what are important assumptions in a business plan

What Are the Key Assumptions of a Business Plan?

by Mariel Loveland

Published on 28 May 2019

We make more assumptions in business plans than you might realize. It is, after all, a plan for something you’re going to do, not something that’s already happened. In order to have the most successful business plan, you need to have a few key assumptions that point to certain areas of your business and how it’s going to function. These assumptions attract potential investors, help secure bank loans and help put you on a path to having a profitable venture.

Before making serious decisions about your startup, you must examine the key assumptions in your business plan.

Key Assumptions Definition

In a business plan, a key assumption’s definition is basically the most important who, what, when and how you need to run your business. Every business plan is filled with assumptions. We can’t accurately say whether a business will for sure be profitable or that you’ll be able to pay off your loan in some number of years, but you can make a really educated assumption.

The most important of these assumptions are called key assumptions, and potential investors usually need to see this information before they decide to put in money. Business plan assumptions examples range from financing, consumer base and profitability to management and resources.

Key Assumption 1: Finances

One of the business plan assumptions examples is finances. Do you have the funding to run your company until it becomes profitable? How are you going to pay for all of the expensive things a business requires – this includes office rent, salaries, insurance, products and marketing.

It’s extremely important to include financial projections in your business plan to help convince investors or banks that your company has a realistic path to success. It doesn’t have to be immediate. Companies often take years to turn a profit, and one of the largest mistakes that business owners make is assuming that sales alone will support business operations.

Your business will be most attractive to potential investors if you have enough capital to run until you think you’ll break even. As a key assumption, you should disclose investment figures and loan amounts in your business plan.

Key Assumptions 2: Consumer Base

The key assumptions definition is assumptions that are key (i.e. your business plan is a failure without them). When it comes down to it, nothing is more important to a business than having actual customers. Who are you generating sales from? Are you a "b2b" business (selling to other business) or "b2c" (selling directly to individual customers). Who are the people you’re servicing?

As one of the key assumptions in a business plan, your customer base must be outlined carefully. Yes, a niche business can be successful, but you should really show that there’s enough of a customer base to turn a profit. You should also note the potential to tap into other markets or expand to different types of consumers.

Key Assumptions 3: Need

Your company isn’t worth anything if nobody actually needs what you’re offering. Yes, you might have a certain consumer base, but investors need to know why people will choose your product over others. This is one of the key assumptions in a business plan that might just be the most important of all.

As one of the many business plan assumptions examples, need might require the most research. You’re going to have to look into your competitors – be it locally or nationally – and figure out what makes your product different. Outline the need and how your product fills that hole. If you can’t figure this out, your business will undoubtedly fail.

Key Assumptions 4: Resources

You can’t run a business if you’re short on resources. That’s why this is a key assumption that should be worked into every business plan. You need to make sure you have the resources – whether that’s access to qualified employees or specialized equipment – before securing a loan or funding. No one is going to want to invest in a company that can’t get off the ground.

One of the most dangerous assumptions for potential startup owners is believing you’ll have access to top talent. In reality, that talent might not want to work for you in favor of a fully-funded tech startup with a fat paycheck and some history of proven success. Keep an eye out for talent pools and try to secure some talent before approaching investors.

Key Assumptions 5: Profitability

We might really believe in our products and the value they give our communities and consumer base, but investors really only care about the bottom line: can you turn a profit? Outline this clearly in your business plan. How many months do you think it will take to start becoming profitable. What steps do you have in place to make sure this ultimate goal is realized?

Financial Assumptions and Your Business Plan

Written by Dave Lavinsky

Financial assumptions are an integral part of a well-written business plan. You can’t accurately forecast the future without them. Invest the time to write solid assumptions so you have a good foundation for your financial forecast.

Download our Ultimate Business Plan Template here

What are Financial Assumptions?

