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Perils and Pitfalls in Business Plan Preparation
by Susanne Lee Houfek

How hard can it be to prepare my companyís business plan, you ask. I wrote one in business school; Iíve got the software and just need to plug in the information; Iíve read tons of them; Iíve got a detailed outline to follow; I donít need a plan Ė a PowerPoint is fine.

While these may be true, working from templates and outlines or making a simple slide presentation is only the first, and the easiest, step. Preparing a document that thoroughly describes and successfully sells your companyís concept and strategies to potential investors requires much more thought and work.

In my experience over the past 15 years working with company founders who have prepared what they say is their completed business plan, I see six common problem areas. In these areas, paying insufficient attention, failing to perform deep analysis and research, and anticipating only the most general objections are perils likely to lead to failure.

The most common pitfalls of the typical business plan include:

  • Unfocused or unproven product strategy
  • Superficial description and quantification of market
  • Ineffective marketing and creative strategies
  • Insufficient competitive analysis
  • Incomplete or overly-aggressive financials
  • Weak and unpersuasive presentation and writing

I. UNFOCUSED AND UNPROVEN PRODUCT DEFINITION AND STRATEGY

The product or service description includes features and benefits and the needs it meets Ė the void in the market it fills. The product strategy must be focused, with the product targeted to clearly defined market segments with the greatest likelihood of purchase.

Fixes to some of the problems I see in the product section of many business plans include:

  • Donít develop multiple products that meet every need or application within your industry or within the supply chain. Focus on the one for which you have the greatest competitive advantage and best managerial skill sets.
     
  • A corollary: donít say you have ten products if youíve merely taken one and split it up by different features or modules. That wonít impress the reader.
     
  • Use consumer/user research to support your statements that users will buy, make repeat purchases, upgrade, prefer your product to those of the competitors, and pay your price.
     
  • Demonstrate that the benefits offered to users are indeed benefits that are important to them.
     
  • Conduct test markets in small geographic areas to confirm sales potential.

II. SUPERFICIAL OR INADEQUATE MARKET DEFINITION, SEGMENTATION, QUANTIFICATION AND FORECASTS

The market section describes how many user or consumer dollars are available to you and your competitors (what is called the ďtotal available marketĒ), how fast itís growing, and the factors that drive its growth. You will need a clear and detailed description of the market and market segments your product targets. You must prove that your markets are either very big or, if not, that they are growing fast enough to support you and the potential competition. Here again, you must conduct research as well as use reputable industry sources.

  • Provide realistic and documented quantification of the total available market and its growth. This will include the actual number of potential customers and their annual dollar purchases of products currently meeting the same or similar needs.
     
  • Define the specific customers you are strategically targeting within the market. These are your market segments. For business, institutional and industrial products: What type of business? How large are the companies? Who is the decision-maker, the user, the purchaser? For consumer products: What are user demographics, psychographics, buying patterns, and geography?
     
  • Be conservative in forecasting your market penetration (share).
     
  • Include a forecast of repeat usage.
     
  • Define and document the market drivers.

III. INEFFECTIVE OR INEFFICIENT MARKETING, ADVERTISING AND SALES STRATEGIES

In this section of your plan, you describe how youíll position your product, how you'll position and advertise to potential purchasers, what sales methods youíll use, and which channels of distribution youíll employ.

ďProduct positioningĒ is the concept - the set of values, the image - that surrounds your product. Positioning includes benefits, but is more than just benefits, and it places you in the userís mind in relation to competitors.

For both consumer and business products, a solid positioning, good creative strategy and targeted implementation are critical to generating brand awareness, the impulse to purchase, and repeat buying.

  • Test different positionings with potential users, then test them versus actual competitorsí positionings. From this, develop your communication strategy and creative direction.
     
  • Hire a small firm or freelancers who have major ad agency and marketing experience to implement your communication strategy.
     
  • Hire a media placement firm or ad agency to select and buy the appropriate media. Such companies can ensure that your media plan is both efficient and effective - not targeted too widely and using the appropriate media for the audience.
     
