Like with just about everything, there are a few common traps or missteps businesses get caught up in when writing their business plan. Some are minor and some are significant. But even the seemingly minor errors can incite investors to dampen the “REJECTED” stamp on their red ink pad. By avoiding the five common mistakes listed below, however, you and your business will have a better shot at catching the attention of investors and lenders and launching a successful business.
1. Ignoring the Competition
All businesses have some sort of competition, whether it’s direct (competitors that sell the same product or service) or indirect (competitors that sell to the same target market). Appropriately analyzing your competitors and the barriers to entry they create for your business is important if you want to portray a realistic market landscape in your business plan.
“There is no such thing as no competition,” says small business advisor Rob Kooner. But he also warns against focusing too much on the competition. The key, as Kooner writes, is to “focus on your niche, what differentiates you from the competition, how you plan to compete in the marketplace and paint accurate picture of what the industry is like now and where you see it going in the future.”
2. Hiding Weaknesses
Let’s face it: we all have weaknesses. Imagine going into a job interview and, when asked to name a weakness, you respond that you have none. The interviewer might show you the door faster than if you had given the cringe-inducing clichéd response, “I’m a perfectionist; I need everything to be perfect.”
The same goes for businesses. An entrepreneur who believes his or her business is flawless is either a dazed optimist or hasn’t done proper research and analysis on the business model and market conditions. So, demonstrate to investors that you have a realistic outlook. Show them that there may be some hiccups along the way but that your business has what it takes to overcome them. That’s what investors want to see.
3. Overly Optimistic Market Size Estimation
Along the same lines as ignoring the competition is overestimating the size of the target market. If you’re marketing a nail polish, you must analyze demographics such as gender, age, and income to see how those numbers relate to your product. Is the nail polish going to be marketed to mature affluent women or teens on a budget? Hint: The target market size does not equal the nearly 160 million women in the U.S.
4. Only Thinking Short-Term
Convincing investors that your business has what it takes to survive the first few years by including three-year projections is a must. But just as important is showing investors that you have a vision for your business. Where do you see your business in ten years? “This kind of unbridled ambition is the lifeblood of entrepreneurship,” says Forbes contributor Annabel Acton. “Think beyond just the immediate impact of that product—after all, Steve Jobs won’t be remembered for inventing the iMac, but for completely revolutionizing computing.”
A hockey-stick projection towards the $100 million revenue mark may look nice, but is it realistic? One of the keys to not getting caught up with naive projections goes back to Common Mistake #3: Overly Optimistic Market Size Estimation. If you overestimate your target market, chances are your revenues will be unfairly skewed upwards.
Other things to take into consideration are costs – will you be able to turn a profit? And how is the projected accounts receivable turnover ratio in relation to the projected accounts payable turnover ratio. In other words, how long will it take clients to pay you versus how long will it take you to pay suppliers? If it takes much longer for you to collect payment, your business could be in serious trouble, even if sales are healthy.