Common Business Plan Mistakes
Many startup business plans have the same errors. It seems new business owners have gone through a list of common business plan errors and checked them off! Here's is a list of what to avoid, so you don't make the same mistakes.
What a Lender Wants in a Business Plan
A lender wants to know only two things:
- How much money do you want?
- How will you pay it back?
That's it. Everything else is just fluff. You don't need a 200-page business plan to tell a potential lender this. Remember KISS - Keep it short and simple. In the thousands of business plans that have been reviewed over the years, these are the most common errors:
Not Using Third Person
Write as if you were not the business owner, but a hired writer talking about the business. Saying, for example, "XYZ Corporation will open its doors on September 1, 2010...." not "We will open our doors ...." The third person (he, she, it, they) sounds more professional and business-like and banker-friendly. If you use the first person, you tend to sound like a cheerleader and less like a reasonable person. I know it seems picky; just trust me on this one.
Not Checking Numbers
If your executive summary states you want $158,000 and your financial statements show you need $190,000, your banker will question your competence. Every number must match in every section of the business plan.
Another example, if you discuss having three employees, but your cash flow shows only salary/benefits for one, you have consistency errors. Have someone go through the plan before you send it out, just to look at all the numbers and make sure they match every time they are used.
Another problem with numbers is being vague with numbers. Don't say, "We'll make a profit soon." What does "soon" mean? In a year? Three years? Some experts say six months to make a profit is a minimum, while others state that three years is a minimum. Of course, it depends on the type of business. In advertising, don't say, "We will spend money on advertising." You should know how much you will be spending over the first year at least. Include details in your narrative as well as in your projections.
If you can't be specific, skip the sentence.
Not Making Sure Everything is Perfect
I have caught lots of typographical errors, misspellings, sentence fragments, and other small and large mistakes in business plans. For example, one plan I viewed switched fonts several times, back and forth from Arial to Tahoma; another plan changed from the first person to the third person. In another document, photos or graphs were on the wrong pages from what the narrative said they were. Having errors in your business plan sends a message to your lender that you don't care about the details.
Being Too Optimistic
A lender wants realistic, not overly optimistic. For example, over-estimate your expenses and underestimate your income. A lender wants to see what will happen if your "worst case" scenario happens. Use meaningful charts, graphs, financial statements, or spreadsheets to show what your cash flow will look like. Include a break-even analysis, so the lender can see how and when you will start making a profit. Don't spend pages telling how wonderful your business it; talk about how it will provide a benefit to your customers and how it is different from the competition.
Confusing Cash with Profits
Your business can be profitable and you can have no cash. Without positive cash flow over a period of time, your business will not have solvency (ability to pay its bills) or long-term viability (survival). No cash means that business loan isn't going to get paid back and you close your doors. Show how your cash flow will support your loan payment.
Leaving Questions Unanswered
Don't assume your lender knows about your business. Pretend he or she is an idiot (not necessarily untrue, in many cases), at least about the business you are going into. Have someone who is not in your business read the business plan and ask you questions. Then put those questions into the plan in the appropriate place. If confused customers don't buy, confused bankers don't lend.
Not Including an Executive Summary
Business loans often go up the line in a bank, and the higher up executives want to know the "bottom line." Just tell them (1) A sentence or two about your business, (2) How much you need, in numbers or a simple chart, and (3) How you expect to pay back the loan. That's it. One to two pages is all you need for the executive summary. Put it at the beginning, so the reader doesn't have to search for it.
How to Fix these Errors
Most of these errors can be avoided by having several people read your plan. Ask each person to review a specific item above and tell them what to look for. Get a good grammarian/writer to review the plan. Remember, there is no second chance to make a good first impression.