A business plan is the blueprint that guides aspiring entrepreneurs as they build their new business ventures. From 2008 – 2010, I taught a 20-week business plan writing course at an SBA-affiliated women’s business development organization. We met for three hours each week and students wrote their plans week by week, guided by the lessons.
When evaluating a business concept, unrealistic expectations or faulty thinking can creep in and undermine planning. Excitement about the idea can distort one’s ability to see potential obstacles. What follows are scenarios budding entrepreneurs should watch out for.
While it is sometimes true that using yourself as your ideal customer is a smart idea, since you understand the value and availability of that product or service, you may misrepresent the size of the market and the appeal that can be achieved 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 motivation to buy from you.
Additionally, make sure you understand the purchase process. Who gives the green light to the sale? What is the sweet spot price range? Finally, where do potential customers get these products or services now?
Access to customers
Access to customers is everything, and some industries or target customers seem impenetrable. You can identify the right customers, understand how your products or services fit their needs, and know how to price and offer them. But if potential clients don’t have the confidence to work with you because you lack an endorsement from a trusted source, you’ll starve.
Cash flow overstatement
Usually, businesses will not achieve desirable gross sales or show a net profit in the first year of operations. Businesses that require particularly high start-up costs will require long periods of growth. The business plan should acknowledge the potential for negative cash flow and demonstrate how fixed and variable expenses will be met during that time. One must know how inventory will be financed, payroll 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 the size of their purchases may initially be small. Furthermore, it is possible for a business to be profitable on paper and still suffer from cash flow problems if customers do not pay on time.
Underestimating start-up costs
Developing a reasonable estimate of how much it will cost to get the venture up and running is essential. You must be prepared to bear the cost of all permits, equipment, inventory and personnel necessary to conduct business. If you plan to hire employees, it’s important to have a good idea of your minimum staffing needs up front (you can hire more as revenue increases).
The “magical thinking” business model.
The business model illustrates how your venture will become profitable. Well-thought-out interactions between marketing, financial and operational processes will drive and sustain profitability, and you need to determine how these will happen. The business model describes the main functions of the enterprise.
Similarly, the value proposition of your products or services must be articulated. The overall marketing strategy and selected tactics and resources that will promote the value proposition—intellectual property, patent rights, key relationships or capital—will be considered. Sales distribution channels will be detailed.
Getting to plan B (2009), by Randy Komisar and John Mullins, details the main components of the business model and advises business plan makers to segment their models into subheadings:
- Revenue Model, to describe what you will sell, your marketing plans and how you expect to generate revenue
- Operating Model, to detail where you will do business and how day-to-day operations will work
- Working capital model, which means the cash flow requirements of the business. Understanding cash flow helps you know when money will be available to cover expenses like rent and payroll (it’s different from income). A business can generate adequate income (sales) and still suffer from cash flow problems.
Your business model will keep you organized and your priorities realistic. Issues such as quality control, collection of accounts receivable, inventory management and identification of strategic partners will mean much more than your number of Facebook followers, for example. Good luck to you and your new business!