Business plans everywhere. I’m reading, annotating, filling in score sheets, and getting cranky. I explained that on this blog last Monday.
So what’s with the unrealistically high profitability projections? This year it seems like I’ve discovered a new 50-50 rule of profitability in business plans, as in, 50% of the plans I’m looking at project 50% or higher profits on sales.
That reminds me of a song my youngest daughter used to play: “That Don’t Impress Me Much.”
Occasionally a very successful startup will come up with something so new that it can, for a while, chalk up very high profit margins. That’s extremely rare. Out here in the real world, though, nobody really makes much more than 5-8-10% or so profits on sales. The real startups might make 15% or even 20%.
Projecting 40%, 50%, and even 60% profitability on sales doesn’t tell me you have a great business; it tells me you haven’t done all of your homework. You’re underestimating cost of sales, expenses, or both.
I find this particularly galling in business plans with some social implications, related to health care, or education.
What would I like to see instead? First, find out average profitability for the industry you’re in. Put that number into your plan. Then explain why your company’s projected profitability is higher. Proprietary technology, specialty niche market, new processes? Okay, I can take that; just be aware of what the normal is, so you know what you’re up against. Please.
Standard financials are available from several vendors, for less than $100 per industry (and here I can’t resist adding that they’re bundled with Business Plan Pro, my company’s software product. Sorry. I’m an entrepreneur. I can’t help it.) You can also get those from Oxxford Information Technology, or the Risk Management Association (RMA).
Anyhow, that’s my opinion.