The Common Mistakes of Business Plans

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by: Joseph Benfield

Nov 28, 2008

The Common Mistakes of Business Plans

As a Financial Consultant and Business Advisor I encounter my fair share of Business Plans. I am also constantly approached by entrepreneurs and business owners lamenting the fact that they have an excellent idea and a business plan yet they cannot get financing. Invariably, after reviewing the “business plan” it usually contains a critical error or errors that would preclude most investors and financial institutions from considering it.

There are many common business plan mistakes that sink the potential business before it has a chance to see the light of day. Unfortunately, these include unrealistic assumptions, lack of clarity in the presentation, incomplete submissions, unjustified financial projections, plans for growth are poor or lacking, failing to describe the product or service in clear terms, inadequate presentation of the market need for the product or service, not understanding the competition. Whilst the list is relatively inexhaustible, the following four mistakes are among the most likely to prevent you from obtaining the financing you need to make your dream a reality.

Financial Projections
A major reason business plans fail to be accepted is because of the financial projections. Entrepreneurs get caught up into believing their own hype and present overly ambitious and wholly unrealistic numbers. Vague or ambiguous assumptions regarding projected revenue and incomplete and unsubstantiated expense or cost of sales models demonstrate that the business opportunity was not researched properly. Another common problem with the financials is the absence of, and inadequacy of business start up costs.
Your financials should be detailed enough so that an investor or financier can be convinced of their accuracy. Include a clear and complete list of the assumptions informing your figures. If you have been in business for a while you must show actual figures otherwise the potential investor or financier will wonder why those figures are not available. I would also advise breaking down the first year figures monthly. This shows you have analysed your plan thoroughly and you are planning for the slow months of your business even before things take off. With all that said however the most important thing is to make sure your numbers make sense. Review them thoroughly, test them, play devil’s advocate, have an objective and knowledgeable third party vet them and once you are satisfied, do a final check to ensure consistency in all sections and be prepared to back-up the assumptions with facts and creditable third party confirmation.
Finally, with regards to the financial projections; do not confuse profit and loss with cash flow. Most people think in terms of profit instead of cash. The profit and loss statement is not a cash flow statement. Irrespective of the amount of profit we expect to earn from the venture, chances are there is a lead time before the funds start to come in. That lead time has to be funded by cash. So understanding cash flow is critical. No business plan is complete without a comprehensive, well thought out cash flow statement.

Market size

It is of critical importance to define your market properly. The population of your geographic area is not your market. The population of the world is not your market. Unless you can show in your plan how your product is getting to the Chinese market and why Chinese consumers would buy your product; the billions of people in China are not your market.

Financial Advisors and Financial Institutions still receive plans that define the market size in terms of numbers, for example “The total market is $5B” or “the population of the Caribbean is thirty seven million which would give us a market of 3.7 million or 10%”. No, that is not your market. Inaccurate sizing of the company’s target market is sure predictor of failure and indicates the business was not well thought out.

Although the Caribbean tourism market is defined as a billion dollar market, it is unlikely your company or any one company could capture $1 billion in sales. A more credible measure of your market size would be 100% of your specific niche-that is the market that is relevant to your company. For instance, if your company sells vegetables to hotels in Barbados, your relevant market size is not the billion dollar tourism market. Rather, it is quantum in units and dollars of vegetables purchased by hotels in Barbados because it is against these products that your company competes.

Do the necessary research and define your market properly. Identify the market relevant to your products or services and be realistic, it may become necessary to support your assumptions, so be prepared to explain to an investor or financial institution how you arrived at your target market size and what empirical evidence supports your theory. Once the market is properly defined you then need to explain why consumers in that market would buy your products or services. You also need to discuss the trends in the market; is the market growing or declining, demographics of the market such as age, income, social status, regulatory and economic issues affecting the market. At the end of the day a potential investor or financier must be convinced that proper research was done.

Competition

“There is no direct competitor in the market space we intend to target”. Believe it or not this is a statement entrepreneurs use frequently. In perhaps nine times out of ten this statement is incorrect and shows a thorough enough analysis of the competitive landscape was not undertaken and, if such an analysis was undertaken the entrepreneur does not understand the competition. Another problem that is seen with the business plan is underestimating the strength of the competition.

The problem for entrepreneurs appears to be the definition of competition. Many entrepreneurs define competition or competitors as companies and individuals offering the same product or service. In fact, a more savvy entrepreneur would realize that competition or competitors include any company or individual offering a product or service that the target market can use to fulfill the same need that their service or product fulfills. In that regard, substitute products, similar products or consumer options for fulfilling the need is a competitor and to say there are no competitors or to dismiss the competition undermines the creditability of the business plan.

Once the competition has been defined and classified the business plan must describe the entrepreneur’s competitive advantage and discuss why it is sustainable in the face of competition.

Management team

The most innovative idea or the best new product will fail if not executed properly. Unfortunately, too many business plans include only a cursory or weak discussion of the management team. A good business plan should include a comprehensive discussion of the management team’s skills, abilities and experiences to convince investors or financiers that these persons are qualified to execute the business plan.

That other problem that is frequently seen in plans from entrepreneurs is the absence of a management team. Frequently, skilled artisans aspire to move their business to the next level but still operate as they though they were a sole proprietorship. For example, someone that has enjoyed tremendous success as a chef wants to open a restaurant with no expansion of the management team so that this chef is responsible for operations, marketing, purchasing, financial management as well as the chef’s real responsibilities for menu design and cooking. Such an enterprise will likely fail because one person cannot possibly perform all those functions effectively.

Depending on the stage of the company, management gaps are acceptable provided the business plan clearly defines the roles and describes the critical attributes and experiences that will be expected in persons hired for the roles. However, roles critical to the success of the venture must be filled, or candidates identified and committed, before a plan is presented for funding.

Conclusion

The overarching advice to entrepreneurs is be realistic, do extensive market research on your business idea, get third party evidence to support your assumptions, have a knowledgeable, objective person who will tell you the truth and not what you want to hear, review your assumptions and prepare an organized, focused, concise business plan that clearly explains the business idea and your plan for execution. If you follow these guidelines and stay away from the common mistakes described above your plan will stand a much better chance of attracting favor.