Financial assumptions are the guidelines you give your business plan to follow. They can range from financial forecasts about costs, revenue, return on investment, and operating and startup expenses. Basically, financial assumptions serve as a forecast of what your business will do in the future. You need to include them so that anyone reading your plan will have some idea of how accurate its projections may be.

Of course, your financial assumptions should accurately reflect the information you’ve given in your business plan and they should be reasonably accurate. You need to keep this in mind when you make them because if you make outlandish claims, it will make people less likely to believe any part of your business plan including other financial projections that may be accurate.

That’s why you always want to err on the side of caution when it comes to financial assumptions for your business plan. The more conservative your assumptions are the more likely you’ll be able to hit them, and the less likely you’ll be off by so much that people will ignore everything in your plan.

Why are Financial Assumptions Important?

Many investors skip straight to the financial section of your business plan. It is critical that your assumptions and projections in this section be realistic. Plans that show penetration, operating margin, and revenues per employee figures that are poorly reasoned; internally inconsistent, or simply unrealistic greatly damage the credibility of the entire business plan. In contrast, sober, well-reasoned financial assumptions and projections communicate operational maturity and credibility.

For instance, if the company is categorized as a networking infrastructure firm, and the business plan projects 80% operating margins, investors will raise a red flag. This is because investors can readily access the operating margins of publicly-traded networking infrastructure firms and find that none have operating margins this high.

As much as possible, the financial assumptions should be based on actual results from your or other firms. As the example above indicates, it is fairly easy to look at a public company’s operating margins and use these margins to approximate your own. Likewise, the business plan should base revenue growth on other firms.

Many firms find this impossible, since they believe they have a breakthrough product in their market, and no other company compares. In such a case, base revenue growth on companies in other industries that have had breakthrough products. If you expect to grow even faster than they did (maybe because of new technologies that those firms weren’t able to employ), you can include more aggressive assumptions in your business plan as long as you explain them in the text.

The financial assumptions can either enhance or significantly harm your business plan’s chances of assisting you in the capital-raising process. By doing the research to develop realistic assumptions, based on actual results of your or other companies, the financials can bolster your firm’s chances of winning investors. As importantly, the more realistic financials will also provide a better roadmap for your company’s success.

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Financial assumptions vs projections.

Financial Assumptions – Estimates of future financial results that are based on historical data, an understanding of the business, and a company’s operational strategy.

Financial Projections – Estimates of future financial results that are calculated from the assumptions factored into the financial model.

The assumptions are your best guesses of what the future holds; the financial projections are numerical versions of those assumptions.

Key Assumptions By Financial Statement

Below you will find a list of the key business assumptions by the financial statement:

Income Statement

The income statement assumptions should include revenue, cost of goods sold, operating expenses, and depreciation/amortization, as well as any other line items that will impact the income statement.

When you are projecting future operating expenses, you should project these figures based on historical information and then adjust them as necessary with the intent to optimize and/or minimize them.

Balance Sheet

The balance sheet assumptions should include assets, liabilities, and owner’s equity, as well as any other line items that will impact the balance sheet. One of the most common mistakes is not including all cash inflows and outflows.

Cash Flow Statement

Cash flow assumptions should be made, but they do not impact the balance sheet or income statement until actually received or paid. You can include the cumulative cash flow assumption on the financial model to be sure it is included with each year’s projections.

The cumulative cash flow assumption is useful for showing your investors and potential investors how you will spend the money raised. This line item indicates how much of the initial investment will be spent each year, which allows you to control your spending over time.

Notes to Financial Statements

The notes to financial statements should explain assumptions made by management regarding accounting policies, carrying value of long-lived assets, goodwill impairment testing, contingencies, and income taxes. It is important not only to list these items within the notes but also to provide a brief explanation.

What are the Assumptions Needed in Preparing a Financial Model?

