It’s been nearly seven years since I posted Top 10 Business Plan Mistakes on this site. Looking back and reading the post again today, I think the list holds up very well. Still, I can’t resist making a few changes. So here is my revised version for 2012, incorporating what I wrote back then that still holds true.
1. Misunderstanding the purpose: It’s the planning that matters, not just the document. You engage in planning your business because planning becomes management. Planning is a process of setting goals and establishing specific measures of progress, then tracking your progress and following up with course corrections. The plan itself is just the first step; it is reviewed and revised often. Don’t even print it unless you absolutely have to. Leave it on a digital network instead.
2. Doing it in one big push; do it in pieces and steps. The plan is a set of connected modules, like blocks. Start anywhere and get going. Do the part that interests you most, or the part that provides the most immediate benefit. That might be strategy, concepts, target markets, business offerings, projections, mantra, vision, whatever. . . just get going.
3. Finishing your plan. If your plan is done, then your business is done. That most recent version is just a snapshot of what the plan was then. It should always be alive and changing to reflect changing assumptions.
4. Hiding your plan from your team. It’s a management tool. Use common sense about what you share with everybody on your team, keeping some information, such as individual salaries, confidential. But do share the goals and measurements, using the planning to build team spirit and peer collaboration. That doesn’t mean sharing the plan with outsiders, except when you have to, such as when you’re seeking capital.
5. Confusing cash with profits. There's a huge difference between the two. Waiting for customers to pay can cripple your financial situation without affecting your profits. Loading your inventory absorbs money without changing profits. Profits are an accounting concept; cash is money in the bank. You don't pay your bills with profits.
6. Diluting your priorities. A plan that stresses three or four priorities is a plan with focus and power. People can understand three or four main points. A plan that lists 20 priorities doesn't really have any.
7. Overvaluing the business idea. What gives an idea value isn’t the idea itself but the business that's built on it. It takes employees showing up every morning, phone calls being answered, products being built, ordered and shipped, services being rendered, and customers paying their bills to make an idea a business. Either write a business plan that shows you building a business around that great idea, or forget it. An idea alone does not a great business make.
8. Fudging the details in the first 12 months. By details, I mean your financials, milestones, responsibilities and deadlines. Cash flow is most important, but you also need lots of details when it comes to assigning tasks to people, setting dates, and specifying what's supposed to happen and who's supposed to make it happen. These details really matter. A business plan is wasted without them.
9. Sweating the details for the later years. This is about planning, not accounting. As important as monthly details are in the beginning, they become a waste of time later on. How can you project monthly cash flow three years from now when your sales forecast is so uncertain? Sure, you can plan in five, 10 or even 20-year horizons in the major conceptual text, but you can't plan in monthly detail past the first year. Nobody expects it, and nobody believes it.
10. Making absurd forecasts. Nobody believes absurdly high “hockey stick” sales projections. And forecasting unusually high profitability usually means you don’t have a realistic understanding of expenses.
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Comments:
Understanding the target market is important but how you intend to reach that target market is the key
Not testing your market! Market research should be an important part of your plan, to show investors/financial partners your target market want to buy it!
These are great tips for those that have never created a business plan before. My family's business has some how not needed a business plan in over twenty years! Being that there are no jobs in my field after graduating in May '11, I feel this is a good challenge to tackle. I would also like to start my own business some day so this makes for great practice.
Being two college students, our only option to receive financing for our start-up was putting hours and hours into a viable business plan. Not only was it an excellent learning curve, but it also built confidence knowing that we had been able to produce reasonable and actual numbers. We were able to secure financing through the Canadian Youth Business Foundation shortly after. Six months later, our actual revenue is up 30% from our projected cash flow, and 505-Junk (www.505junk.com) is up for "Best Concept" at Small Business BC's annual awards. Proper planning combined with a conservative business plan has helped us succeed during our start up phase. Barry Hartman Co-Founder 505-Junk
But how often do people go back and revise their business plan? I have never gone back and did revisions after we started running our business, but I will have to soon, since we will be getting financing from a bank.
