Top Business Plan Mistakes and How To Avoid Them
Starting a business can be a very exciting time, but it doesn’t come without stressors and anxiety here and there. With nearly 20% of new businesses failing in the first year and nearly half of businesses failing by year five, business owners need to be on top of their game. One of the best ways to ensure the chance of success and viability for an organization is to create a well-thought-out business plan. By avoiding common business plan mistakes, business owners can not only ensure that they have put together a plan that is nearly bullet-proof but can also ensure that they can receive the funding they need to get their business off the ground.
Winning over your lender with your business plan
An entrepreneur (or a want-to-be entrepreneur) will rarely have all the funds needed from the get-go to get a new business off the ground. In the majority of cases, additional funding will be needed. Those funds will need to come either from family or friends, from investors, or the bank. And to get funds from the bank, business owners will need to present a solid plan, free from the top business plan mistakes discussed in this article.
In general, lenders just want to know how much money you are going to need, and how you plan to repay that money. Though the rest of the business plan is important as it creates the background that is backed into the amount of money you need, from a lending perspective, the shorter and simpler the plan, the better.
Here are the top business plan mistakes and the potential suggestions to help your business plan succeed:
- Use the third person – Even though you are the business owner and this is your brain-child, keep the first person out of the document. Using the third person (he, she, it, they) will sound more professional and also provides a bit of separation that positions the organization as its own entity, apart from just you as the proprietor. The goal here is to make your business sound as though it can stand on its own. This is not the time to come across like a proud parent or cheerleader.
- Check your numbers – Though short and simple is important, your business plan will still need to contain a lot of critical information. Your plan will need to include an executive summary (the critical element for your lender), a description of your organization, a competitive and market analysis, an outline of resource plans including your organizational leadership structure (roles and responsibilities), a breakdown of the products and services that your business will sell or offer, your marketing plan with an outline of expenses, your sales strategy, and your financial projections. With all of this content, it is easy to lose track of all of the numbers. So, be sure to go through that business plan with a fine-toothed comb to make sure your numbers add up and match where appropriate. Those financial projections and any figures listed in the other sections will all get reiterated in some form or fashion in the executive summary and in the request for funding. So be sure to get it right.
- Avoid errors – So many business plans get presented with spelling and typographical errors and other inconsistencies. When this happens and the plan is presented to a lender, the natural reaction of the lender is to think that the plan was just put together in haste and that it is not well-thought-out. If editing is not your strong suit, then find a trusted professional or two that can make a review for you. And make sure they aren’t just looking for spelling and typographical errors. It is important to ensure that language use is consistent throughout and that any cross-referencing makes sense.
- Be realistic – Of course, you want your business to succeed, and optimism is important. But your lender wants to know that you are level-headed and that you aren’t living in a dream world. Make sure your plan includes financial statements or spreadsheets that depict your anticipated expenses and the resulting revenue. A break-even analysis will also be helpful so that the lender understands when you anticipate that your business will become profitable. Remember, you won’t likely be profitable right out of the gate.
- Understand the difference between cash and profits – Though profitability is critical, being profitable doesn’t necessarily mean that you will have a positive cash flow. Having this cash flow is vital to ensure that you can pay your bills over time and that you can be a viable business in the long run. If you don’t have cash, it means that if your business goes under, you will likely be unable to cover and repay the remaining funds due to your loan.
- Answer questions before they are asked – Your lender will not necessarily understand your business. Keep in mind that lenders are introduced to new business plans and proposals every day. They are not you and will not be able to fully understand your business and how you plan to make money, unless you make it very easy for them by answering questions before they are asked, directly within the business plan. If your lender is confused about your business proposition, it is highly unlikely that they will offer you the lending that you need.
- Don’t underestimate the executive summary – If your executive summary is polished, clear, and answers the important questions that your lender might ask, you will be far more likely to be approved for the funding that you need. Make sure that your lender-focused executive summary is clear and succinct by including just a few sentences about your business, clarity on how much funding you need, and your plans to repay the loan. This information can easily be accomplished in one to two pages. If you find yourself needing more, this should be a red flag to you that your business proposition is too complicated.
Taking the time to create a well-polished business plan will not only help you to ensure you have a solid business proposition, but it will also increase your chances of receiving a business loan. With the right funds and the ability to pay, on top of a well-thought-out business plan, your business will experience the greatest chance at success.