Thirteen common business plan mistakes part-4

We conclude our series with this 4th installment on mistakes you should avoid when preparing a business plan:

Predicting a Baseless Exit Strategy
Overlooking Expenses and Overstating Profit Margins
Providing Too Much Financial Detail

Predicting a Baseless Exit Strategy
If I had a nickel for every business plan that said of its exit strategy, “The company will either have an IPO, or it will be acquired,” I’d be a very rich man.
The truth is that investors need to know that you have the ability to think clearly about your company and its future. Any moron can figure out that an IPO or acquisition are common exit strategies. Distinguish yourself by indicating who might actually be potential buyers for your business and explaining why such an acquisition may make sense based on synergy. A far better exit strategy statement might read something like this:
While a public offering is always a possibility if the company achieves its forecasted results, management believes that the company would make a very attractive acquisition for a corporation interested in extending its reach in the fast foods market. Accordingly, management plans to engage in discussions with entities such as Tricon Global and CKE Restaurants.
Think it through and make it make sense.

Overlooking Expenses and Overstating Profit Margins
You want to present a profitable company, and you believe your margins will be exceptional, but if you look at other companies, lots of other companies, you’ll see that even the best have pre-tax margins of 20% to 25%, and 30% is rare and exceptional. Why, then, do you want to present a financial forecast that shows profit margins in excess of 50% of sales? Why do you believe your company will be the one that breaks all trends, that sets new rules? The answer is…you can’t. Plenty of business plans forecast margins of 50%, 60%, 70% and even 80%, but no one achieves these results.
Remember…your credibility is everything, and if your forecast is terribly out of sync with other businesses, then your credibility is shot and so are your chances to be financed. After you’ve completed your forecast, analyze it. Compute cost of goods sold, sales & marketing, research & development, general & administrative expenses and profit margins as a percent of revenues. If your margins are too high, then beef up your expenses.
Always be realistic; always be believable.

Providing Too Much Financial Detail
Don’t provide too much financial detail. I know that you will have generated a forecast based reams of detail schedules, rolled up into a five year summary, but your business plan is not the place to present this detail. You will have plenty of time to show your investors the methods to your madness later. If you remember that the business plan’s purpose is to get an initial meeting, then you only want to include enough financial information to entice them to want to look further.
Your business plan should only have three financial schedules, each summarized by year, as follows:
Income Statement Forecast
Cash Forecast
Balance Sheet Forecast
Summarize each line into major categories, and round your numbers to the nearest $1 million. Make it easy to read and quick to understand.
Even the best business plan doesn’t guarantee funding. If your business isn’t a fundamentally sound way to earn revenues and profits, or if you don’t have the management to effectively execute against your plan, then you shouldn’t be looking for funding in the first place. If you do, on the other hand, have a great business model and solid management team, then make sure your business plan doesn’t create obstacles by making one of the Thirteen Common Mistakes.

© Copyright 2001 by Eli Eisenberg and Straight Line Management

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