Some very good points, I second the forecast. For my business, we thought our forecast was on the conservative side, but turns out it was still a little higher. You were right about the expense, we tried to think of all the expenses, but without prior experience running a business, it is very difficult to anticipate some of the costs. If you are an entrepreneur, and doing your forecast right now, make it as conservative as you can, if your business can still survive well with those number then great, if not you better be careful.
Hi Tim! It is an awesome post. It is really very helpful post for the entrepreneurs to get good results in their business. And as an entrepreneur, I am very thankful to you for sharing this pure information. I like your way of explanation.
"Making absurd forecasts" is my favorite thing not to do. Being realistic in your expectations doesn't mean you're not confident in your product/service; it means that you understand that your maximum profits aren't made in the first year.
This is pure informative content. You actually teach better than my professor way back in college. Thanks for the article.
There are in my opinion two types of business plan. There's the business plan you write when you're looking for finance e.g. from a bank, then the business plan you write that is the one you're actually likely to follow. One has to be properly formatted and contain lots of wild projections 3 years in to the future (bank) and the other can be written on notepad and kept open all day to be added to like a piece of scrap paper.
Great post Tim! As someone who wrote a business plan last year for a class project and then started the business after graduation, this would have been great advice to have. I especially appreciate the point about the plan being an adaptable document. I have found it essential to continually update and modify our plan as we move forward with our company.
Why any but any business plan cannot have a scenario regarding the management of a great/unexpected success? Some businesses really go well, fast and strong but this success is badly managed. Why there's no plan for such a "crisis management"?
TB you may be onto something. Great article. All the points are valid but I especially like point number 5. That confusion between profits and cash flow is a REAL one. To your first point...It's the planning that matters, not the document, that's classic. So when are you going to bring out "the top 10 reasons why business plans fail ? (smile)
I like the one about 'Finishing the plan'. I strongly believe it's a living breathing document that we should update regularly. Very well put Tim.
Business plan must have a risk, because there no way when your deals going to back with you. So I think this article give me different hints which is effective.
Great points Tim. I would like to add that failure on steps of the plans may happen. We are human and tho many create great business plans, there are also plans that have flaws. Some people give up too quickly when a step "fails" or really doesn't work the way it was planned instead of re-evaluating their plans and pushing forward. Some people don't re-evaluate the plans and they then try the same steps that didn't work the first time. Mistakes happen and so do failed steps. Getting back up and pushing to succeed after the failure is very important! #10 is great, I worked for a place in the past that used to make absurd forecasts. It was crazy, they always promised the customer things that they knew they couldn't do. Made it a stressful place to be when things didn't happen as promised as they were impossible in the first place!
Fantastic article. Glad you listed the most fatal mistake first "Misunderstanding the purpose: It’s the planning that matters, not just the document." If you can't get through the business plan, you're not ready.
Very good article. As to details, I would stress being flexible in this area. Yes, a good amount of detail is helpful, but even more important is clear communication of the core idea being put into action. I like having a less detailed plan that serves as an overall guide to the business, with another more detailed plan behind this. The less detailed plan generally works better for communicating with most employees and many others. I also like your comments about cash versus profit. This is an area where so many businesses fail. Yes, they are profitable in the accounting sense, but the cash lags so far behind the profits that a company cannot grow or worse the business fails. As you mentioned, excessive inventory is a common cause of cash problem, along with poor policies and procedures for credit and collections.
Very helpful. Thank you for sharing the insight.
Got to agree that the plan should be flexible enough to adapt to changes and should be reviewed often. Can't go wrong with that.
I agree completely Wasim - that point stood out to me too. Not being open about your business plan, goals and measurements doesn't make sense. Your people will be hesitant, miss opportunities to celebrate successes at each stage, assumptions will be made and probably not in your favor. This seems to be a key component of business planning that gets missed.
Thanks, can't stress enough in not communication with your team, whatever your business plans may be, ensure that your team is fully aware of the plans, and the direction you as a leader is taking, not only this will help the support you on your mission, but also build a good bond between your team.