Your business plan is one of the most important documents that you will ever prepare. It is the working, breathing and living document for your business aspirations.
However, planning is hard work. You should expect to spend countless sleepless nights in putting together various elements of your plans. Be aware of some common misconceptions when drafting your business plan.
MYTH 1: “Business plans are only for companies starting up”
REALITY: Your business plan will serve as your guide during the lifetime of your business. It is the blueprint of your business that you can use for planning and financing specific projects, for financing general expansion, for mergers or acquisitions, and for overall improvement of the company’s financial and managerial performance. Hence, companies at all stages of development need to prepare business plans. While there is no rule that you have to prepare a new plan every year, it is best to keep your business plan as updated as possible to be of real value. Instead of shelving it in the deep recesses of your filing cabinet, you can add current financial statements, updated rate sheets, recent marketing information, new environmental analysis, and other data as they become available.
MYTH 2: “Business plans should be as detailed and slick as possible. The more is spent preparing a plan, the better the chance that a project will be financed”
REALITY: Business plans should be carefully prepared and well thought out. While there is no set length to business plans, it is important to remember that investors will not have the time to review hundreds of pages of text. Thus, the plan must be concise and yet must contain as much information as possible. The average length seems to be 30 to 40 pages, including the supporting documents. Avoid overly technical descriptions of the company’s processes or operations. Investors will commit funds based on the quality and clarity of the document, not its bulk. Present the plans as professionally as possible, preferably bounded.
MYTH 3: “Business plans should emphasize ideas and concepts, not people”
REALITY: The strength of the management team is an important consideration potential investors and lenders place in evaluating business plans. They place prime importance on who will lead the team, and whether the management can indeed push the business forward. Any experienced venture capitalists will tell you that ultimately they would prefer to invest in a company that has great people and only a good concept, rather than a great concept and a weak management team.
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MYTH 4: “Business plans should be prepared only by the founding entrepreneur”
REALITY: While founding entrepreneurs possess the vision for the business, the business plan is best prepared as a team effort. Its preparation need not be delegated solely to the founders, as few business owners know how to write a business plan! Ideally, a team of managers within the company should develop the plan, to be reviewed by qualified experts, such as accountants, attorneys, and the board of directors. If you have money to burn, you can ask outside consultants to prepare the plan for you – but only with the inputs and close collaboration of your internal management. However, if you are a one-man business with no budget to spare for an outside consultant, try to get as much help and advice as you can. The thought of having to research and combine all the requisite information into a working business plan can be a heavy burden. Remember, a well-written business plan will provide a pathway to profit for any new or existing business, so utmost care should be given in its preparation.
MYTH 5: “Business plans should be distributed as widely as possible.”
REALITY: The business plan will invariably contain information that is proprietary and confidential. Distribution should be controlled and careful records kept as to who has been provided with copies of the plan. Distribute the plan only to your targeted audience: the internal audience, namely, you and any key employees or co-owners; and the external audience, including your banker or potential investor. Indicate in the cover sheet that these are only the plans of the company, the success of which cannot be assured, as well as a notice of proprietary information.
MYTH 6: “A business plan should follow a specified format, regardless of the industry in which the company operates.
REALITY: There in no set format and outline for a business plan. Normally though, the business plan should include strategies a business will undertake to respond to common challenges in marketing, management, administration, and finance. However, companies at different stages of growth and companies operating in different industries face different problems and will require different sets of topics in the business plan. For example, a start-up company will have no historical financial records to speak of and may be more concerned with financing the plant, equipment, patents, inventory, and production schedules. Plans of an established service-oriented company, on the other hand, may be more focused on personnel, marketing costs, protection of trade secrets, and goodwill.
MYTH 7: “Optimism should prevail over realism”
REALITY: The business plan should demonstrate the enthusiasm of the founders of the company as well as generate excitement in the reader; however, it should be credible and accurate. Investors will want to know all of the company’s strengths and its weaknesses. In fact, a realistic discussion of the company’s problems, along with a reasonable plan for dealing with these various risks and challenges, will have a much more positive impact on the prospective investor. As a general rule, investors will feel more comfortable investing in someone who has learned from previous business failures rather in someone who has never managed a company. Finally, any budgets, sales projections, company valuations, or related forecasts should be well substantiated with accompanying footnotes, for both legal and business reasons. Unrealistic or unsubstantiated financial projections and budgets will reveal to an interested investor inexperience or lack of attention to detail, or even lead to litigation by disgruntled investors if there are wide disparities between what was represented and reality.
MYTH 8: “A well written business plan should contain an executive summary, which should be written before the full text is prepared”
REALITY: The executive summary is the thesis statement of your business plan, summarizing its content and purpose. Institutional investors are exposed to hundreds of business plans in any given month and as a result will initially devote only a few minutes to the review of each business plan. It is true, then, that the executive summary (generally one to three pages in length) will be the first (and possibly the last) impression that the company makes on the investor. Thus, if the reader’s attention is not captured in these first few minutes, he or she is not likely to complete the review of the plan. The executive summary should contain all of the information that will be critical in the investment decision, such as (a) the nature of the company and its founders; (b) amount of money sought; (c) allocation of the proceeds; (d) a summary of key financial projections; and (e) an overview of marketing considerations.
Although the executive summary appears near the front of the plan, it is most effectively written after the rest of the plan is complete. The mistake often made by entrepreneurs is writing the executive summary first, before the main components have been drafted. It augurs well to write the executive summary last, since your concepts will be fully developed and all the information and financial data needed will be available. The executive summary is then truly a preview of the details of the plan.
MYTH 9: “Business plans are written only when a company needs to raise capital”
REALITY: Thinking that the only reason to develop a business plan is to convince potential lenders or investors to provide financial backing is a little shortsighted. A well-written business plan will serve a variety of beneficial purposes to the company and its management team. The completed business plan serves as (1) a blueprint for growth; (2) a realistic self-appraisal of the company’s progress to date, as well as its projected goals and objectives; (3) a foundation for the development of a more detailed strategic and growth management plan (especially after the proposed financing has been successfully completed). A good plan will provide step-by-step instructions on how to translate your idea into a profitably marketed service or product.
Recommended Books on Writing a Business Plan:
- How to Write a Business Plan: Create Your Strategy; Forecast Your Finances; Produce a Persuasive Plan (Sunday Times Creating Success)
- The Right-Brain Business Plan: A Creative, Visual Map for Success
- Writing a Convincing Business Plan (Barron’s Business Library)
- The One Page Business Plan for the Creative Entrepreneur
- Pros and Cons of Financing a Business
- How to Start an Executive Search Business
- How to Create a Killer Business Plan
- Why Business Plans Fail
- How to Raise Money to Finance a Franchise