8 Reasons Small Business Plans Fail

Friday, 17th November 2017

 

A strong business plan, for any small business, is essential not only in developing a company, but in growing that company, its culture and its profits.

At the start, a small business plan may be used to entice investors or banks to contribute financially to the development of the organization. As a business plan grows and changes, there are many ways and reasons that a business plan might fail.

Missing deadlines, submitting an incomplete plan, inaccurate or outdated data, among others, are obvious reasons that investors might file a business plan in the bin!

Of course, filing your business plan on time doesn’t guarantee it will spark an investors interest. There are more understated reasons investors might be disinterested in your business plan. One miniscule mistake can deter a bank or an investor, when they are reviewing hundreds of plans a month. Knowing the often-overlooked mistakes and avoiding them can send a business plan straight to the acceptance pile!

1. Having a bad business idea

Business plans that sink the minute they enter the investor pool, are all too often just a bad idea. Like Ford’s ‘Edsel’, some products or services sound amazing on paper but, there is a bunch of tiny problems that make it a terrible idea. To avoid failures like the Edsel, companies are now utilizing user-driven development (UDD) or user-centered design (UCD) to only produce products and services that the market desires. The basic concept of UDD is the involvement of real-world tests implemented throughout the design process taking into consideration user characteristics, environment, workflow of the product or service and usability are prevalent through each stage of the design process. In layman’s terms, as the product or service is being developed, constant feedback is being attained by the actual target market of the product. Meaning there is definitely going to be a demand if not a use for the product!

8 Reasons Small Business Plans Fail

An excellent example of UDD in action is the Embrace Warmer designed by Stanford University Students. The Embrace Warmer first came to fruition by asking mothers who had given birth prematurely, what they disliked about the hospital’s traditional incubators. The mothers overwhelmingly responded that not being able to hold their new-born babies was the single-most awful part of their experience. Knowing exactly what their target market needed, the developers could create a successful business plan with a high demand product.

Conduct the research, speak with your target market, and implement UDD from the beginning. Take the feedback from the first round of discussion and make the adaptations.

Have a second or third round of discussions if needed, to make the product or service tailored specifically to what the market wants and needs. Don’t waste energy and time on a product that nobody wants.

2. Employee incentives

In the business plan, a demand for employment should be developed. The employee incentive plan is designed to entice qualified prospective employees to not only work for the company but to remain employed with the company as it grows. If a company’s goals are not aligned with the employee’s goals in terms of incentives, a business plan can fail. According to Game Theory, a contract is incentive-compatible when, “every participant can achieve the best outcome to him/herself just by acting, according to his/her true preferences” (Nisan and Roughgarden, 2007). In other words, if an employee is given benefits that appeal to them, they will in turn, provide the employer with quality work and the two will be equally satisfied with the relationship. So, how do you ensure that your incentive package is compatible with the employees’ expectations? First, remember that incentives don’t necessarily mean salary!

A 2015 article in Forbes magazine suggested offering different salary packages based on company goals. Start-ups and Small businesses can offer tailored benefit packages to each employee. Keeping each employee’s personal situations in mind means a company may feature maternity and paternity leave to one employee, and focus on a retirement plan for another. Employee stock options can be paid out over several years rather than a lump sum payment and will draw the employee to focus on the long-term relationship with the company. Non-Cash incentives can be regarded as well, offer training programs, mentoring, and plenty of room for advancement.

Not only will these benefits motivate and attract employees, but they may also help with the bottom line of the business, which any small business owner will know, is extremely important when it comes to making sure your business works.

3. Disagreements between co-founders

Have a clear cut, step-by-step ‘dispute and resolution strategy’ within the business plan. Disagreements are bound to happen and the only sure way to survive them is to have an agreed-upon plan for addressing these issues as and when they arise.

When choosing a co-founder for example, (and yes two is the magic number when it comes to co-founders), take the decision extremely seriously. Try taking a personality test, The Myers & Briggs for example, to understand your personal strengths and weaknesses and match them your co-founders to see if you complement each other. If you are extremely outgoing but also a little flighty, get a co-founder who is good at reigning you back in and who enjoys working with the numbers. Your co-founder should also be someone who you can spend a great deal of time with, because during the first few years of a company, you might as well be married to them. You should have some history with them!

To avoid conflict, delegate tasks and set clear deadlines that co-founders must meet along with penalties for not meeting the deadlines. If the co-founder isn’t carrying their weight cut ties early on. Include a quick and easy process in the business plan for firing a co-founder and make it as seamless as plausible.

4. The team is not balanced

Not having a team in place that can properly execute the business plan is another reason investors or banks will deny a business plan. A great plan must include a balanced team to become an effective plan. You can’t focus on an aggressive marketing plan if you don’t have someone in marketing on your team just like you can’t open a franchise of walk-in clinics if you don’t have a doctor on staff. You must have a team of people with the right skills for the work that needs to be done. Just like your co-founder, the team must have different skill sets and complement one another to be successful.

5. Detailed financial projections are missing

A proper and complete business plan includes projected financial statements. This is non-negotiable. Investors and banks need to see the figures. Even if everything else is in place they are not going to offer an investment into a company without knowing the break-even point or the Return-on-Investment (ROI).

Provide charts as visual representation of your estimates.

A balance sheet, profit and loss statement and income statement, should be provided for the first year of operation along with a 12-month cash flow statement. The statements should not only reflect immediate start-up costs but they should project future expenses like new computers or renting office space. Deciding the type of business will determine any legal costs and how taxes are deducted and should also be included within the business plan.

6. Spelling and grammar mistakes

Mistakes in spelling and grammar reflect so poorly on your business. You spent hours researching and writing an effective business plan, why let it go to waste over grammatical errors. Investors and banks spend hours upon hours reviewing business plans, if you couldn’t take the time to review yours before submitting it, why should they take the time to read it? If, spelling and grammar are not your strong suit, get a friend or family-member to review it or hire a professional editor. Most firms have a professional editor on staff, or subcontract one that reviews all their documents for accuracy. To avoid seeming incompetent or uncommitted take the time to review your business plan, have others review it, read it out loud etc. before submitting it to investors.

7. False assumptions

Don’t make assumptions. You can have beliefs and you can feel quite strongly about them, but don’t assume they align with the beliefs of your future consumers or investors! Recently we have seen a lot of backlash towards company leaders and celebrities who assumed everyone held their beliefs, and that their words are not controversial. Matt Harrigan, CEO of the start-up, Packetsled, ultimately resigned after he made comments about President Trump.

With proper research, you can develop a highly accurate portrait of your potential investors or lenders. Use that portrait to tailor your business plan towards them but leave assumptions and opinions out of it entirely.

8. Failure to improve your business plan after receiving feedback

After all the hard work, you put into the business plan you need to show it to people before you show it to the investors or banks. Choose a group of people that you will send the plan to for review and feedback. Send it to at least five people in different fields and from different aspects of your life. For example, an old boss or supervisor who you are still on good terms with, a co-worker from a different position, an old friend, a new friend, and a family member.

This way you will have five different channels providing feedback. If one recommends changes that you don’t agree with, ask the others their opinion and make an educated decision based upon the groups’ collective feedback. Edit your plan accordingly and thank them profusely. If your group was highly successful in developing feedback you may consider having them act as an advisory board for your company in the future.

 

After all of this, you should have a solid business plan for your small business that attracts the right kind of attention and works for you and your business. Starting here, you will be able to use this as a base to scale your small business up to a medium company and go even further!

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