Business plans are about business decisions. When I read them — and I read hundreds of them every Spring — I’m looking for the concrete specifics, like dates and deadlines and tasks and milestones, that point towards execution. But part of that is reasonable, credible projections. And I am way too familiar, way more than I’d like to be, with these three very common mistakes.
Credibility killer #1: unbelievable profits
Face it: startups aren’t normally profitable. Existing businesses, once they’re established, rarely make more than 10 or so percent profits on sales (that’s profits divided by sales). Some of the best businesses make 15 or 20 percent.
Therefore, when you project 30, 40, 50 or more percent profits on sales, you’ve lost all credibility. That doesn’t make anybody think you’ve actually going to generate that kind of profitability. It does make people think you don’t know the real costs.
Additional tip: nine times out of 10, you’ve underestimated the marketing costs.
Credibility killer #2: ignoring sales on credit
Businesses that sell to other businesses don’t normally get paid immediately. They send invoices for products and services. They wait. Weeks or months later, they get paid. Sales accompanied by an invoice like that are called sales on credit. They count as a sale, but instead of adding to cash they add to accounts receivable, and then they get into the bank account later, when the receivables are paid off.
If you don’t allow for sales on credit in your projections, you kill your credibility. So plan your cash to include the additional working capital it takes to support waiting to get paid.
Credibility killer #3: expenses vs. assets
We all use the word asset to refer to something good to have, like a friend, a second language, and a college degree. More to the point, we often refer to business advantages such as a product design, software code, a prototype, brand awareness and so on as assets.
In financial terms, however, assets are specific. They are entries in a balance sheet. Assets are equal to capital plus liabilities. Cash, inventory, accounts receivable, equipment, office furniture, vehicles … those are assets.
The most common problem with this is what happens when you pay salaries or project fees for software or web development. That’s an expense. It reduces your profits and lowers your taxes. So it’s a loss. Way too often people show those expenses as if they were buying an asset. Sorry, we hope that your programming expenses generate something good for your business; but they are expenses, not purchase of assets.
Oh, and that land and those buildings your business owns? Those are assets, yes, but they should be on your books for what you paid for them, not what you think they’re worth.
Finance and accounting have this annoying thing about them: things have to mean what the standard principles say they mean. You don’t get to redefine them back into what you think they ought to mean.