Well-developed business plans are critical for any business. Yet, their quality seldom reflects their relative importance in the entrepreneurial process. What follows are the most common pitfalls of unsuccessful business plans.
Krogger Highlights | 2015
Few areas of business creation receive as much attention as business plans. Done properly, they connect people’s ideas with the possibility of creating a new venture, provide a blueprint to transform concepts into actions and bring team members together by building consensus around the nature of the effort. More important, a high-quality business plan is the sine qua non of successful capital raising. It is almost impossible to raise money without a way to communicate properly with potential investors or lenders. This is the role of a business plan – hence its relevance.
Judging by the above, you would think that the quality of business plans is reflective of their importance. Yet, in our experience, nothing could be further from reality. The low quality of business plans out there is pervasive – in part due to people not committing the required amount of time and resources to the exercise, but mainly because managers and entrepreneurs fail to recognize that writing a business plan is an integrative process. More often than not, the individuals behind the business idea contribute a very specific set of skills and have their own way of approaching things. Some are great salesmen but have no head for financials; some are incredibly technology-proficient but are ineffective communicators; some are very analytical and some others trust their gut-feel. People work via their own idiosyncrasies.
This bias, which is natural of course, finds its way into the business plan and what is supposed to be a well-rounded document, ends up being an unstructured amalgamation of themes, styles and opinions. Not surprisingly, the rate of success of the businesses behind those plans (measured first as their ability to raise cash from investors and then, launch a sustainable operation) tends to be low. This of course does not mean that having a stellar business plan is enough. No matter how comprehensive, well-written and professionally presented is a plan – a bad business is still a bad business. Our focus here then is on those fundamentally good ideas and companies that shoot themselves in the foot by producing subpar business plans.
Over the years we have come across many ventures that unfortunately fall into this category. Their plans’ shortcomings are too varied and numerous to draw all-encompassing conclusions – but is still possible to distill those issues that investors and lenders most frequently find as detrimental when assessing them.
The quality of a business plan can be analyzed in two dimensions: its content (i.e. the information to be communicated) and its form (i.e. how is this information delivered to the intended audience). Most business plans present weaknesses in both dimensions and although one could think that content is far more important, investors’ proverbial short attention span makes form just as relevant.
What follows are – based on our experience – the most common pitfalls of unsuccessful business plans for each dimension.
The objective of a business plan from this point of view is to provide enough information of the appropriate quality so people can make informed decisions followed by actions. The most common content-related pitfalls include:
A good business plan should draw insights and conclusions from facts – not assertions. We have seen innumerable plans developing an investment thesis solely based on opinions and unquantifiable statements. Affirming for example, that the market is ‘big’ or that consumption in a target segment is ‘growing’ without evidence is not only useless, but worse it might be just plain wrong. Failing to include adequate research in a business plan dramatically diminishes its credibility. It indicates that the venture has probably been conceived disconnected from reality and therefore its chances of success are slim.
A good business plan leverages research to drive the assumptions behind the venture. Understanding the size and growth rate of the market determines how large the business can be and how fast it can grow. Learning more about customer segments and their subtle differences has huge implications on marketing and pricing – and knowing well the competition for example, highlights the venture’s strengths and weaknesses. A well-researched plan has indeed important implications that go beyond the document.
Not Enough or Too Much Detail
The business plan should include enough information for the reader to make an informed decision but not so much that is impossible to focus on what is relevant. The aim is to be comprehensive but succinct – ensuring that the answers to all key questions are easily found and that each piece of information included in the document has a reason of being there.
Plans that lack enough information are usually half-baked products prepared in a rush. Some actually find it hard to even articulate what is the business about, let alone provide a coherent picture of the business model, products and operations. Vague plans don’t go very far.
On the other hand, we have seen many of those 80-page plans whose verbiage is such that investors don’t go past the first couple of pages, lest they die of boredom. This is a clear example of the biases we mentioned before – particularly in the case of tech companies – where founders with a strong technical background dominate and inundate the business plan with details that most professional investors don’t even understand. Too much detail doesn’t go very far either.
Unrealistic (If Any) Financial Projections
Unbelievable as it sounds, we have come across many business plans without financial projections. Revenue figures and investment needs are included as passing comments in the body of the document and more attention is paid to non-financial variables such as volume, number of clients or on-line traffic. All these plans of course, go nowhere.
But even those plans that do include financials tend to fall short of providing a clear view of the opportunity lying ahead. The ‘projections’ are usually derived from whatever the founder or management believes the company can make (‘based on their experience’). No insight is provided on the drivers behind those financials and needless to say, they all are (almost without exception) way too optimistic.
As difficult as it sounds, given that entrepreneurs and managers are in general passionate about their projects, financial projections should be credible and reasonable – conservative even. Unrealistic projections have limited mileage in the real world and in any case most investors discount management’s projections almost by default.
Hidden Weaknesses and Threats
A business plan is also a marketing document. Along with the pitch, it is the way entrepreneurs and managers introduce their ventures and projects to the intended audience. Therefore, there is a natural tendency to present them in their ‘best light’ – however, some ventures take this too far and hide weaknesses in key aspects of their businesses instead of tackling them head-on and finding ways to mitigate them.
