Due Diligence

CEO Norm Brodsky explains that a complex business plan drawn up for investors can yield unrealistic numbers or mistakes. He suggests that entrepreneurs first write a simple business plan for themselves.

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Street Smarts

You're setting yourself up to fail if you do a FANCY BUSINESS PLAN for investors before you do a simple one for yourself

Ask most people what it takes to start a business and they'll tell you, "Money." They're right--to an extent. Sooner or later, you do need money to get a business up and running. But money isn't the first thing you need, and you're making a big mistake if you focus on raising it before you're ready to spend it wisely.

Unfortunately, that's one mistake a lot of people are making these days, at least judging by the business plans I've been receiving lately. I'm talking about elaborate, four-color, 100-page business plans printed on high-grade paper, with photographs, tables, graphs, pie charts, flow charts, and every kind of number you could ask for. I mean, these plans are gorgeous.

There's just one problem: the numbers don't make sense. No business operating in the real world could ever produce them.

I'll give you the example of a particularly professional-looking plan I received from a husband and wife who were trying to raise $50,000 to start a cookie business. According to the plan, they were going to use that money to take the company's annual sales from zero to $2.9 million in just two years.

Understand, it's extremely difficult to achieve such a rate of growth in any business. It's almost impossible to do it in something like the cookie business with only $50,000 in outside capital. You'd run out of cash long before you hit your sales target. And yet the numbers were all right there in black and white, and they added up perfectly, which immediately aroused my suspicions.

I gathered that the plan had been written by the husband, a guy with very little business experience, using a sophisticated business-plan software package. Looking closer at the numbers, I saw how he had come up with such an outlandish projection. For one thing, he'd plugged in a ridiculously short collection period for his accounts receivable, about 20 days, while figuring he could get away with stretching his vendor payments to 60 days. He'd also underestimated the amount of equipment he needed and assumed he'd be able to lease whatever he wanted on his own signature--without putting up any additional security. None of those assumptions were plausible. If you replaced them with more realistic ones, you'd find that the couple needed at least another $200,000 in outside capital to have a prayer of getting the company's sales to $2.9 million in the second year.

I don't mean to suggest that the guy was intentionally deceiving anybody. Frankly, I doubt he even realized what he'd done. My guess is that, like most people with an idea and a burning desire to be in business for themselves, he was thinking only about the amount of money he needed to drop everything else and get started.

So how do you raise money? With a business plan, right? He'd gone out and bought the software, which had walked him step-by-step through the plan-writing process. Then he'd tweaked the numbers until he came up with a plan that showed the business achieving its goals after two years with just the amount of capital he thought he could raise.

It was all very neat and tidy, and the final document couldn't have looked more impressive. I've been in business almost 30 years, and I've never seen such a plan, let alone produced one. What it contained, however, was not a recipe for successful cookie making. It was a recipe for disaster.

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