The importance of planning for your business should never be overlooked. Creating an effective business plan conveys that you know where your company is going, and that you know how to get there. Many aspiring entrepreneurs have big ideas, but don’t know how quite to communicate that idea to prospective business investors-which means big money could be lost. Here are a few common mistakes to avoid when documenting your business plan.
- You don’t create a business plan at all. When starting a new business, it is imperative to create a business plan! After all, this document can serve as a powerful tool to secure financing. For a business to be successful and profitable, the owners must be able to demonstrate that they have a clear understanding of all aspects of the business-including the firm’s customers, strengths and competition. Taking time to create an extensive business plan provides you with insight into your business.
- Your plan is too vague. When describing your company and its purpose or objective, be specific and compelling. Make investors want to know more about what your plan is, so they will want to be part of it. Take the time to thoroughly investigate your market and target customers, the competition and other basics, with a sound business model.
- The plan is poorly written. Spelling, punctuation, grammar and style are all important when it comes to getting your business plan down on paper. Although investors don’t expect to be investing in a company run by English majors, they are looking for clues about the underlying business and its leaders when they are perusing a plan. When they see one with spelling, punctuation and grammar errors, they immediately wonder what else is wrong with the business-and the competency of its owners. Since there is no shortage of people looking for capital, investors don’t wonder for long-they just move on to the next plan.
- The plan is too detailed. While it is important to cover all major aspects of the business plan, don’t get too bogged down in the technical details! Keep the details to a minimum in the main plan-if you want to include them, do so elsewhere, say, in an appendix. One way to do this is to break your plan into three parts: a two- to three-page executive summary, a 10- to 20-page business plan and an appendix that includes as many pages as needed to make it clear that you know what you are doing. This way, anyone reading the plan can get the amount of detail he or she wants.
- The plan makes unfounded or unrealistic assumptions. By their very nature, business plans are full of assumptions. The most important assumption, of course, is that your business will succeed! The best business plans highlight critical assumptions and provide some sort of rationalization for them. The worst business plans bury assumptions throughout the plan so no one can tell where the assumptions end and the facts begin. Wherever possible, make sure you check your assumptions against benchmarks from the same industry, a similar industry or some other acceptable standard, and tie your assumptions to facts.
- Financial projections are unrealistic. Everyone wants to think that their business will take off and be successful as soon as production is started, assuming of course that the entrepreneur obtains enough capital to get started. Most angel investors and venture capitalists view unrealistic financial projections as one of the most critical mistakes one can make in creating a business plan. This mistake could be due to you not fully understanding business start-up costs, possibly due to a lack of research, or not fully understanding how to project cash flow. To avoid this mistake, thoroughly research the upfront costs needed to get the business started. Consult with a non-profit group such as the Small Business Administration to get assistance with projecting future cash flows.
- Your plan does not identify your competitors. Never say in your business plan that you have no competitors. According to Christine Comaford-Lynch, former venture capitalist and angel investor, “Even inertia is a competitor, and a formidable one at that.” A more appealing route to take is to list out all of your competitors and explain why your product or service is a better solution for customers and clients.
By creating an effective business plan and avoiding these common mistakes, not only will you knock investors off their feet, but you will also be on your way to executing an outline that serves as the blueprint for the success of your firm.