In our article on “ How to Create Financial Projections for Your Business Plan ,” we list the 25+ most common assumptions to include in your financial model. Below are a few of them:

For EACH key product or service you offer:

What is the number of units you expect to sell each month?
What is your expected monthly sales growth rate?

For EACH subscription/membership you offer:

What is the monthly/quarterly/annual price of your membership?
How many members do you have now or how many members do you expect to gain in the first month/quarter/year?

Cost Assumptions

What is your monthly salary? What is the annual growth rate in your salary?
What is your monthly salary for the rest of your team? What is the expected annual growth rate in your team’s salaries?
What is your initial monthly marketing expense? What is the expected annual growth rate in your marketing expense?

Assumptions related to Capital Expenditures, Funding, Tax and Balance Sheet Items

How much money do you need for capital expenditures in your first year (to buy computers, desks, equipment, space build-out, etc.)
How much other funding do you need right now?
What is the number of years in which your debt (loan) must be paid back

Properly Preparing Your Financial Assumptions

So how do you prepare your financial assumptions? It’s recommended that you use a spreadsheet program like Microsoft Excel. You’ll need to create separate columns for each line item and then fill in the cells with the example information described below.

Part 1 – Current Financials

Year to date (YTD) units sold and units forecast for next year. This is the same as YTD revenue, but you divide by the number of days in the period to get an average daily amount. If your plan includes a pro forma financial section, your financial assumptions will be projections that are consistent with the pro forma numbers.

Part 2 – Financial Assumptions

Estimated sales forecasts for next year by product or service line, along with the associated margin. List all major items in this section, not just products. For instance, you might include “Professional Services” as a separate item, with revenue and margin information.

List the number of employees needed to support this level of business, including yourself or key managers, along with your cost assumptions for compensation, equipment leasing (if applicable), professional services (accounting/legal/consultants), and other line items.

Part 3 – Projected Cash Flow Statement and Balance Sheet

List all key assumptions like: sources and uses of cash, capital expenditures, Planned and Unplanned D&A (depreciation & amortization), changes in operating assets and liabilities, along with those for investing activities. For example, you might list the assumptions as follows:

Increases in accounts receivable from customers based on assumed sales levels
Decreases in inventory due to increased sales
Increases in accounts payable due to higher expenses for the year
Decrease in unearned revenue as evidenced by billings received compared with those projected (if there is no change, enter 0)
Increase/decrease in other current assets due to changes in business conditions
Increase/decrease in other current liabilities due to changes in business conditions
Increases in long term debt (if necessary)
Cash acquired from financing activities (interest expense, dividends paid, etc.)

You make many of these assumptions based on your own experience. It is also helpful to look at the numbers for public companies and use those as a benchmark.

Part 4 – Future Financials

This section is for more aggressive financial projections that can be part of your plan, but which you cannot necessarily prove at the present time. This could include:

A projection of earnings per share (EPS) using the assumptions above and additional information such as new products, new customer acquisition, expansion into new markets
New product lines or services to be added in the second year. List the projected amount of revenue and margin associated with these items
A change in your gross margins due to a specific initiative you are planning, such as moving from a high volume/low margin business to a low volume/high margin business

Part 5 – Calculations

Calculate all critical financial numbers like:

Cash flow from operating activities (CFO)
Operating income or loss (EBITDA) (earnings before interest, taxes, depreciation, and amortization)
EBITDA margin (gross profits divided by revenue less cost of goods sold)
Adjusted EBITDA (CFO plus other cash changes like capital expenditure, deferred taxes, non-cash stock compensation, and other items)
Net income or loss before tax (EBT)
Cash from financing activities (increase/decrease in debt and equity)

Part 6 – Sensitivity Analysis

If your assumptions are reasonably accurate, you will have a column for “base case” and a column for “worst case.” If you have a lot of variables with different possible outcomes, just list the potential range in one cell.

Calculate both EBITDA margins and EPS ranges at each level.

