In dealing with business plans and business planning for four decades, I’ve come to know well some very pervasive business plan myths that should be debunked. The business plan myths can create unnecessary hurdles for entrepreneurs and hinder their chances of success. Here are the 10 most common business plan myths that I run into all the time.

Myth 1: A business plan is just for securing funding. Reality: While a business plan can indeed be used to attract potential investors, it serves a broader purpose. It acts as a roadmap for the company’s growth, outlining its goals, strategies, market analysis, and financial projections. A well-crafted business plan provides a solid foundation for decision-making and helps entrepreneurs stay on track.

Myth 2: You only need a business plan if you’re seeking external funding. Reality: Regardless of whether you’re seeking external funding, a business plan is essential for guiding your company’s growth and development. It helps you identify potential challenges, allocate resources, and measure your progress.

Myth 3: A good business plan guarantees funding. Reality: A strong business plan can increase your chances of securing funding, but it is not a guarantee. Investors consider various factors, including the strength of the management team, market potential, and the competitive landscape, before making an investment decision.

Myth 4: Business plans are only for startups. Reality: Both new and established businesses can benefit from having a business plan. For established companies, a business plan can help identify new opportunities, plan for expansion, or reevaluate current strategies.

Myth 5: The more elaborate the plan, the better. Reality: A concise, focused business plan is often more effective than an excessively detailed one. Investors and stakeholders appreciate clarity and brevity, and a well-structured plan that highlights the most critical aspects of your business is more likely to resonate with them.

Myth 6: Business plans are static documents. Reality: A business plan should be a living document that evolves with your company. Regularly reviewing and updating your plan ensures it remains relevant and reflects the current state of your business and the market.

Myth 7: The financial projections are the most important part of the plan. Reality: While financial projections are essential, they are just one component of a comprehensive business plan. Investors also pay close attention to your company’s mission, value proposition, target market, and competitive advantage.

Myth 8: Investors only care about the bottom line. Reality: While profitability is undoubtedly important, investors also consider other factors such as market potential, the strength of the management team, and the company’s ability to scale. Demonstrating a strong business model and a clear path to growth is crucial for attracting investment.

Myth 9: A great idea is all you need to secure funding. Reality: A great idea is just the starting point. Investors look for a solid business plan, a strong management team, and evidence of traction to determine whether your idea has the potential to become a profitable business.

Myth 10: You need a perfect plan before approaching investors. Reality: Your business plan doesn’t need to be flawless before you approach investors, but it should be well-researched and thought-out. Investors understand that plans can evolve, and they appreciate entrepreneurs who are adaptable and open to feedback.

Conclusion: Understanding the realities of business plans and startup investments is crucial for entrepreneurs looking to succeed. By debunking these common myths, you’ll be better prepared to create a solid business plan that paves the way for growth and attracts the right investors.

This is updated from an earlier version.

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What are the critical mistakes in startup financial projections? Here is my list of five critical mistakes. It comes from reviewing more than a hundred possible startups with either detailed projections or pitches and, of course, business plans.

Good news at the bottom: these are much easier to fix than some more common startup problems not related to financial projections.

First: Not linking the three statements.

Income (also called Profit & Loss), Balance, and Cash Flow are interactive. If the model doesn’t reflect change in one of the three with related change in the other two, then it’s incorrect. For example, a change in sales should affect not just profits but also balance and cash. A change in inventory might or not affect cash — depending on whether it’s been paid or remains in Accounts Payable — but won’t affect profits unless there are related expenses for storage etc. Interest on debt is an expense that affects Income and Cash Flow, but not directly on the Balance. Repaying principal on debt affects Balance and Cash Flow but not profits. And so forth.

The image above reflects standard accounting and bookkeeping, also called GAAP (generally accepted accounting principals). In the western world, financial models don’t get the luxury of ignoring GAAP. If they don’t adhere to standards, they aren’t useful, and aren’t even correct.

Second: Assets must always equal liabilities plus capital.

This is the force behind point one, the need to link the three statements. The best test of a good financial model is this essential equation: assets less liabilities equals capital. If it doesn’t, then the model is off. Also, the various related equations: capital plus liabilities equals assets. Liabilities equal assets less capital. These must always be true.

So even simple changes flow through the system and in a good system, those changes reflect properly to the essential equations are always true. If I keep my three projections separate, or have only one or two of the three, then I lose the value of the ultimate error check.

