SmallBizResource Blog -- Startups

10 Business Plan Gaffes You Don't Want To Make

Posted by Benjamin Tomkins Tuesday, May 19, 2009, 10:23 AM ET

Done right business plans aren't something you use to lure investors and then stick in the bottom of your desk drawer. Rather, they become living documents that guide your business, keep you on course, and -- yes -- adapt as your businesses changes. But too often, business plans are rife with problems -- expert Tim Berry breaks down the top 10.

Tim Berry, the founder of Palo Alto software and bplans.com (the providers of several free online calculators available on bMighty) has spent years reviewing business plans, talking about business plans, thinking about business plans, and giving advice about business plans. Most likely, he's seen more business plans than you ever will. All that experience has taught him a thing or two about what makes a good business plan and what makes a bad one.

By far the biggest mistake he sees is the lack of business plan. That what constitutes a business plan is all over the map may, in part, be why VCs claim they often ignore the business plan and make funding decisions by instinct. But do you really want to leave the future of your business up to your gut (or anyone else's)?

Looking beyond the simple fact of not having a business plan, Berry recently posted his top 10 business plan mistakes and problems to the American Express OPEN forum. Here's his list (click through for a lively debate and more good points about business plans in the comments):

1. Straightjacket Plans -- All business plans are not alike. One size doesn't fit all. What's supposed to happen is that form follows functions, so a good business plan includes only what makes the business better. If you're not dressing the plan up to support your efforts to raise money, for example, then don't bother to do a document describing your company for outsiders. Do only what you need, and not one thing more than that.
2. Pollyanna Profits -- The business plan proudly brandishes 40%, 50%, 60% profits on sales and the entrepreneurs congratulate themselves on how good their business will be. Not hardly: plans projecting making 50% on sales three years later aren't showing me how good the business is, but rather that the planners don't know the business. Nobody makes 50% on sales. You've underestimated costs or expenses. Go back to the drawing board.
3. Vertigo -- I'm reading along and suddenly whoosh, the plan sweeps up into the air as it glides over all the details from a mile-high level. Just when I adjust to the new level, zoom, it dives back down into detail. I get dizzy. What's happened is somebody's so in love with one part of it that they relish all the detail in one part - often the science or technology, sometimes the marketing or sales, occasionally even the finance - and then they gloss over other parts where they really don't know.
4. Potholes -- Then you're rolling along with a business plan and you fall into a hole. Different holes for different plans, obviously, because the context is so important. But a plan for seeking investment has no exit strategy or management backgrounds? That's a big hole. Or the plan says so-and-so has startup experience and doesn't mention when, or what company? Pothole. A plan for business-to-business has no cash flow to cover receivables? Big hole? A plan for consumer marketing has nothing about customer profiles or segmentation? No way.
5. What's The Story? -- Business plans should tell stories. What better way to explain a business than to tell a story of how this person had that problem and found this solution? Make it come alive, make it real. This is especially true of the business plan for outsiders, raising money; help them see what you're doing, and for whom.

   Stories are the most powerful tools in communication. They make it much clearer than facts, numbers, or bullet points.

6. Hockey Sticks -- A venture capitalist friend sat down for lunch one day, and told me: "I'm getting sick of all the hockey stick plans I see."
   I asked him: hockey stick? He said:
   Yeah, hockey stick. The sales line is almost flat and boring, but turns up wildly 'as soon as we get your money.'
   There's irony there, because investors want big growth rates. Flat and boring isn't better. But the good plans have good reasons, documented reasons, for growth rates turning up.
7. All Those Cs -- Do me a favor: if there's just two or three or four of you, don't give yourselves the titles CEO, COO, CFO, and CTO. Sure, name a president and make it clear who's in charge of marketing, finance, sales, and production. Lately I see business plans for companies with only three or four people, and one of them is "Chief Strategy Officer?" Doesn't anybody have to take phone calls and take out the trash?
8. Lowball Pricing -- When the economists said lower price means higher volume, they were talking about undifferentiated coal, not 21st century business. Price is the strongest message you send about quality. High volume low cost pricing strategies work well for giant brand-name retailers whose names are household words. I like business plan that uses segmentation and differentiation to price for quality. Give the market a better product and price accordingly. Or, at the very least, don't think that your small startup will sell more volume because it has lower prices.
9. Working For Free -- Before I say this, just for the record, I understand how you can end up working for free in the early stages, when you have to. You have no choice. You're building the business. What I don't get is those seeking-investment plans where young entrepreneurs boast that they're working for free. They act like it shows how much they believe in the idea. What it does for me is make me wonder how long they can last without lives.

   Investors don't want people working for free; they want businesses that can afford to pay their people fairly.

   And even with all the rest of the business plans, those simpler and less formal plans that aren't going towards investment, put your salary into the projected expenses. Even if your accountant says your taxes will end up as draw against profits, show your salaries. Otherwise you give a false picture of profitability; you understate the real costs of running the business. That's poor planning.

10. Dead Scrolls -- What I hate most about business plans is how often they end up gathering dust somewhere. The become relics, historical oddities, or just plain forgotten. That's a damn shame.

    Business plans are supposed to be a step in a planning process. Eisenhower said: "the plan is useless, but planning is essential."

I don't care if it's on your computer, or a blog, or if you have to print it out. Make it concrete and specific, and then follow it up. Review the plan, check the changing assumptions, and expect to revise.

Planning, not just a plan.

Follow me on Twitter @ http://twitter.com/benjamintomkins
Follow bMighty.com on Twitter @ http://twitter.com/bMighty
Add the bMighty gadget to your iGoogle page @ http://www.bmighty.com/tools/gadgets_google/index.jhtml
Get bMighty on your mobile device @ http://mobile.bmighty.com

Startups