Part 7 – Section Highlights

Just list the two or three key points you want to make. If it is hard to distill them down, you need to go back and work on Part 3 until it makes sense.

Part 8 – Financial Summary

Include all the key numbers from your assumptions, section highlights, and calculations. In one place, you can add up CFO, EPS at different levels, and EBITDA margins under both base case and worst-case scenarios to give a complete range for each assumption.

The key to a successful business plan is being able to clearly communicate your financial assumptions. Be sure to include your assumptions in the narrative of your plan so you can clearly explain why you are making them. If you are using the business plan for financing or other purposes, it may also be helpful to include a separate “financials” section so people unfamiliar with your industry can quickly find and understand key information.

How to Finish Your Business Plan in 1 Day!

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It includes a full financial model. It lists all the key financial assumptions and you simply need to plug in answers to the assumptions and your complete financial projections (income statement, balance sheet, cash flow statement, charts and graphs) are automatically generated!

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Click here to see how our professional business plan writers can create your business plan for you.

If you just need a financial model for your business plan, learn more about our financial modeling services .

Other Resources for Writing Your Business Plan

How to Write an Executive Summary
How to Expertly Write the Company Description in Your Business Plan
How to Write the Market Analysis Section of a Business Plan
The Customer Analysis Section of Your Business Plan
Completing the Competitive Analysis Section of Your Business Plan
How to Write the Management Team Section of a Business Plan + Examples
How to Create Financial Projections for Your Business Plan
Everything You Need to Know about the Business Plan Appendix
Business Plan Conclusion: Summary & Recap

What Are Key Assumptions of a Business Plan?

A business plan is a document that outlines the strategy and goals of a business.

It serves as a roadmap for the company, helping it stay on track and achieve its objectives.

A key aspect of any business plan is the assumptions it is built on. These assumptions are the underlying beliefs and assumptions that the business plan is based on and that help shape the way the company operates and makes decisions.

In this blog post, we will take a closer look at what key assumptions are and why they are important for the success of a business.

What are key assumptions?

Key assumptions are the underlying beliefs and assumptions that shape the way a business operates and makes decisions.

They can be related to various aspects of the business, including its target market, competitive landscape, revenue streams, and financial projections. These assumptions serve as the foundation of a business plan, and they help the company make informed decisions about its strategy and goals.

It is important for a business to carefully consider its key assumptions, as they can have a significant impact on the overall success of the company.

If the assumptions are not well thought out or are overly optimistic, the business plan may be based on false premises, leading to poor decision-making and ultimately, failure.

On the other hand, if the assumptions are well-founded and realistic, they can help the business navigate challenges and make informed decisions that lead to long-term success.

Why are key assumptions important in a business plan?

Key assumptions are a crucial part of a business plan because they help the company make informed decisions about its strategy and goals.

By clearly outlining the underlying beliefs and assumptions on which the business plan is based, a company can better understand the potential risks and opportunities it may face, and make decisions accordingly.

For example, if a company assumes that its target market is a specific demographic with certain buying habits, it can tailor its marketing efforts and product offerings to meet the needs and preferences of that market.

If this assumption is incorrect, the company may struggle to reach its target market and may not be successful in selling its products or services.

In addition to informing decision-making , key assumptions can also help a company set realistic goals and financial projections.

By basing these projections on well-informed assumptions, a company can better understand the resources and investments it will need to achieve its goals and can allocate these resources accordingly.

In summary, key assumptions are a vital component of a business plan, as they help shape the direction and strategy of the company and inform decision-making and goal-setting.

It is important for a business to carefully consider and review its key assumptions to ensure that they are well-informed and realistic, to increase the chances of success.

Examples of key assumptions in a business plan

There are many different types of key assumptions that can be included in a business plan.

Here are some examples.

Target market assumptions

These assumptions relate to the characteristics and behavior of the customers that a company is targeting. For example, a business may assume that its target market is primarily young, tech-savvy individuals who are interested in sustainable products. This assumption would inform the company’s marketing efforts and product development.