Third: Not understanding how and why profits not the same as cash.

It’s quite natural and so many of us do it: we think of financial projections as profit or loss. But that simplicity is fatally flawed. For example, when a business delivers goods or services along with an invoice to be paid later, that value goes straight into sales and therefore profit and loss; but it is not cash in the bank until it is paid. Profitable companies can go under because they have too much money sitting in Accounts Receivable waiting to be paid — and that doesn’t show up in Profit & Loss. Debt repayment doesn’t show up there either. Not do Accounts Payable or Inventory. Lots of things that cost a business money, and therefore affect cash flow, are not included in the Profit & Loss (also called Income).

Fourth: Underestimating expenses.

Very common problem with projected financials. Many vastly underestimate marketing expenses, admin expenses, etc. A founder should have a reasonable idea of general spending patterns in the industry they are in. I’ve often seen plans projecting 2–5% marketing expenses to sales in web and software industries that spend 30–40% of sales on marketing. I’ve seen plans that show less than $1 million in admin expenses including salaries in a business making 20 million and up in revenues. That doesn’t happen.

The quick key is profits. Real businesses make 5–10% profits on sales, once in a blue moon significantly more than that. Growing business generally make low profits or none at all, because growth and profits don’t normally coexist well. You pick one or the other, not both.

Projections showing high profits are almost always vastly underestimating expenses. The projections show not what a good business it will be, but rather that the founders don’t know the business well.

Fifth: Overestimating Cash

The first problem with overestimating cash is why in the world would you need investment if your business is going to generate these huge levels of cash. If you generate cash, you don’t need investors. And furthermore, if you generate cash, investors don’t want you, because you’ll never need to exit. Bottom line: no, you are not going to generate cash during your early growth stages. Growing startups absorb cash. They generate growth with deficit spending and they need new cash (investment) to finance the deficit.

The other, possibly more important problem, is that these rich cash projections always miss the impact of financing inventory and Accounts Receivable. They don’t understand the sales cycles, and don’t understand the difference between making the sale and getting the money.

The errors compound each other. Failing to include realistic expenses leads to unrealistic profits which then, in the projections, create unrealistic cash.

The good news here…

… is that for a startup, these problems are way easier to fix than problems with the team, the product, the market, the scalability, the barriers to entry, and the path to exit.

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What’s a good business plan? A business plan is as good or bad as its results. The decisions it causes.

Divide this into two parts: First, how can you tell a good business plan after the fact, after time, after the business has been running with it. Second, how can you tell a good business plan before the fact, as just a plan, before the fact, valuating the plan alone without the execution that is supposed to follow.

After the fact:

First and foremost, you value a business plan by its results. Measure its value by the management it causes. Was it easy to follow, track, review, and revise? Were the milestones useful? Were the assumptions reasonable and the results in line with expectations? Were you able to make realistic progress, see the progress as it happened, and adjust for what’s working and what isn’t?

For those business plans used to show to bankers or investors: Did it work? Was it enough? Did it serve its business function? Did you get the approval you sought?

Before the fact:

However, realistically, that’s after the fact and your question is about how to judge the plan before the fact. So, here are factors to look for. A strong business plan…

• A good business plan includes concrete specifics you can track and measure so you can tell how its working at any time. That means major milestones, metrics, tasks, responsibilities, dates, deadlines, etc.

• A good business plan manages the essential numbers based on drivers and realistic assumptions: Sales, costs, expenses, and cash flow. Are projections complete? Are they based on drivers and realistic assumptions? Are you able to track the numbers month by month, and adjust on the fly?
• A good business plan aligns strategy and tactics and execution.

• Includes regular scheduled dates for review and revision.

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How do you feel when somebody steals your idea? It’s a frequently asked question. Here’s my answer.

That happened to me once. A business associate listened to my idea that I shouldn’t have shared in a cocktail party setting, and he went quietly off and executed. I was annoyed because he didn’t invite me to be part of it. That wasn’t flattering. But I got over it.

By the way, that’s not stealing. We don’t own those ideas. Good ideas are like warm summer days. They belong to whoever uses them.

And if I let it go to make myself feel smart during a conversation, that’s my tough luck. As it turned out, the guy who moved on my idea ended up with a business that never took off and always struggled; and I ended up realizing, without the pain and suffering, that my supposed great idea wasn’t so great after all.

