Every spring, the president of a Palo Alto software company studies about 50 business plans for several different business planning competitions. The plans were created for beginner companies that are looking for thousands, sometimes even millions of dollars from angel investors. By the time the business plans make it to the company’s president, the plans have been pulled from the less valuable entries and chosen as semi-finalists, or finalists.
He says that every year, he realizes that even the greatest business designs can have major issues. Some of these plans promise very unrealistic profits, while others have essential details hidden deep in the document. Here is his list of the top business plan mistakes that are made, along with tips on how to prevent yourself from making them.
1. Projecting absurd profits. More than half of all business plans project profits well over the average 10 to 15 percent that most businesses have. A high profit projection shows that the company’s owner is miscalculating costs and expenses. It also signals that the company’s owner is favoring profits of the growth of company. The best start for a company is to invest the money that’s left over from other expenses and costs, which will help the growth of the company.
To avoid unreal profit projection, pull up some financial reports for a company similar to yours, and determine what real businesses are producing in profits. Then go back to your plan and reconsider your calculations. Is your annual margin more than average? Can you support it? Are your expenses lower than they should be?
2. Incomplete financial estimates. Every business design needs to have a practical cash-flow projection and a detailed list of the start-up costs. Using charts is a good way to do this, but it’s also a good idea to make all of the details accessible in the content somewhere. An index is a great way to do just that. Make sure to show how much investment you’re going to need, as well as what you’re going to use the money for. Projecting the sales and profits alone isn’t enough.
If you’re planning on selling your goods to other companies, you’re going to need to show that you comprehend the cash-flow inferences of having to wait to get paid.
3. Top-down predicting. Don’t promise to get a little percentage of a bigger market. Yes, 1 percent of $56 billion is $560 million, but, no, you aren’t going to sell that much.
Start with distinct assumptions and work your way up to the sales forecasts. Build it up from the economics and on elaborated assumptions that you can demonstrate.
4. Amplifying the market. No one would believe you if you told them, for example, that your drawing tutorial website is going to attract 50 million people. You need to be sensible and hesitant when talking about the total value of the market, and make guesses in order to bring down those high market numbers.
5. Too much ‘overall idea’. Business designs often only deal in global approaches, focusing only on the expected outcome. A business design needs to demonstrate the economics of a distinct group: from the production, to the channels, and to the final user. Show what you receive, what you pay and what it costs the buyer. Also illustrate how you’re going to rise up, how you’re going to create a force of direct sales, how you’re going to increase your web traffic, and the amount of time the cycle of your sales will take.
6. Unrealistic about distributing. Not comprehending how a retail channel works is a big error that you don’t want to make. Don’t think that merchants will want to buy your goods directly from you. Usually, they would rather go through a distributor. If you plan on selling your product through a distributing company and to take over 50 percent of what the final buyer pays, then you don’t understand the selling channels.
Know your boundaries, including executive costs and co-promotion dollars for wholesalers and retail stores similar to yours. Once you have all of that figured out, you need to remember to assign enough working capital to tide over your company as you wait for your distributors to pay your account.
7. Buried treasure. Remember to bring your point across clearly and in plain language. Prove your technological knowledge by showing your degrees, qualifications, and quoting some experts. Then show your team, distribution channels, markets, sales, and your strategy.