Which Of The Following Statements Best Describes Free Cash Flow Fatal Flaws in Your Business Plan

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Fatal Flaws in Your Business Plan

A business plan is a blueprint that guides would-be entrepreneurs as they build their new business ventures. From 2008 to 2010, I taught a 20-week business plan writing course at an SBA-affiliated women’s business development organization. We met for three hours every week and the students wrote their plans week by week, guided by the lessons.

When evaluating a business concept, unrealistic expectations or faulty thinking can creep in and undermine planning. Excitement about an idea could distort one’s ability to see potential obstacles. The following are scenarios budding entrepreneurs should beware of.

Unrealistic expectations

While it’s sometimes true that using yourself as your ideal customer is a smart idea, because you understand the value and availability of that product or service, you might misjudge the size of the market and the appeal that can be achieved outside of a select group of true believers.

Not enough information

Confirm the need for your products or services when you research and verify the number of potential customers who have the money and motivation to buy from you.

Furthermore, be sure you understand the purchase process. Who gives the green light to the sale? What is the “sweet spot” price range? Finally, where can potential customers get these products or services now?

Access to customers

Access to customers is everything, and some industries or target customers seem impenetrable. You can identify the right customers, understand how your products or services fit their needs, and know how to price and deliver. But if potential clients don’t have the confidence to work with you because you don’t have support from a trusted source, you’ll starve.

Cash flow overestimation

Usually, companies will not achieve the desired gross sales and/or show a net profit in the first year of operation. Companies that require high start-up costs will especially require long growth periods. The business plan must recognize the potential for negative cash flow and show how fixed and variable costs will be met during that time. One must know how the inventory, payroll and office rent will be financed.

When writing your business plan, conservative financial projections are strongly recommended. Customer acquisition may take longer than expected, and the size of their purchases may be small at first. Moreover, it is possible for a venture to be profitable on paper but still suffer from cash flow problems if customers do not pay on time.

Underestimating initial costs

Developing a reasonable estimate of how much it will cost to get the venture up and running is key. You must be prepared to cover the costs of all permits, equipment, inventory and personnel necessary to perform the work. If you plan to hire employees, it’s important to have a good idea of ​​your minimum staffing needs in advance (you can hire more as revenue increases).

“Magical Thinking” business model.

A business model illustrates how your venture will become profitable. Well-thought-out interactions between marketing, finance and operations processes will drive and sustain profitability, and you need to map out how this will happen. The business model describes the basic functions of the enterprise.

Likewise, the value proposition of your products or services must be articulated. The overall marketing strategy and selected tactics and resources that will promote the value proposition—intellectual property, patent rights, key relationships or capital—will be considered. Sales distribution channels will be described in detail.

Come up with plan B (2009), by Randy Komisar and John Mullins, details the key components of a business model and advises business plan writers to segment their models into subheadings:

  • A revenue model, to describe what you will sell, your marketing plans and how you expect to generate revenue

  • Operating model, for details of where you will operate and how day-to-day operations will work

  • Working capital model, meaning business cash flow requirements. Understanding your cash flow helps you know when money will be available to cover expenses such as rent and wages (this is different from income). A business can generate adequate revenue (sales) and still suffer from cash flow problems.

Your business model will keep you organized and your priorities realistic. Issues such as quality control, receivables collection, inventory management and identifying strategic partners will mean a lot more than your Facebook follower count, for example. Good luck to you and your new job!

Thanks for reading,

Kim

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