  • Test your advertising and media plan.

IV. POOR COMPETITIVE ASSESSMENT

Here you describe your strengths and weaknesses vis-ŗ-vis your competitors' and the barriers to entry - what prevents others from doing the same thing you do.

  • Describe each direct competitor fully, both the product and the company.
     
  • Objectively assess your product and company strengths versus each competitor. Then, accurately describe your product and company weaknesses versus each competitor. Then include how you may be able to overcome each weakness.
     
  • In the barriers-to-entry section, include how long your window of opportunity is.
     
  • Donít overlook other types of competition, such as partial and indirect.
     
  • A graphical gap analysis showing unmet needs and available positioning in the marketplace is useful.

V. INCOMPLETE OR OVERLY AGGRESSIVE FINANCIALS

In developing the financial projections, use an expert such as an accountant, a temporary CFO or a finance consultant. Now, having said that, it is also critical that you, the founder, be closely involved in the forecast process. Ideally, you will start building the spreadsheet yourself, defining the variables that drive revenues and costs. Then, bring in the financial consultant to ask the tough questions and prepare the final versions.

  • If you have historical data, show a P&L and Balance Sheet for three to five years.
     
  • Forecast your Profit and Loss, Cash Flow and Balance Sheet for three to five years. For Cash Flow, show it monthly for the first year or two until ending cash turns positive.
     
  • Show what month you will use the funds raised and for what specific capital and expense purposes.
     
  • Profit goals must be realistic; on the other hand, make sure you have budgeted enough for marketing and sales.
     
  • Include the assumptions driving the forecasts. These can be written separately or be line items in the spreadsheet.
     
  • Make certain that your sales forecasts tie specifically to each product category, target market segment, and distribution channel described in the plan.
     
  • The exit strategy is the investment pay-off, which will be either IPO, acquisition or continued dividends, interest, or profit participation.
     
  • Show comparable valuations and P/E ratios.
     
  • Include sensitivity analyses - best, worst and average cases. You can also show different growth scenarios with different levels of funding.

VI. DISORDERED AND UNPERSUASIVE PRESENTATION AND WRITING

How you present your material and explain it is as important as what you say in making your plan persuasive. You need to tell a compelling story, setting up a problem in the beginning and demonstrating that you have the solution.

In a way, your business plan should be like a good adventure novel or movie. You want your reader to be intrigued and read through to the end. So you need to set up the question in the beginning: ďWill Dirk Pitt find the undersea treasure?Ē ďIs Neo really the Chosen One?Ē In your case, the question is: "Why is this investment opportunity superior?Ē

There are many ways to strengthen the narrative of your plan and present a logical, orderly case to answer the question:

  • Donít force your reader to wade through paragraphs of rationale to get to each conclusion.
     
  • Donít try to impress your reader with your detailed scientific or technical knowledge and vocabulary. If you are a scientist, physician or engineer, you need to remember this isnít a publication for peer review in a scientific journal.
     
  • Donít exaggerate. Market forces, need for the product, benefits, accomplishments, etc., must be described in a conservative and honest fashion.
     
  • Donít just compile data and statistics. Your business plan isnít an undergraduate research paper.
     
  • Make sure the names of the products, product categories, market segments, channels of distribution, etc. are consistent throughout the plan, all the way through to the financials.

Copyright © 2005 Susanne Lee Houfek. All rights reserved.

Permission to reproduce this article is granted provided the following is included: Copyright © 2005 Susanne Lee Houfek. All rights reserved.
Susanne Houfek has developed business plans for over 70 companies across a variety of industries worldwide in the past 15 years. She also worked for a decade at Fortune 100 companies and an international advertising agency in corporate strategic planning, new product development and consumer product management. She is a graduate of Stanford, with her MBA from U.C. Berkeley. www.SusanneHoufek.com.

 This article was first published in the September 2005 issue of our e-zine, Propel Your Venture.

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