That’s another thing about great ideas. Most of them crumble back into reality upon execution.

And beyond that, to go more directly to the real issue: I repeat for emphasis: that’s not stealing. Ideas aren’t owned so they can’t be stolen. All the emotion over this is wasted. It’s just not a thing. Ideas don’t get stolen.

I was annoyed with myself for talking too much. What did I gain by sharing too early? Nothing. It was just making me feel good for how smart I supposedly was. I learned. If you want to execute an idea, shut up.

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(Note: consider this one a guest post from Paul O’Brien, CEO of MediaTech Ventures. It’s his answer to a Quora question “how much money do I need to start.”)

How much do you need to start? Here is Paul’s Answer

Zero dollars.

What “should be” the minimum??

Nothing. It takes nothing to start:

1. Do the Marketing about the industry, competitors, history, potential partners and investors. All that is freely available.
2. Start talking to hundreds of people about the idea, mission, and vision. Validate it. Not with “customers” but with everyone and anyone. Does a 13 year old understand it and think it’s a solid idea? No? Keep talking till you get that right.
3. Build an audience and community online. This is also free by the way, start some social media groups, stand up a landing page and get email subscribers. Go.

Total spent? Zero dollars.

Now, is it worth proceeding? It should be otherwise why would you do anything else?? You should now have confidence and clarity that any spend will be worthwhile.

What do you start with? Build a website. This could be free too, but may cost a bit. A few hundred dollars.

Use that to prove you can grow demand and carve out a market. Also free by the way.

Finally, clear you have something?? Incorporate, which does cost something, to protect it. And start building. Now we’re spending money, but you should be certain of an ROI (return on that) because you have an audience and clarity to who customers would be (and that they’ll pay).

Most founders don’t proceed this way.

90% of startups fail.

Don’t be most founders.

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Why Am I Posting this Here?

I’m posting it here because it’s a good answer to several related questions as well. Such as “how do I start my business with no money” and “what do I do with my business idea” and “how do I check whether my business idea is valid?“ Paul’s makes an important point that many of us who write about startups often miss: what you can do, with or without money, to move forward with a possibility. If you search my blog here and the larger collection of articles on the main bplans site, you’ll find posts on how to estimate starting costs, how to make money on your idea, how to evaluate a business idea, and related. This one is a different approach, well worth adding into the mix.

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Investors look at startup forecasts for concepts, not accuracy. When investors look at your projections, they are looking not for just the numbers, but essential insight into the knowledge, experience, and goals of the founders.

Important: you need to forecast to manage your business. Hard as it is to forecast, it’s much harder to run a business without forecasts. Forecasts become budgets and budgets become spending and you don’t have the luxury of not guessing. You go from guess to truth to revisions to management.

However, this post isn’t about that. It’s about what investors look for.

Investors look at startup forecast for insight

Here are some examples of the insight investors will take from a startup. Investors look at startup forecasts for what’s beneath the numbers. They answer some very important questions.

Do the founders understand the business? Do they know what’s realistic? For example, do they show reasonable and believable levels of, say, marketing expenses to sales, and profits to sales? Do they realize they’re going to wait months to get invoices paid? Do they understand the length of the sales cycle, and what web marketing costs? Do they know what a direct sales team costs? Do they understand margins through channels?

Do the founders understand about investors, exits, and returns? Raw revenue numbers give us a sense of scale and founder’s goals. There’s a big difference between a business trying to grow to $2M in five years and another trying to hit $50M. That’s important not so much for the raw numbers — many times the $2M one is even more likely to get to $2M than the $50M one — as for what it tells us about founders.

Unrealistic projections don’t convince investors to invest; they tip investors off to inexperience. For example, just yesterday I just looked at four business plans projecting 70%, 49%, 48%, and 34% profits to sales in five years. That’s absolutely absurd. Although all four of them show naivete and inexperience, the 34% projection is way better than the 70% projection.

True story: I was present at a presentation where the founder proclaimed, at the beginning, “everybody knows financial forecasts are just BS … so we don’t have one.” Every investor in the room stopped listening at that point. None of them was going to touch that deal, ever.

