The most common mistake in startup business plans is having the profits way too high. There\u2019s no sense whatsoever to priding oneself in projected profits, as in profits you predict your business will have in the future. That\u2019s like having replicas of future Olympic gold medals made and putting them into a trophy case. And in most business settings, it just lowers your credibility. I read 100 or so startup business plans every year, and I\u2019ve getting tired of it.\u00a0I\u2019ve discovered a new 50-50 rule of profitability in business plans, as in, 50% of the plans I\u2019m looking at project 50% or higher profits on sales.<\/p>\n
Pick one: high growth or high startup profits<\/h2>\n
![\"projected-profits\"](\"https:\/\/timsstuff.s3.amazonaws.com\/content\/uploads\/projected-profits-300x292.jpg\")
In real business, there is inherent conflict between high growth and high profits. That is the collective result of lots of small decisions owners make as they choose to spend marketing money or not. Every dollar you keep in profits is a dollar you didn\u2019t spend to generate growth.<\/p>\n
It\u2019s not just coincidence that the history of high-growth online business successes started with losses. Facebook founder Mark Zuckerberg resisted charging membership fees in the early years, when Facebook was losing money but staying free to users. Sure, later, through advertising, Facebook found a way to make money \u2013 but first it had to grow its user base to gain the critical mass that made advertising a practical source of revenue. And Facebook is still free to users. Twitter is still free, struggling to figure out how to make more money, but not even for a second considering charging a fee for participation. LinkedIn is still free, and was free and losing money for years. Revenues came later, after the user base was established.<\/p>\n
And even with more traditional businesses on main street, startups are rarely profitable. There are always expenses before launch, and those cut into profits. And few businesses manage to generate revenue to cover costs from the very beginning. Most have a deficit phase as they gain traction and grow.<\/p>\n
And as they do establish themselves, they still have to decide, dollar for dollar, whether they spend available money on marketing, or save it and keep it as profits.<\/p>\n
Find realistic levels of startup profits<\/h2>\n
Real businesses make five or 10 percent profits on sales, at best. The NYU business school keeps an updated web page that lists profitability by industry<\/a>, with an overall average of 6.4%<\/p>\n Occasionally a very successful startup will come up with something so new that it can, for a while, chalk up very high profit margins. That\u2019s extremely rare. Out here in the real world, though, nobody really makes much more than 5-8-10% or so profits on sales. The real startups might make 15% or even 20%.<\/p>\n Projecting 40%, 50%, and even 60% profitability on sales doesn\u2019t tell me you have a great business; it tells me you haven\u2019t done all of your homework. You\u2019re underestimating cost of sales, expenses, or both.<\/p>\n I find this particularly galling in business plans with some social implications, related to health care, or education. I\u2019ve seen many startups planning to sell something offering huge medical benefits to people suffering from serious medical problems, projecting profits of 100 percent or more. Do you agree with me that this is wrong? Nobody chooses to buy these things. Can\u2019t they charge a fair price, that allows a fair profit?<\/p>\n What would I like to see instead? First, find out average profitability for the industry you\u2019re in. Put that number into your plan. Then explain why your company\u2019s projected profitability is higher. Proprietary technology, specialty niche market, new processes? Okay, I can take that; just be aware of what the normal is, so you know what you\u2019re up against. Please.<\/p>\n Standard financials are available from several vendors, for less than $100 per industry (and here I can\u2019t resist adding that they\u2019re bundled with LivePlan<\/a>,\u00a0my company\u2019s software product. Sorry. I\u2019m an entrepreneur. I can\u2019t help it<\/em>.) You can also get those from Oxxford Information Technology<\/a>, or the Risk Management Association (RMA<\/a>). And some summary profit by industry data is available for free, from sources such as the NYU page above<\/a>.<\/p>\n \u00a0<\/p>\n<\/p><\/div>\n