There are virtually no ‘zero-risk’ ventures, so not having a candid discussion of factors that significantly affect the company is at the very least naïve. Using the business plan as an opportunity to acknowledge these factors and more important, describe how the company intends to manage them, takes the plan’s credibility to a whole new level.
On the other hand, there are instances where potential threats materialize without the people behind the business plan knowing. Changes in the market, competition, customers and even the company itself can occur suddenly, taking the management team by surprise. Not being on top of key developments affecting the venture is unacceptable. If the business plan is not up to date because management has been blindsided by the circumstances, investors, lenders and partners will not trust the content of the plan, the team or the company. A single key item that is notoriously inaccurate can discredit the rest of a business plan.
Too Much What? – Not Enough How?
One of the most common characteristics of unsuccessful business plans is that they focus disproportionately on what the opportunity is, what the business does and sells; what are their milestones, etc. (the What?) and not enough on describing the actions the company needs to undertake in order to accomplish its objectives (the How?). These plans are dossiers rather than roadmaps and therefore defeat the purpose of their existence: to bridge business ideas and reality via actions.
Stating that a business is going to offer the most competitive prices in the market for instance, means nothing unless there is an action plan with clear steps that show the reader how management is planning on achieving such objective. This does not need to be depicted in excruciating detail (this is a business plan after all), but there should be no doubt that the company knows exactly what needs to be done to get there.
Form is all about the way content is delivered. The objective is to make it easier for readers to understand what the venture is all about and prompt them to action. A well written, professional business plan is unambiguous, resolves the reader’s major questions quickly and makes an impression through the quality of its presentation. The most common form-related pitfalls include:
A Poorly Written Document
A business plan is supposed to be a professional document. It needs to be flawless and sometimes it does require many revisions to ensure is error-free. This is a must. If there is one pitfall that has absolutely no justification, it is having a poorly written business plan. If entrepreneurs and managers don’t take the time to produce a high-quality document, chances are they will do the same for the business.
The most common quality issues we have found include but are not limited to the following:
- The business plan has no structure and no defined sections
- Endlessly repeating the same concepts without adding any new information
- No page numbers
- No table of contents
- Spelling, punctuation and grammar errors
- No footnotes
- No sources and references
- Including diagrams or graphs without explaining them
- Graphs without titles and labels
- Inconsistent margins
- Font is too small or too large
- Titles and subtitles are not clearly defined
- Indiscriminate use of colors and font types
- Use of colloquial language
- Poor presentation of financial information
- No indication of what format and currency are used throughout the financial section
Remembering that the business plan is in a way the chance of a first impression, helps to put some weight on the importance of getting the writing right.
Inappropriate Tone for the Intended Audience
Just as pitching to equity investors is not the same as presenting to a bank, a business plan intended for one should not be the same put in front of the other. Business plans need to be prepared with the intended audience in mind. This is a subtle yet powerful point.
Understanding what makes your audience ‘tick’ can make or break a deal. For example, a bank generally focuses on the company’s ability to generate enough cash to pay a loan back, so the tone of the business plan tends to be slightly conservative and confident – inspiring security and communicating the venture’s ability to manage its downside risk, which is what the bank ultimately cares about. Compare this with the upbeat, crisp and bullish tone of a plan intended for equity investors, who look for sizeable returns in exchange for the risk they take. The tone of the document needs to be tailored according to the audience.
Another common mistake is having conflicting or inconsistent information in different parts of the plan. This frequently occurs between the financial section and the rest of the document (e.g. there is one revenue figure in the income statement and another in the executive summary) or between graphs and certain paragraphs (e.g. a chart indicates that the industry is growing and somewhere else there’s a statement to the contrary). Sometimes the issue gets more complicated; particularly with financials (e.g. a company claiming that it can reach gross margins in line with the industry in 3 years, but when the calculation is actually performed this is not true). In any case, such mistakes are distracting, confuse the reader and could convey the wrong message altogether. Every single part of a business plan should complement each other and convey the same underlying messages consistently.
Writing a business plan properly is not an easy task; it involves a significant commitment from entrepreneurs and managers and should be given high priority within the venture or project creation process if it is to succeed.
In addition, attention should be paid to the bias generated by the different idiosyncrasies from which each member of the team normally operates. A focused effort to write a well-balanced plan will uncover new possibilities for the business and will strengthen the unity of the teams by evidencing how equally important is each individual’s contribution. In a way, seeing the business plan from this perspective makes the writing exercise a preamble to the organizational dynamics of managing the business once is up and running.
Finally, we cannot reiterate enough the significant value a professional business plan creates. Many critics tend to dismiss business plans as a gimmicky distraction to the entrepreneurial process. We couldn’t disagree more. True, many business plans lack that connection between the idea and the action (too much what? and not enough how? remember?) – but that doesn’t mean that they don’t add value; it just means that those specific plans are not adequately prepared and therefore are ineffective. A good business plan is a tool. It goes beyond the document. It has to be used.
Business plans are critical for any business. Start-ups, small and medium companies, large firms, not for profit organizations, even governments – all certainly recognize the value of having a roadmap to accomplish their respective objectives. A well-developed business plan captures that roadmap. It is worth therefore, putting the time and effort to get it right.