But there is a silver lining

And, finally, a silver lining: Some fellow investors would disagree with me, but I am quite sure that bad financials are not a reason not to invest in a startup that has the more important factors such as a good team, a strong market, some way to differentiate, and ability to scale. I’ve said several times, in group discussions, that bad financials are the easiest flaw to fix. It exposes a gap in the team, and a weakness; but it doesn’t mean rejection. That is, as long as the founders are willing to acknowledge, learn, and fill that gap.

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Question: How do entrepreneurs without salaries sustain their families and pay bills?

My answer:

As an entrepreneur without salary,

I built a business and supported my family at the same time by continuing to consult in the same field I was developing software for. That’s not unusual. I did not have the luxury of not making an income. When I started Palo Alto Software, we already had four kids and a mortgage. Not making money was not an option.

So that was a lot of work.

It was hard. But it’s what really happens most of the time … entrepreneurs do a lot of work on the side, in between, to build their business without the luxury of working full time for free.

Few investors want entrepreneurs without salaries

I expect founders to work without formal compensation only during the very earliest phases, because they have to. I expect that to be temporary. And when I invest in them, I want there to be enough money to pay them. I don’t believe entrepreneurs without salaries is a sustainable idea as they grow a business. People have lives. They need money.

I don’t like it when founders promise to work for free over any extended period. It doesn’t work. They burn out. They need jobs and income so they quit.

Remember the big myth

The myth I refer to above is that startup founders are supposed to work for free, and that investors want them to work for free, even as there is capital to work with. That’s just a myth. IMO.

Originally posted on Quora:

My answer above has generated half a million view, more than 1,500 votes, and 61 comments so far on Quora, the big question-and-answer site.

And, if you’re curious, check out the other answers to this same question. There are several dozen of them.

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What entrepreneurship skills do you need before you start? Here is my top 10 list, revised for 2021. This isn’t the first such list I’ve prepared, but it is the latest. I don’t think it matches many of the millions of other such lists. That’s fine with me.

Here is my list

1. Empathy. Understand what other people feel, think, and want. You’ll need it to understand your market, develop business offerings, work with employees, customers, social media, everything.
2. Cash flow. Don’t think you can stay financially above water just by selling something for more than it costs you to make it. You have to pay for overhead, fixed costs, employees, etc. You need working capital. If you do b2b you’ll have to finance receivables, waiting for your customers to pay you. If you sell products, you’ll have to buy inventory before you can sell things. And you also have to repay loans, keep up assets, and other stuff. Cash flow is vital. There’s a huge difference between fixed costs and variable costs. This stuff really matters.
3. Listening. An often-undervalued skill. It starts by not talking. And it takes a while to realize, but listening is absolutely essential to selling. The great salespeople listen first, then solve customers’ needs.
4. Dealing with mistakes. You can’t do this without making mistakes. Perfectionists drive themselves crazy. You have to learn from mistakes, analyze, record it in your mind where you can recover it on demand, and then put it away. Mistakes are like boxes on shelves, to be used only when necessary.
5. Sorting through options. You have to be able to understand what knobs you actually have to turn, sort through options, and come up with the best decision that’s actually available, executable, now.
6. Writing simply and clearly. Another often-undervalued skill. Entrepreneurship daily life is a parade of emails, memos, messaging, explanations, and vision.
7. Time management. So much to do, so little time. It’s about choosing the right things to do, when. Not just being busy.
8. Summarizing. You have to be able to start with putting things in the right context, so your listener is oriented. Then figure out what’s most important to the listener (see #1 above, empathy) and start with that.
9. Presenting ideas. Speaking in public, speaking to groups, influencers, social media, etc. Slide decks and presentations. You can’t live without it.
10. Letting go. Closely related to #4 above, dealing with mistakes. You have to stay fresh without assuming that what worked in the past still works, or that what didn’t work in the past doesn’t work in the present. Be able to sort through each new issue on its merits.

Note: the original question asked, on Quora, was “what are the top 10 entrepreneurship skills I should learn before I start my business?” This is my answer.

Wait, what? Nothing about sales?

Not exactly … but if you combine my #1 empathy with my #3 listening, and add in writing well, summarizing, and presenting ideas, you’ve got sales.

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How to pitch a startup idea by email? I scoffed a bit when I saw the question, on Quora. Nobody invests in ideas, I mumbled to myself. And pitching by email? Fat chance.

But then I read the answer here, written by Brett Fox, former CEO of Touchstone Semiconductor, and now a CEO coach.

