Seven Reasons Business Plans FAIL
By PJ Stevens
7 reasons Business Plans FAIL
In this article let’s look at seven reasons why business plans fail. Granted, this list could be 57 or 107 reasons that business plans fail, but let’s concentrate on a few often experienced reasons.
1. It was not a good idea!
Almost any idea or business plan can look good on paper, and almost any idea can be backed up with some sort of figures and analysis to the point of creating what appears to be a ‘viable’ business plan - I know, I am guilty! The problem is simple, not all business ideas are good ideas. Not all ideas could or should be businesses. Far too often, individuals and companies realise they have invested in a bad idea once it is too late and they wasted time, energy and money from family and friends.
Too many business ideas are not tested via simple MVPs (Minimal Viable Product) or similar, and shared with clients to get real feedback. The plan is based on theory (and untested assumptions) and creative numbers and usually lacks testing in the real world so there is no sense of whether there is a market or people will buy the product or service.
2. Employee compensation package is not aligned
Business plans can fail because employees are not compensated or incentivised in a way that aligns the company and employee goals. In game theory, Nisan and Roughgarden, (2007) note that a contract is an incentive compatible if “every participant can achieve the best outcome to him/herself just by acting according to his/her true preferences” For example if an employee is bonused monthly then their views and attention is likely to be very short term, this may suit people and companies, but if you want employees to have a longer term view then there may be a conflict.
There are number of useful Forbes articles on how to tailor compensation packages for employees, whether you are a start up or more established business.
Arguably, having a clear and agreed ‘purpose’ or vision will help alugn peoples thinking and behaviours.
3. You don’t have difficult or challenging conversations
Anyone who has started a company or been in business knows that – like it or not – conflicts and misunderstandings happen in teams. A good business plan will pay attention to having difficult conversations effectively, handling internal disputes, poor performance and working to resolve conflict efficiently. This might mean ‘sacking’ some one. Sadly, all too often I see companies who have not considered how they will deal with conflict, manage difficult staff or how they plan to exit a member of staff from the business. This may result in brushing this issues under the carpet and leaving them unresolved, damaging the company culture.
The greatest reducible costs in business are in people issues. Having difficult conversations with staff early and effectively can reduce cost and boost the morale and culture in the business. Exiting a person from the business needs to be thought through. Exiting some one well can improve trust, respect and belief in the business. Failing to do it, or doing it poorly can have a negative impact.
4. The team is not balanced or appropriate.
Another problem that I have noticed in business plans is that the team is not balanced or appropriate for the task in hand.
I have read business plans that present a compelling argument for a new product or service but the majority of plans fail to put together a team that has the competencies required to actually execute the business plan. Further, there is little thought to how and why they will execute the plan.
Having a team (or teams) of people with cleared shared mission and goals, and the energy and capabilities to deliver the plan is central to success.
Teams need to be balanced in terms of skills and ‘Chiefs and Indians’. Many projects and plans become top heavy, others have managers and leaders ‘doing’ rather than leading and supporting. A business plan needs to include these matters in order to execute the plan with a degree of success
5. Detailed financial projections are missing
The majority of business plans particularly in start up scenarios, seem lack metrics and financial detail such as balance sheet, cash flow statement, profit and loss statement, and income statement. Its important to have an understanding of the numbers from a day to day cash flow matter, but also investors – including you as owner – will want to have a return in investment.
Think about how many businesses run out of money, often due to poor planning, a lack of detail in the numbers and sadly a lack of understanding of vanity metrics versus actionable metrics.
As one close friend and colleague once stated - and is now running a success and profitable £10M business - 'hiring a good FD was the best thing I ever did... it helped me transform my business and make it far more future proof'.
6. False assumptions
This is one that personally drives me insane!
Far too many businesses, start up and new-to-business managers make assumptions about the business, product and plan. For example, there is an assumption that people will buy this product, but then they fail to test or challenge the assumption by seeking real feedback from real (potential) buyers.
I see huge assumptions around product, price, delivery, sales numbers and so on. Much of this can be validated by simply asking customers for their feedback.
Owners (and project managers) need to have the courage and commitment to test assumptions as early as possible and as cheaply as possible.
7. Failure to improve business plan after receiving feedback
Finally, when assumptions have been challenged, data gathered and the plan is written, it is a good idea to share it with a few trusted colleagues or mentors.
Do not get the business plan written by someone else as you will not know it inside out, it wont be yours. It may look beautiful and prove to be an excellent door-stop, but it will not prove you and business with direction!
If you are seeking investment then consider having some one who understands the needs and views of investors to review and give you feedback from that perspective. Writing a Business Plan for a bank loan is somewhat different, and you are unlikely to be ‘grilled’ in the same way an investor will, nor are you likely to get the same quality feedback.
A word of advice, do not keep the plan in your drawer, it is a working (living) document.
What have I missed? What do you think are the reasons business plans fail, or indeed, how can we improve the quality of plans and greatly increase the likelihood of their success. After all, we all need businesses to be successful in our communities. Good businesses makes great sense. They can choose to innovate, grow and invest, recruit and train people, make better decisions, invest in the community, export or expand..... they can even pay tax. The last one may be less attractive, but this country, like many others needs businesses to be successful and pay tax.
About the author
PJ Stevens is an expert in organisational change, performance and improvement, with 20 years experience. He is chair of the business improvement network.
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