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5 warning signs your business plan is unrealistic

March 15, 2013

As you start up your business, the need for a well thought through business plan is clear.

Even if you are just going to be you sitting in your spare bedroom selling things over the internet, you need a business plan to understand how you are going to market your products or services and actually turn a profit.

When you ask people who have been in business for a few years to look back at their original plan and compare it to what they’re doing now, most will laugh. Very few businesses end up exactly how they were planned – and even if they do, the journey is rarely as predicted.

Usually that’s because better opportunities come along, or you find yourself following the money (there’s nothing wrong with this, it’s called survival).

While you can’t anticipate every turn, you can ensure your business plan is as realistic as possible from the outset. This will make it easier for you to make good decisions based on your goal and the information you’re seeing in your business.

Here are 5 warning signs your business plan is unrealistic;

You are going to sell one million units by year three

This is the most common mistake, and it’s understandable if you’re launching a new venture from scratch. You look at how long you think it will take you to sell one unit, multiply it on, and realise you will be turning over millions within a year or two!

Unfortunately predictions like this rarely happen. They fail to take into account how many contacts you need with a customer to actually sell an item, or how long it will take to get a good distribution deal for your product. A general rule of thumb is if it looks impressive, it’s probably unrealistic.

It’s better to set a realistic figure for sales and exceed your expectations. Financially this is a safer way to plan… there’s nothing worse than spending based on a certain level of sales, then realising with horror you are spending way more than you are bringing in.

You “know” your product or service will sell, although you can’t prove it

Lack of proper market research is a sure fire route to trouble. When you look at an industry you don’t know very well and spot a gap, that gap may actually be there for a reason. The demand may be low, or the necessary pricing might not generate any profit.

Proper market research doesn’t have to be difficult. Find lots of potential customers and ask why they buy from their current choice and what would make them switch.

Don’t ask your friends as they won’t want to tell you your idea is stupid. Ask strangers, and even then take their answers with a pinch of salt. You can also do a competitive analysis to establish if there is a real need for your new venture.

You’re going to compete on price alone

Low price high volume is a risky way to do business. It tends to mean higher overheads for less profits, meaning more pressure on your new business. And a customer that switches to you for price alone will leave you just as quickly when a new cheaper competitor arrives.

If the only differentiation you can see in your industry is price, it would be worth looking at other industries. The business model may have been set by the likes of Tesco, but even they don’t take a risk… many supermarkets make their suppliers pay for price cuts and two for one promotions!

You’re going to compete on service alone

When you have only two clients, of course you can offer a better service than your established competitors. But once your order book starts to fill, your service levels will naturally drop. This is fine as long as you have set realistic expectations of level of service all along.

If you have promised higher levels of service for the same price as your competitor, you could end up failing your clients, or working 18 hours a day 7 days a week! Either way, it’s not a sustainable offering. Clients will switch for a mix of reasons, to do with price, service, experience, brand, and how you make them feel.

You don’t have a business goal

Lots of people set up a business because they find themselves out of work, or just fancy working for themselves. That’s OK, but every business plan needs a realistic goal. It gives you something to work towards and helps to focus your day to day activities. Ensure your goal is SMART:

Specific – exactly what do you want to do? You need to be exact. Saying you want to make cakes is too general, whereas making the UK’s best selling cake is specific. Goals are often based around revenue or profit figures

Measurable – you must be able to measure your goal, so you know when you have achieved it. If your goal is to make the UK’s best selling cake, and the current top seller shifts 500 cakes a year, you will have achieved your goal when you sell cake number 501

Achievable – see point one above. Can you really sell one million units? If your goal is clearly unachievable you won’t focus your entire energy onto it. Don’t be afraid to change your goal as your business progresses.

Realistic – it must be a goal you are willing and able to achieve

Time bound – you should set a time period to achieve your goals, for example, to sell 501 cakes by Christmas Day.

When you start a new business, there will be plenty of ups and downs. Having a business plan and goals will help you to stay focused, both when you are run off your feet and when you are struggling, so their value should not be under-estimated.

When you’re developing your business plan it’s easy to get carried away with fanciful financial forecasts, but you’ll only be setting yourself up for a mighty fall. Make sure you remain realistic and your new business will be far more likely to succeed.

To help you work out whether your new business can be a success read our Brilliant or bankrupt? How to work out if your business idea is viable guide.