Here is Bret’s answer:

And the following is Brett Fox’s answer to how to pitch a startup idea by email, on Quora. Direct quote.

When I was feeling really desperate (a common occurrence when I was raising our initial funding), I would build up a list of potential investors I had no way of getting a warm introduction to.

You can learn how to develop a cold email that works too. Just follow these three steps:

Email Pitch Step 1: Narrow the Target

Step 1: The first thing I would do was make sure I was targeting people who were investing in our product area.

It seems obvious. But you’ve got no chance if you target a random group of VCs.

So do your homework and make sure the firm is investing in your business area, and you identify the partner that actually does investments in your business area. Oh, and make sure the firm invests in the stage of operation your company is at.

Email Pitch Step 2: Make your subject line to the point.

In our case, we were making Analog ICs. So my subject line was: Analog IC investment opportunity.

That’s it. You can’t trick people into opening your email. They’re either interested or not.

Email Pitch Step 3: Make your message short.

Introduce yourself and tell them what you’re doing. A key point is don’t try and sell the deal in the email.

You want to provide enough information to let them know what you’re about, but not so much that you’re trying to pitch in an email.. The goal is to get a meeting or a phone call.

So, I did something like this:

Hi Name,

My name is Brett Fox. I am the CEO of Touchstone Semiconductor.

Touchstone is a high-performance Analog IC company (think Linear and Maxim) that achieves profitability with minimal funding.

The founding team, including the design team, are alumni of Maxim. The designers average over 20 years of experience.

We have a term sheet from a very good VC on Sand Hill Road, and we are looking for an additional investor. Please let me know how you would like to proceed.

Best regards,

Brett Fox

Let me break this down for you, so you can understand what we were doing.

Each sentence had a purpose.

Each sentence had a purpose. The sentences in your cold email should as well.

The first sentence was introducing myself and the name of our company.

My name is Brett Fox. I am the CEO of Touchstone Semiconductor.

The second sentence explained what we did, how to think about our company, and how we were different in a meaningful way:

Touchstone is a high-performance Analog IC company (think Linear and Maxim) that achieves profitability with minimal funding.

The two companies I referenced, Linear and Maxim, were considered the two most successful companies in the Analog Semiconductor space. The reference to minimal funding addressed a concern that investors had about the costliness of investing in semiconductor companies.

The third sentence showed that the team was strong:

The founding team, including the design team, are alumni of Maxim. The designers average over 20 years of experience.

The final sentence explained where we were at in the fundraising process:

We have a term sheet from a very good VC on Sand Hill Road, and we are looking for an additional investor. Please let me know how you would like to proceed.

Already having one investor in the bag, especially a highly regarded VC, is a good thing.

So what were the results of this simple, to the point, email?

It worked.

We got meetings with this simple pitch. I think we had about a 20% success rate.

Now we didn’t get an investment with this approach (the traditional warm-introduction approach eventually did the trick), but that’s not the point.

The point is you can get meetings with cold emails. Target the right investors and be direct and you put yourself in play.

For more, read: The Nine Facts Of Fundraising You Need To Know – Brett J. Fox

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The question surprised me: “Is it a red flag for a founder to have a child while a startup is still in an early age?” It’s an odd view on startup founders with children. Enough to prompt me with this blog post. I could summarize my answer with simply, “absolutely not.”

But here’s my more complete answer:

No, of course not. It is in no way a red flag for a founder to have a child while a startup is in the early stage.

This question assumes several common myths about entrepreneurship. None of these is true:

1. That entrepreneurs are more likely to be 18–25 than 25–50 (not true).
2. That entrepreneurs are supposed to ignore everything else in life in single-minded obsession on the business (not true).
3. That having a life is bad for business (not true).

Here’s a general reminder: building a business is supposed to make your life better, not worse. It’s business serves life, not life serves business.

True, many, maybe most, entrepreneurs work like hell for a while, especially at the beginning, seem obsessed, and sacrifice some other elements of life, temporarily. There’s no denying that. But most of those who do (I did) realize later on that having a life actually enhances your business, rather than detracts from it. People are more productive in 8-hour days than 14-hour days. People are more productive when they have the rest of their life, and their people, to provide balance. IMO.

The original came on Quora.com, the question-and-answer site. Here’s the link to that: Is it a red flag for a founder to have a child while a startup is still in an early stage?

Image by Neil Dodhia from Pixabay

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