Competitive landscape assumptions

These assumptions relate to the competition that a company may face in its industry. For example, a business may assume that there are several well-established competitors in its market and that it will need to differentiate itself to succeed. This assumption could influence the company’s pricing strategy and marketing efforts.

Revenue stream assumptions

These assumptions relate to the sources of income that a company expects to generate. For example, a business may assume that it will generate revenue from sales of its products, as well as from services it provides to customers. This assumption could inform the company’s pricing strategy and sales efforts.

Financial projections

These assumptions relate to the company’s financial performance and projections for the future. For example, a business may assume that it will achieve a certain level of sales and profit margins in the coming year, based on its target market, competitive landscape, and revenue streams. These assumptions would inform the company’s budget and resource allocation.

Considerations for making key assumptions in a business plan

When making key assumptions for a business plan, a company needs to consider several factors to ensure that the assumptions are well-informed and realistic.

Here are some key considerations.

A company needs to gather as much information as possible about its target market, competitive landscape, and other relevant factors. This can involve conducting market research, analyzing industry trends, and consulting with experts. By basing its assumptions on solid research, a company can increase the chances that they are accurate and well-informed.

Conservatism

While it is important for a business to be ambitious and strive for success, it is also important to be realistic and avoid making overly optimistic assumptions. By being conservative in its assumptions, a company can better manage its expectations and be better prepared to handle challenges and setbacks.

Flexibility

It is also important for a business to be flexible and open to adjusting its assumptions as needed. As the business grows and evolves, it may become clear that certain assumptions are no longer valid or accurate. By being open to revising its assumptions, a company can better adapt to changing circumstances and remain agile.

Tips for reviewing and updating key assumptions in a business plan

Once a business has established its key assumptions, it is important to regularly review and update them to ensure that they are still relevant and accurate.

Here are some tips for reviewing and updating key assumptions.

Regularly review and assess the accuracy of your assumptions

It is important to regularly review and assess the accuracy of your assumptions, especially as your business grows and changes. This can involve analyzing market trends, reviewing financial performance, and soliciting feedback from customers and employees.

By regularly reviewing your assumptions, you can ensure that they remain relevant and accurate.

Be open to revising your assumptions

As mentioned earlier, a business needs to be flexible and open to revising its assumptions as needed. If you discover that certain assumptions are no longer accurate or relevant, be willing to adjust them accordingly.

Communicate updates to your team

If you make changes to your key assumptions, it is important to communicate these updates to your team. This can help ensure that everyone is on the same page and working towards the same goals.

Use your updated assumptions to inform your decision-making

Once you have updated your key assumptions, be sure to use them to inform your decision-making and strategy moving forward. This can help ensure that your business is well-positioned to achieve its goals and succeed in the long term.

In conclusion, key assumptions are an important part of any business plan.

They are the underlying beliefs and assumptions that shape the way a business operates and makes decisions, and they inform the company’s strategy and goals.

By carefully considering and reviewing its key assumptions, a company can increase its chances of success by making informed decisions and setting realistic goals.

Some key considerations for making and reviewing key assumptions include researching, being conservative, and being flexible.

By following these tips, a business can ensure that its key assumptions are well-informed, relevant, and accurate, which can help it navigate challenges and achieve long-term success.

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Questioning Key Assumptions in Your Business Plan

Asking the hard questions now will save you time and money in the future

Amanda McCormick is an entrepreneur, marketing consultant, and content strategist who has worked with arts and government organizations, including the New York City Ballet. She is the co-founder of a small marketing agency focused on arts and media companies.

what are important assumptions in a business plan

Is There a Need for Your Product or Service?

Is there a significant customer base, can your business turn a profit, are you the right person to run your business, is your business funded appropriately, the swot analysis, frequently asked questions (faqs).

