The following are errors that entrepreneurs commonly make when developing a business plan, particularly when the audience is made of investors.
1. Projecting rapid growth of a venture beyond the capabilities of the founding team.
This is a common problem. The new venture shows potential for rapid increasing demand, sales doubling or tripling on an annual basis in the first few years. The entirereneur believes this will be very attractive to investors. What he or she doesn’t realize is that there is no evidence in the business plan that the founding team can manage and control this type of growth, and this can cause great concern on the part of the investors.
Too often they have seen a business fail during rapid growth because management didn’t have the systems in place to deal with it. It is far better to project controlled growth and have a plan for bringing on the necessary personnel when the company is ready for more rapid growth.
The other danger in projecting too high a level of success is that doing so increases the chances that the new venture will not live up to the projections. It is better to project more conservatively and try to exceed those projections.
2. Envisioning a three-ring circus with only one ring leader
Many entrepreneurs pride themselves on being generalists. They claim to have expertise in all the functional areas of the new venture. What they really have is general knowledge of all the functional areas and maybe a real expertise in only one.
Investors are very nervous about relying on solo entrepreneurs to lead world class ventures. They much prefer a team of founders with at least one person specializing in each of the functional areas.
3. Reporting performance in some or all areas that exceeds industry averages.
Although it is possible for a new venture to exceed industry averages in a particular area, it is not likely. Most averages, such as those for receivable turnover and bad debt losses, have come about as a result of economies of scale, which the new venture is not likely to achieve for some time. It is better for the business plan initially to indicate performance measure at or slightly below industry averages with a credible plan for exceeding those averages at some time in the future.
4. Underestimating the venture’s need for capital
Investors need to know that the business plan projects sufficient capital infusion to (1) grow the company until internal cash flows can carry the load and then (2) provide an additional infusion of capital when the company is ready for rapid expansion. If the entrepreneur underestimates the amount of capital needed, most savvy investors will recognize this and attribute the error to naiveté on the part of the entrepreneur , or, conversely, they will rely on the figures presented in the plan and ultimately suffer the potential loss of their investment as a result. Every estimate of capital should contain an additional amount for contingencies.
5. Mistaking tactics for strategy
It is much easier to develop tactics than to develop strategies, Strategies define the overall focus of the business; tactics are the methods by which those strategies will be achieved. When an investor asks what the entrepreneur’s strategy is for achieving a projected market share by year 4, and the entrepreneur’s responds with “attending trade shows and advertising in trade journals,” the entrepreneur loses the confidence of the investor by citing tactics rather than strategy. This is a common mistake, because many entrepreneurs focus on tactics to the exclusion of identifying the overall strategy those tactics will support. An entrepreneur’s strategy for achieving the market share might be to become the first mover in a market niche.
6. Using price as a market strategy for a product or service
Using price as a strategy is similar to projecting performance above industry averages. It is rarely possible for a new venture with a product or service that currently exists in the marketplace to enter on the basis of a lower price than that of its competitors.
7. Not investing in the business
Investors are more confortable investing in a new venture where the entrepreneur has contributed a substantial amount of the start-up capital. That signals to the investors a level of commitment necessary to achieve the goals of the company.