plan create or drive that demand rather than concentrate on ‘the product or the idea’. This classic cliff edge is a silent killer for investors, they don’t believe in it.
An effective business plan needs to be consistent throughout as all the various strands are brought together into one single entity, the plan. It is pitfall which entrepreneurs gloss over, but investors relentlessly prod before committing to any plan.
If there are multiple authors of the plan the risks of inconsistencies will exponentially increase. Extrapolating data can also cause problems, using research data and then jumping from possible market size to sales potential and then sales forecast are classic pitfalls which need to be thought through.
Presenters of the plan must have a simple narrative that runs through their plan, using key facts and staying ‘on script’ so as to ensure that a cohesive story is communicated. The numbers must also be consistent with the broader content so that there are no contradictions between them.
There is always competition. Yet the number of times the phrase “there are no competitors” appears in plans is considerable.
It does not matter how unique the proposition is there will also be some other business competing for people’s money. While there may not be a direct competitor it will certainly be a transfer investment that customers will be making. The business plan must recognise where the customers invest is coming from. If competitors are not identified in a business plan then the only credible assessment is that the company has not been diligent enough in its research.
Also remember that no company lives in a vacuum, as soon as you launch (or before) the marketplace will change. What will the competitive landscape look like in a few days, weeks, months or years? Can you create or establish significant barriers to entry for likely competition. Otherwise it is likely that a successful market entry will be followed by better-placed competitors with greater resources, etc
You never get a second chance to make a great first impression.Your plan needs to be right the first time and the content needs to be accurate, clear, concise and correct.
More often than not business plans need to be completed by a certain date and hence the final stages can be rushed, a classic pitfall.
Consequently, in many instances the final output does not do justice to the plan. Attention to detail at the end is vital, so ensure you have a completed plan with references and formatted correctly. Also ensure the content of the plan has been edited down to a digestible size, use appendices for details.
Get someone removed from the process to proof the plan. If a presentation is part of the process, it should reflect the Executive Summary.
In Summary The Top 12 Business Planning Mistakes are caused by:-
Business plans by definition have a purpose of communicating a course of action so make sure they do that primary role. Support inevitably means resources with the primary aim of the plan often being to secure financial investment. Explain what the investment will be used for and how it will be protected from these classic pitfalls.
Writing a successful business plan is all about preparation, about being as thorough in your research and planning as is possible. By avoiding the cliff edges and pitfalls above, the chances of the plan objectives being met increase substantially.