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Fatal Flaws in Your Business Plan
A business plan is a blueprint that guides aspiring entrepreneurs in creating their new business venture. From 2008 – 2010, I taught a 20-week business plan writing course at an SBA-affiliated Women’s Business Development Institute. We met for three hours each week and the students wrote their plans for the week guided by the lessons.
When evaluating a business concept, unrealistic expectations or flawed thinking can creep in and disrupt planning. Enthusiasm about an idea can distort the ability to see potential obstacles. Following are the situations that entrepreneurs should be wary of.
Sometimes it’s true that using yourself as an ideal customer is a smart idea, because you understand the value and availability of that product or service, so you can misjudge the size of the market and the traction you can get beyond a select group. True believers.
Confirm the need for your products or services when you research and verify the number of potential customers who have the money and intention to buy from you.
Also, make sure you understand the buying process. Who gives the green light to the sale? What is the sweet spot price range? Finally, where will potential customers get these products or services now?
Access to customers
Reaching customers is everything, and some industries or target customers seem impenetrable. You can identify the right customers, understand how your products or services meet their needs, and know how to price and deliver. But if potential customers don’t have the confidence to work with you because you’re not backed by a trusted source, you’ll starve.
Excess cash flow
Often, businesses do not achieve the desired gross sales or show a net profit in the first year of operation. Businesses that require high start-up costs require particularly long ramping-up periods. The business plan should acknowledge the possibility of negative cash flow and demonstrate how fixed and variable costs will be met during that period. One needs to know how inventory will be financed, salaries will be met, and office rent will be paid.
When writing your business plan, conservative financial projections are strongly advised. Customer acquisition may take longer than expected and their purchase size may initially be small. Moreover, if customers do not pay on time, it is possible for a business to be profitable on paper and still face cash flow problems.
Underestimating start-up costs
It is necessary to develop a reasonable estimate of how much it will cost to start the venture. You must be prepared to cover the costs of all permits, equipment, inventory and personnel required to operate the business. If you’re planning to hire staff, it’s important to have a good idea of your minimum staffing needs up front (you can hire more as needs grow).
The “magical thinking” business model
A business model explains how your venture will be profitable. We must determine how well-thought-out interactions between marketing, financial and operations processes will drive and sustain profitability. A business model describes the main functions of the enterprise.
Likewise, the value proposition of your products or services should be clear. The overall marketing strategy and the selected strategies and resources that will promote the value proposition—intellectual property, patent rights, key relationships or capital—will be accounted for. Sales distribution channels will be detailed.
Moving on to Plan B (2009), by Randy Komisar and John Mullins, detailed the main business model elements and advised business plan writers to divide their models into sub-headings:
Revenue model to describe what you will sell, your marketing plan and how you expect to generate revenue
Operating model, to detail where you will do business and how day-to-day operations will run
The working capital model, i.e. the cash-flow requirements of the business. Understanding cash-flow helps you know when money will be available for expenses such as rent and salaries (which is different from revenue). A business can generate sufficient revenue (sales) and still suffer from cash flow problems.
Your business model will keep you organized and your priorities realistic. Matters like quality control, collecting accounts receivable, inventory management and identifying strategic partners will mean much more than the number of your Facebook followers, for example. Best of luck to you and your new business!
Thanks for reading,
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