Are you putting together a business plan? Well, good luck with that. I’ve seen lots of business plans over the past few decades that have been prepared by many well-meaning business owners for themselves, their bankers and their investors. Just about all of them have been useless.
Want to know why? It’s almost always one or more of the following three reasons.
It’s overly optimistic.
If you’re an entrepreneur, by nature you’re a glass-half-full kind of person. That’s a great thing, except when it comes to doing a business plan. You can’t just start with a sales number and sweepingly claim that it will increase 20% each year over the next five years. You can’t just assume that people will love your products so much that sales will double in just a short period of time. Instead, you need to look hard at marketing data.
According to research from CB Insights, 42% of startups fail because there’s a lack of market need for their products or services. And I’m sure these were all well-meaning, optimistic people – just too optimistic.
To create a realistic plan, you need to invest in market research and be very conservative with your revenue estimates. You also need to consider worst case scenarios. Don’t just assume that you’ll get a 5% market share or even a 1% market share. A lot has to happen before you get there and your revenues aren’t going to leap out of nowhere without investing time and spending money.
Want to write a great business plan? Then go to the Securities and Exchange Commission’s EDGAR filings and download a recent S-1 statement, which is a required document of all companies looking to raise money on the public exchanges. Then turn to the “risk factors” section. This entire section is devoted to giving investors reasons to NOT invest in the company. It lays out all the risks, issues, challenges and potential problems the company faces or could face. It’s sobering. And it’s exactly what you need in your business plan.
If you really want to win over potential financiers and create a document that’s relevant for your management, you need to be 100% realistic about all the risks your company will face and build those risks into your plan.
You don’t measure your progress.
So many of my clients create a business plan and file it away, never to be looked at again. How do you know if your plan is good if you don’t measure its progress? How can anyone trust your forecasting and planning in the future if you don’t have a process in place to benchmark how you’re doing against what you planned?
Good business planners are constantly comparing actual vs. budgeted. They keep the budget numbers the same (these can’t change), but they revise them in another column for forecasting purposes – a kind of reality check. Then they compare the actual numbers against the forecasted ones.
Of course, plans change within hours of finalizing them. But the big picture – your goals and objectives – should be consistent and you must measure them to be sure your plan was prepared adequately.You may want to create more plans in the future. To get better at them, you’ll need to be honest in your evaluations.
Does this all sound familiar? Yeah, it probably does. This is why your business plan is useless.
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