5 ways a business plan can come back to bite you

Image courtesy of Skooba Design

We've all heard the expression, "If you fail to plan, you plan to fail." And few people disagree on the importance of a business plan. But too many business plans risk turning against their authors (and often do) because of one or more of these potentially fatal flaws:

1. Being too attached to a product or idea. The "everyone will want this" phenomenon, where you love an idea so blindly that you don't even consider the possibility that the world might not beat a path to your door.

Gut feelings, experience and a willingness to take risks certainly count, but don't get too stubbornly attached to your ideas. Be brutally honest with yourself, and do as much homework as you can. A mentor of mine once said, "Never make decisions based on an assumption that you're your own customer."

2. Overestimating the market. Almost every formal business plan I've ever seen cites impressively researched industry statistics and uses them to come to hypothetical conclusions. Typically they read something like, "We anticipate NewCo can capture 1 percent of this $50 billion industry within two years, resulting in revenues of $5 million."

It seems reasonable -- hey, just 1 percent -- but in many industries getting 1 percent market share is a Herculean feat. For start-ups with limited resources, it might even be impossible -- many run out of money chasing flawed assumptions or unrealistic/unfundable goals. So for the typical entrepreneur, it's better to build estimates from the bottom up (units, distribution outlets, marketing and other resources, etc.) than to back into numbers based on market share.

3. Not fleshing out execution details. In one of my favorite bits, comic actor Sacha Baron Cohen's alter ego, Ali G., is pitching real, unsuspecting venture capitalists on investing in a hoverboard -- a levitating skateboard inspired by the movie "Back to the Future." He hands a plain wooden skateboard deck to an impatient VC, who quickly points out that it's just a skateboard without wheels -- and doesn't hover. Ali G. replies, "It doesn't yet. That's where you lot come in." This happens in real life all the time. The business plan describes a great concept, but with no real-world execution plan.

Determined people with big ideas and dreams often have faith that the missing pieces will just come together. If you're the late, great Steve Jobs, that may be true. Bust most of us aren't, and most don't have the resources for endless exploration. So if you don't know how to execute your idea (much less if it can be executed at all), or you don't at least know of specific resources to which you can turn, then it's just an idea -- not a plan.

4. Overestimating financial results. Business plans commonly make overly aggressive or unrealistically ambitious assumptions about sales, rate of growth, gross margin, profitability timing, cash flow, market share and other tangible results. To be sure, some startups knock it out of the park, but most work their way up slowly, through zigs and zags that rarely follow the original plan. I can't think of an entrepreneur I know whose startup financial estimates materialized as planned. Mine certainly didn't, and I'm as conservative as they come.

Another wise piece of advice I got years ago was to separate goals from estimates. Goals are what you shoot for, estimates are what you bet on. Keeping them separate in your head -- and in your plan -- can help avoid painful surprises down the road.

5. Underestimating costs. This is usually the biggie. "Assume that everything will cost twice as much and take twice as long" may be cliche, but it's always been wise and healthy advice. Running out of cash is, of course, among the top reasons businesses fail, and underestimating expenses is one of the top reasons they run out of cash.

No matter how much homework you've done and how much you think you've nailed down the numbers, add a generous margin of error. If you're seeking financing, you may only get one shot. And if nothing else, think of it this way: chances are you can only be pleasantly surprised if you overestimate.

There are generally two reasons for doing a business plan: one is for yourself -- to organize your thoughts on paper, make sure you really understand and feel good about what you're doing, and give you a path forward (one that will almost certainly change, but a place to get started).

The other is for outside use, which typically means asking for money. There may be some differences in the content and presentation of the plans to suit each purpose, but no matter what, it should be honest, thorough and as realistic as possible.

It's great and important to be positive, determined and enthusiastic about your business, and I'm not suggesting writing a pessimistic or self-defeating plan. I think anyone who has a good idea, a solid plan and the personal qualities it takes to be an entrepreneur should go for the wild ride.

But it's equally important to balance your passion, drive and conviction with a healthy dose of conservative self-evaluation. Challenge everything about your plan, then challenge it again. Making unrealistic assumptions and/or kidding yourself -- much less others -- can come back to bite you.

I'd love to hear your own business-plan pitfalls or advice. Please share your thoughts.

  • Michael Hess On Facebook»

    Michael is an entrepreneur who has launched businesses including Skooba Design and Hotdog Yoga Gear travel bag brands, as well as Journeyware Travel Outfitters. Michael sold his company in 2014 and is now focused on writing, speaking and consulting. Learn more about his ventures at www.businesswithclass.com.

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