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How To Avoid Risky Business Plans

Aug 17, 2007
Financial projections in business plans are the most important and difficult to maintain, because of the uncertainty associated with them. Identify the risk factors while preparing the business plan so that contingency plans can be formulated to avert a crisis. The business investors want to quickly gain the return on the investment, without being deceived by the business plan.

It is not a good idea to be conservative with financial projections at the beginning of the business. Business investors invest money with the sole aim of gaining a suitable return on the investment. The length of time for which the investment is made also influences the amount of money gained. They don't want to lose money or get a low return on their investments. By being conservative in your business plans, you are display uncertainty about how to obtain certain level of sales over a particular time period.

Develop A Sound Business plan
To make a sound business plan consider the market share, which the competitors own and assess how an entry into the market will have an impact on the prevailing trends. Evaluate the overall producing capacity and the number of products, which the company can sell. Avoid calculating the costs of the products as a straight percentage of the revenue, because the company must foresee the competitive advantage of cost reduction before evaluating the revenue as part of the business plan. Be clear about how to price the product or service.

Pricing a product
Never determine the price of the product on the basis of striking margins. It is better to find out what most the customers are willing to pay for the product. The cost of the product should be based on cost of manufacturing, distribution, and what customers are willing to pay. The cost of the product and the profit added to it should not exceed the value of the product, which the consumer perceives it to have.

Keep Fixed Costs Low
Keep the fixed costs of the business low in the business plan financial projections, so that when the sales growth is slower-than-expected the company can recover the costs easily. Perform the cash flow analysis, which indicates the amount of capital required to run the business. By preparing the income and balance sheet projections, assess the performance and growth of the company.

Identify Uncertain Elements
Identify all the uncertain elements of the business plan financial projection. Estimate how the wavering elements will have an affect on the cash flow and determine how much backing is available in times of crisis. Stay focused on the details that make up the business plan. Find the critical elements, which may affect the working of the business. Study all the risks and plan ways to resolve them, if they occur.

Risk factors cannot be ignored in business. A sound business plan provides an in-depth analysis of the risk factors involved and contingency plans to resolve them if they occur.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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