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5 Misconceptions About Business Plans

By: SmallBizClub

 

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How necessary is a business plan when starting a business? Is writing a business plan just a waste of time? Is a business plan the only way I can get my idea funded?

These are all common questions among prospective entrepreneurs who lack experience. However, the answers to these questions can at times be misconstrued. Below are the most common misconceptions new entrepreneurs have about business plans and why they may damage your chance of success.
#1: “A business plan is a waste of time”
There is no doubt that the business planning process can take a good bit of time and effort. This is for good reason as most businesses fail due to poor planning. Cash flow is the all-time killer of startups as over 80% of new businesses fail due to poor cash flow management. Without proper planning and forecasting, entrepreneurs often overlook the potential for cash flow shortages down the road.
Working through the process of writing a business plan helps you to cross-examine your financials and produce projections for your cash flow in the future. The following items are all things you should consider when creating your business plan:
  • Inventory costs
  • How your customers will pay
  • Operational expenses
  • Loan payments
  • Taxes
  • When you pay your bills
The above factors all have an effect on your business’ cash flow. Even a profitable company can fail without a proper cash flow plan.
#2: “A traditional business plan is required to get funding.”
Many college students enrolled in business programs are still taught that the conventional paper business plan is the only way to obtain investment. This, however, is not necessarily true.
Businesses do not always need a traditional bank loan to get funded. Common alternatives of funding range from friends and family to crowdfunding and VCs. While these means of funding do not necessarily require a 100-page business plan, do not get fooled into thinking that you can forgo the business planning process.
#3: “Writing a business plan is about getting investments”
This misconception is what has become inherently wrong with the approach of new entrepreneurs. Merely having a business plan does not guarantee that your business will be funded. A business plan is not a document that you just “hand in” like a homework assignment.
Many prospective business owners only think of writing a business plan in terms of turning it in to investors to get the money they think they deserve. However, the practice of making a business plan is about much more than simply receiving a check.
Building a plan should be viewed as more of an exercise that helps you to better understand your market. Creating a business plan is also useful for setting performance goals to monitor your growth and keep you and your team accountable.
#4: “A business plan should be at least 40 pages.”
A business plan should be concise and address the aspects of your business in a succinct manner. Investors want to see the fundamentals and be able skim through your plan to find exactly what they need.
With regards to the financial, financiers want the meat and potatoes of your financial model: the profit and loss statement, balance sheet, and cash flow statement. Try to keep your business plan under 20 pages, anything more and you run the risk of losing the attention of investors.
#5: “Business plans are static and don’t evolve”
Business plans are living documents that should be updated regularly. Don’t think of a business plan as a rigid set of rules that must be followed to the T. Instead, a business plan should be adaptable to market fluctuations, instead of a one and done document.
Since every business is different, plans can come in various shapes and sizes depending on the business’ intentions. Depending on the investor, entrepreneurs may need a more presentation-friendly business plan in the form of a pitch deck.
Presentable plans hit on the key aspects of the business and are much shorter than traditional business plans. Nonetheless, presentation-friendly business plans must be well thought out and often requires the amount of planning that it takes to write a traditional business plan.
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To sum it up, writing a plan provides you with a framework to launch your business. There is no rule that says you cannot stray from your plan or make changes along the way. The ability to pivot your business’ direction is essential to the survival of your business, but without a business plan there is no point to pivot from. Whether it’s on paper, PowerPoint, or even a napkin, take the time to craft a functional business plan. I promise, you won’t regret it.
Author: Taylor Johnson is a serial entrepreneur and business plan expert at BusinessPlanToday, the leading provider of business plan software and free business plan samples. He possesses an MA in Business Finance, and was involved in the founding of three businesses — Uncle Chen’s Cuisine, Christina’s Design, and Kids and Co. He is happily married to his lovely wife Andrea, with three “above average” children.
Published: January 20, 2015
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