Common business planning mistakes

2nd October, 2015

To be successful, you need to understand your capacity to take on additional work at all levels of the business process. You also need to understand how you will provide the support and skills to ensure your team can manage increased activity.

A business plan is the strategy around which you can determine the whole process, identify gaps, address them and put contingency plans in place. It helps you set deadlines, track progress, shift priorities, allow for contingencies and save yourself from looking a fool in front of customers, financiers and staff.

Mistake 1: Making false assumptions

The lack of a plan — or a plan that exists only in a manager’s head — is riddled with biases. It is often unfounded or sinking in unrealistic assumptions. By their very nature, “gut feelings and “spur of the moment ideas” are full of assumptions. The most important assumption, of course, is that your business will succeed because you are ready to work hard.

The best business plans highlight critical assumptions, test them and provide some sort of rationalisation for them.

Mistake 2: Not identifying gaps before it’s too late

A business plan looks at all cogs in the business machine, identifies those areas that have capacity and those that will require support, and gets that support in place and trained before the deluge of new work.

I had a client who ramped up sales, which meant that the cost of sales increased. The board felt great about the amount of turnover of stock and sale figures. Unfortunately they were in a notoriously slow-paying industry and did not give their only accounts clerk any support in pumping out and following up invoices. They followed up for payment when some invoices had not even been sent out yet, which hurt relationships with customers. They also damaged their credibility when they couldn’t pay suppliers on time. Finally the bank reduced their management strength rating — it was a bad outcome all round.

Mistake 3: Misusing finance facilities

Another mistake is misusing various finance facilities. Many companies will draw on short-term facilities even though they know the invoice recovery period will extend beyond the payback deadline. Credit scores get damaged and future financing is put at risk or cut off completely.

Ensure staff know your plans — and their finance limits. Senior staff and those with purchasing power need to realise that while the purse strings are loosened, they are not to be abused. I had one client’s warehouse manager decide to triple their nickel order because it seemed cheap — only for the price of nickel to plummet and demand dry up. If you can’t turnover stock very quickly, do not extend your inventories in areas you cannot control the prices.

Creating your business plan

These days, going to a bank without a well designed business plan is about as useful as going on Shark Tank with no prior sales, no patents, no market testing and multiple overseas competitors. You have to bring your story, your unique selling proposition, and show the groundwork you have put in to protect a viable product. There is no one-plan-fits-all, but there is help available.

The Australian government’s business website also has a number of useful business templates and guides you can use as a starting point.

Don’t be worried about getting a plan wrong — be worried about getting it wrong without a contingency plan. Creating business plans before you need them is critical. Working through the process will identify weak areas or gaps and help you stay on course no matter the circumstances. And online accounting software like MYOB will give you a clear picture of cash flow — and give you some visibility over issues before they arise.

P.S. I still have that client looking to offload $300,000 of nickel now worth about $165,000. Lesson learned!