5 Common Reasons Why Business Plans Fail

There are obvious reasons why business plans fail -- missing crucial deadlines for finishing the business plan or drawing unattractive profit projections are just some of those instances that may repel potential investors. On the lighter side, there are also those more subtle reasons that investors and banks lose interest to. By learning these tips, you can avoid the often overlooked mistakes some people usually make when writing a business plan.

1.    Bad business idea

Nobody likes to talk about it, but the main reason why business plans fail is bad ideas. Most ideas look great on paper—but all too often, companies realize they have invested in a bad idea once it is too late.

To avoid this, smart businesses are using “user-driven development” (UDD) to build new businesses. Lots of ideas seem great until you figure out that the market doesn’t actually want your product. In order to ensure that a business idea is sound, entrepreneurs should search for product validation by reaching out to their target consumers before sinking huge amounts of time and money into the project.

Firms that want to innovate with a focus on customers often hold small meetings with the potential end users where they describe the project and then ask users for their opinions. After the first round of discussion, the firm can go back to the drawing board to incorporate the helpful feedback. Second and even third rounds can enhance the final product’s popularity.

Avoid wasting time on a bad business plan by gauging the market sentiment toward your project before investing a significant amount of time and effort.

2.    Employee compensation is not incentive compatible

Business plans can fail because employees are not compensated in a way that aligns the goal of the employee with the goals of the company. For example, if an employee is paid with annual or monthly bonuses then the employee will only do what is good for the company in the short run. Startups and small businesses can offer more customized salary packages than large multinational corporations.

For example, instead of offering a standard salary package of retirement plans, child-care assistance, savings program, determine what the employee wants the most. For example, elderly employees may not be motivated by child-care assistance, so don’t focus on that in their package. Secondly, instead of offering an upfront payment of 2 percent of the company’s stock, offer a salary that pays that 2 percent over several years to ensure that the employee stays committed in the long-run.

3.    Un-balanced team

Another common cause why business plans didn't work out is that the team is not balanced. Say for example a tech business plan that was making a health application for smartphones. The problem is, the team did not have a single developer or IT specialist involved. If the business idea requires 80 percent of the labor hours to be performed by a software programmer, then the team needs at least one developer onboard. It is important to keep in mind that venture capitalists sometimes refuse to fund companies that only have one founder or have unbalanced teams.

4.    Missing financial projection details

The “numbers” are actually the most interesting part of the entire document for most investors. Break-even and return-on-investment (ROI) calculations are also parts of a good business plan. Do not forget to factor in future expenses. For example, if the company needs to purchase new office equipment every three years, then the discounted value of those expenses should be included in the forecasted financial projections. Of course, the figures are only estimates, but they are important benchmarks that can be used to measure the company’s progress toward achieving their goals.

5.    Failure to improve business plan after receiving feedback

Once you have finished writing your business plan, it is a good idea to send it out to at least three people before showing it to potential investors.

Think of these three people as your board of advisors. Ask them to read the plan and look for logical gaps in the content. If one advisor recommends a change that you disagree with, do not ignore his advice. Instead, ask the other advisors for their opinions and then make a decision. Edit your plan according to their constructive criticism, and thank them for their help.