As a business consultant and MBA prof, I am often called on to help out with or critique business plans. Inevitably, the businesses that fail to get funding or even get off the ground have made similar errors with their business plans.
Here are what I think are the 7 worst business plan mistakes with a checklist to fixing pesky business plan mistakes.
1. Failure to Focus on the Market
• Strive to be market driven (meeting customer needs) rather than technology driven. The potential of the marketplace and resulting revenue/earnings is far more important than your product’s technical features.
• Demonstrate the users’ benefit rather than promoting the product’s virtues and innovation. If the product can provide significant cost savings to clients (e.g., a pay-back period under two years), this translates to a significant user benefit.
• Document booking orders with supporting data indicating the number of customers who have committed to purchase. This allows you to provide a convincing projection of the “rate of acceptance” for the product or service and the pace at which it is likely to be sold.
2. Failure to Anticipate Investors’ or Lenders’ Requirements
Too often, business plans skim over the meat and potatoes of financial planning and don’t consider what the needs of those who are supplying the cash.
• Investors: Are they friends and family, angels, venture capitalists or strategic corporate investors? Primary objectives will be a defined exit strategy (cashing out) and setting an appropriate price and percentage ownership.
• Lenders: Why is financing required? Amount of funds required? Repayment: Over what timeline and from what source (ongoing earnings, sale of assets?) Security: What company assets are available?
3. Inability to Emphasize & Demonstrate Management Depth
• Does your management team have:
Proven industry experience?
Previous start-up experience?
Track record in bringing new products / services to market?
• If not, how will you mitigate the gaps in management experience?
4. Inadequate Customer Definition and Competitor Analysis
The business plan is your opportunity to really make sure you understand your customer and competition yet one of the biggest business plan mistakes is the lack of effort in really understanding customers and competitors.
• Customers
Segmentation – Which are the most attractive segments?
Targeting – Who is buying from you?
Preferences – What do they buy from you and what will they buy again?
Timing – When do they buy?
Criteria – Why do they buy?
• Competition
Demonstrate your knowledge of the competition, how you are keeping track of them (latest product offerings, price discounts, marketing etc.) and how you differentiate yourself from them.
5. Defensiveness or Inability to adapt to Feedback
Show drafts of your business plan to business advisors, senior management and other key employees. Ensure that your lawyer has confirmed that the plan meets all necessary regulatory issues (especially from an investment standpoint).
Inability to adapt or listen to experienced advisors is a critical mistake. Is all feedback right? Of course not, but not being able to hear and adapt to fair criticism is a key element of business failure.
6. Lack of Realistic Financial Projections
Investors and lenders will focus on the accuracy and integrity of your financial numbers. Projections and revenues, gross margins and earnings have to be carefully supported by assumptions that are reasonable and that can be defended. Complete ‘best-expected-worst case’ scenarios. Don’t just give a hockey stick growth projection – demonstrate that you have injected realism! Experienced investors and lenders will see right through any financial smoke screens.
7. Writing the Executive Summary First
Most people will read your executive summary first and formulate their initial impressions based on these critical pages so there is an incentive to make it strong. Unfortunately, enthusiasm often leads business people to write the executive summary first and support it with the plan instead of the other way around. The executive summary is also chance to check your assumptions and make sure you told the story based on the data in your business plan. So write it last! Writing an executive summary first means you are jumping to the solution and not using the business planning process to learn.
This is content abridged from – Business Diagnostics– 3nd edition – authored by Richard Mimick, Michael Thompson and Terry Rachwalski. If you found this content valuable, order the Business Diagnostics book now.
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