6Mar
Fatal flaws in your business plan

A business plan is the blueprint that guides aspiring entrepreneurs as they build their new business ventures. From 2008 to 2010, I taught a 20-week business plan writing course at an SBA-affiliated women’s business development organization. We met for three hours each week and the students wrote their plans week by week, guided by the lessons.

When evaluating a business concept, unrealistic expectations or wrong thinking could creep in and undermine planning. Enthusiasm for the idea can distort one’s ability to see potential obstacles. What follows are scenarios that budding entrepreneurs should be aware of.

unrealistic expectations

While it is sometimes true that using yourself as the ideal customer is a good idea, given that you understand the value and availability of that product or service, you could misunderstand the size of the market and the traction that can be achieved beyond a select group of true believers.

Insufficient information

Confirm the need for your products or services when you do your research and check the number of potential customers who have the money and are motivated to buy from you.

Also, make sure you understand the buying process. Who gives the green light to the sale? What is the sweet spot price range? Lastly, where are potential customers getting these products or services now?

access to clients

Customer access is everything and some target industries or customers seem impenetrable. You can identify the right customers, understand how your products or services fit their needs, and know how to price and deliver them. But if potential clients don’t have the confidence to work with you because you lack the backing of a trusted source, you’re going to starve.

Overestimating cash flow

Typically, businesses will not achieve desirable gross sales or show a net profit in the first year of operations. Businesses that require high start-up costs, in particular, will require long start-up periods. The business plan should recognize the potential for negative cash flow and demonstrate how fixed and variable expenses will be covered during that time. You must know how inventory will be financed, payroll covered, and office rent paid.

When writing your business plan, it is strongly recommended to make conservative financial projections. Customer acquisition may take longer than expected and the size of your purchases may initially be small. Also, it is possible for a business to be profitable on paper and still experience cash flow problems if customers do not pay on time.

Underestimating start-up costs

Developing a reasonable estimate of how much it will cost to start the business is essential. You should be prepared to cover the cost of all permits, equipment, inventory, and personnel needed to conduct business. If you plan to hire employees, it’s important to have a good idea of ​​your minimum staffing needs early on (you can hire more as income increases).

Magical thinking business model

The business model illustrates how your company will become profitable. Thoughtful interactions between marketing, financial, and operations processes will promote and maintain profitability, and you need to plan how they will occur. The business model describes the core functions of the company.

Likewise, the value proposition of your products or services must be articulated. Consideration will be given to the overall marketing strategy and the selected tactics and resources that will promote the value proposition (intellectual property, patent rights, key relationships or capital). Sales distribution channels will be detailed.

Get to plan B (2009), by Randy Komisar and John Mullins, details the key components of the business model and advises business plan writers to segment their models into subheadings:

  • The revenue model, to describe what you will sell, your marketing plans, and how you expect to generate revenue

  • The operating model, to detail where you will do business and how day-to-day operations will work

  • The working capital model, that is, the cash flow requirements of the business. Understanding cash flow helps you know when money will be available to cover expenses like rent and payroll (it’s different from income). A business can generate adequate revenue (sales) and still suffer from cash flow problems.

Your business model will keep you organized and your priorities realistic. Issues like quality control, accounts receivable collection, inventory management and identifying strategic partners will mean much more than your number of followers on Facebook, for example. Best of luck to you and your new business!

Thank you for reading,

Kim