Are you someone who previously started a business, but it didn’t work out? Some people will go the formal route to launch a business plan; however, it doesn’t always lead to a great outcome. So why do business plans fail? There are a lot of reasons for it to happen.
In this article, I will briefly explain what a business plan is. Also, I’ll go over why I don’t believe they’re effective in today’s world.
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What is a business plan?
A business plan is a formal document that explains what a business is about: What type of services will it offer to the public? How will the plan be executed properly?
Some components of a business plan include:
a.) Who is working on the business ventures?
b.) What are the objectives of the business (the purpose)?
c.) When will the business operations start?
d.) Where will the business operate? (i.e. locally, globally, online)
e.) Why is the product or service needed in the marketplace?
f.) How will the business accomplish its goals?
How are business plans used?
Business plans take place through funding (i.e. raising capital). Some ways to fund a business include:
- Self-funding (i.e. a business owner uses his own money to raise capital)
- Investors and/or venture capitalists
- Banks (i.e. applying for business loans)- It’s a very common method to present a business plan
Reasons why business plans fail
Before I explain why I think business plans are not the best approach, I will lay out nine reasons why they fail down the road. Some of them are easy to understand, while there are some that some entrepreneurs are not fully aware of.
- Entrepreneurs Do Not Understand Their Area Of Expertise
- No Marketplace Demand For The Product/Service
- Not Having The Right People Involved
- Not Understanding How To Market Properly
- Relying On Only One Or Two Customers For Business
- Not Planning For The Short-Term Or Long-Term Potential
- Business Is Not In The Best Location
- Business Scales Too Quickly
- Lack Of Cash Flow
Entrepreneurs do not understand their area of expertise
If an individual is not familiar with their services, it can be difficult to operate a business. A lack of understanding can lead to poor decisions.
They may not know whether to hire or outsource when starting a business. Also, how they spend their revenue can be another factor as they launch the business.
No marketplace demand for the product/service
If there’s no marketplace demand for the service, that can be a huge red flag for an entrepreneur. When you invest time and capital into something that may not be needed, it’s time that potentially could have been spent elsewhere.
Who will need your product or services? If there are not a lot of people who need your service, the demand is not there.
Not having the right people involved
It is hard to run a business if you don’t have the right group of people working there. The people who participate play vital roles in the overall success of a business.
It’s why people with effective leadership skills are positioned to make better decisions. Having the wrong set of people can easily lead to a business failing down the road.
Not understanding how to market properly
Learning how to market your services is crucial to any business succeeding. Without any marketing skills, it’s hard to provide your services to others.
If you don’t have any prior experience in selling, it doesn’t help in running a successful business. A lack of marketing skills can put you at a loss if you don’t have the right team. If you don’t know how to advertise or use social media to market your business, it’s a lot more challenging to run a business.
Relying on only one or two customers for the business
This one is a big mistake a business owner may not understand. Some people think they can do well with one customer- but that’s the wrong approach to take.
When you rely on only one customer, they could decide at any time not to continue using your services. After that, your income stream stops with no more customers to service.
Going back to the marketing approach, it benefits you to market effectively to find as many customers as possible. Even if you lose one customer, you still have multiple customers with whom to do business.
Not planning for the short-term or long-term potential
Oftentimes, businesses don’t plan ahead for long-term growth. Short-term planning helps, but it may not interconnect with the long-term goals of a business.
It’s easy to plan out the first several months (or the first year of business). But, where will the business be in the next three-five years? Will it be profitable, or will it no longer be in service?
It’s why a lot of businesses fail within the first three years of operations. There are not a lot of businesses that may pass five years or longer- usually due to a lack of long-term planning.
Business is not in the best location
Running a brick-and-mortar business in a quiet rural area can be challenging. It doesn’t do a business any good if it’s in the middle of nowhere.
In addition, if a business has no presence on the internet (i.e. a website, social media channels, email list), it’s much more difficult to conduct business these days. Even a simple website can help potential customers locate your business.
In the age of the Internet, it is very important for all types of businesses to be online. A business’s online presence, as well as its location, plays a major role in its success today.
Business scales too quickly
Businesses can make the costly mistake to expand or scale too soon. Things may go well in the short run, but they can quickly fall apart.
For instance, if a business hires a lot of people for a short period of time, they can easily let them go sooner than expected. That may also be the result of not planning ahead for the long-term growth of a business.
My situation at a previous job
At one job I had in the past, a similar situation happened where the company hired a lot of people. At one point, they ended up letting go of a lot of people because they lost a lot of clients in a short period of time.
Without going into many details, it was the result of bad decisions the company made early on. Unfortunately, I was one of those people who got let go at the time.
Even though it was not a good situation, I learned a lot about how businesses can scale too quickly. Without proper planning, it can come back to bite a company down the road.
Lack of cash flow
Cash flow is by far the biggest factor that can make or break a business. Without consistent cash flow, it makes it difficult for a business to operate each day.
When your business has cash flow, it’s so much easier to plan for the unexpected. There may be slower periods of business throughout the year, so you could put some cash aside for a couple of months.
Therefore, it’s a good idea to have some revenue on hand to keep the money flowing. Having problems with cash flow can be disastrous for your business.
Why I believe business plans don’t work
For many people, business plans may help get some ideas down on paper. I don’t think that’s enough to determine whether a business will be successful.
New entrepreneurs will write out business plans for the sake of raising capital. If that’s going to a bank to take out a business loan, that tends to be the case.
But there’s always risk involved in starting any type of business. So writing a business plan may help, but there’s no guarantee the plan will work out as expected.
Some people believe their desired outcomes will happen; however, it seems that the actual results don’t always lead to the best outcomes.
When reviewing a business plan, it may look great when launching a new business. But as I just mentioned, the desired outcomes may never take place.
More so, a business plan may not be looked at again after the first year of business. I always refer to it as being thrown down the trash can.
If you’re looking to start a business, I recommend you take another route. The path I’ve taken does not involve a business plan, and it’s much simpler to get started than ever.
For more information, feel free to send me a message via the contact page. I’d like to help you get on a roll today.
Business plans may have worked well in the past, but not so much these days. It’s harder for people to get funding, and they may end up not making the right decisions as well.
Earlier, I mentioned that the actual results of a business’s success matter more than the expected results. If they want to do it right, they must write clear plans that are tailored to the goals of their business.
If people are able to do that, they can run their businesses more effectively. If done properly, a business plan that is actionable and concise will be of great benefit.
Your Turn: Do you think business plans are beneficial?
I want to get your thoughts on business plans. Do you think business plans help to launch a product or service?
Or, do you think they’re not useful at all? Which one of the reasons listed do you think resonates most with you?
Feel free to share your thoughts by leaving a comment below. I look forward to reading your responses, and I’ll gladly respond promptly.
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Eric is the owner and chief editor of notimekillers.com. He takes great pride in helping people manage their time and grow their businesses. Eric is a firm believer in financial and time freedom, as he believes in financial independence and taking ownership of your time. “Time is your most important asset. It can be your best friend or worst enemy. How you use your time can shape the future you desire to have.” In his leisure time, Eric loves to write and read whenever possible. He enjoys going for long walks outdoors while doing in-home workout videos every week. You can also connect with Eric via LinkedIn.