The Balance / Getty Images

Constructing a business plan is all about looking at and confronting assumptions. Consider the five following key assumptions, and you'll have a business plan—and future—in which you can be confident.

Key Takeaways

A business plan is a document that helps a business communicate and organize its plans and strategies for the future.
Sufficient market research is perhaps the most important part of starting a business.
A SWOT analysis clarifies the business' strengths, weaknesses, opportunities, and threats.
Asking yourself if you have the expertise to run all aspects of the business and whether or not you have sufficient capital is also important.

It's an obvious question, but many entrepreneurs overlook it. Knowing that there's a need for your product is different than having a hunch or a feeling. How do you know the difference? You do the research to find out. First, look at the competition. Are there others who have a similar offering and are they profitable?

Maybe you are breaking new ground -- that's no excuse for saying "there is no competition." Look around for evidence that your proposed business fulfills a concrete need. Without evidence to validate the need for your business, your business plan will fail.

As of December 2021, there were 32,540,953 million small businesses in the U.S.

The second assumption that's important to look at in your business planning preparation is whether or not there is a significant customer base for the business you are proposing. It can be a highly subjective question, as there are a number of successful niche businesses that serve small markets quite profitably. You are well-served to look at the concrete size of a potential market and to assign real dollar values to its potential.

Once you can decide that A) there is a need for your business and B) there is a sizable market for it, you are on solid ground to establish your business's potential profitability. But don't pluck numbers from the air.

You'll need to figure out what your startup costs are, as well as ongoing business-related expenses. You'll need to figure out a pricing structure that your customers will pay and will generate enough cash flow to keep the business running. After generating a set of realistic financial projections, you'll have a solid picture of your business' profit potential.

You believe in your business. You eat, sleep, and breathe it. But you're still going to have to make the case why you are uniquely qualified to start and run the business. As CEO, you'll also need to demonstrate the ability to delegate and find employees to complement your weaker points. First, know yourself, and second, be able to find the right people to bring into your management structure.

Financial projections are the place in the business plan that investors will flip to first. They want to know if you can understand the financial bottom line of running a business, or if your vision is unrealistic. Demonstrate in your business plan that you have a realistic startup budget, and you don't expect revenue to pour in within the first few months magically. Show that you have sufficient capitalization to run the business to break even.

Lack of sufficient capital is cited again and again as one of the top reasons why businesses fail.

A SWOT analysis , which stands for Strengths, Weaknesses, Opportunities, and Threats and is a popular strategic framework for business planners, is a great tool for questioning assumptions. The first two items refer to qualities that are internal to the business. The second two items are external factors. Consider the following in questioning your assumptions in writing a business plan around your fledgling operation:

What does this company do well?
What are our assets?
What expert or specialized knowledge does the company have?
What advantages do we have over competitors?
What makes us unique?
What resources do we lack?
Where can we improve?
What parts of the business are not profitable?
What costs us the most time and money?

Opportunities

What has the competition missed?
What are the emerging needs of the customer?
How can we use technology to cut costs and enhance reach?
Are there new market segments to exploit?
What are our competitors doing well?
How do larger forces in the economy affecting our business?
What is happening in the industry?

What is a SWOT analysis?

A SWOT analysis is a popular strategic framework used by business owners. It is performed throughout a business' existence and asks about its Strengths, Weaknesses, Opportunities, and Threats.

What percent of businesses fail within the first year?

According to data from the Bureau of Labor Statistics, around 1 in 5 (18.4%) of businesses fail within the first year and nearly half (49.7%) fail in the first five years.

Small Business Association. " Frequently Asked Questions ."

Small Business Association. " Selecting a Business That Fits ."

Bureau of Labor Statistics. " Survival of Private Sector Establishments by Opening Year ."

Business Assumptions: Understanding Key Predictions in Entrepreneurship

✅ All InspiredEconomist articles and guides have been fact-checked and reviewed for accuracy. Please refer to our editorial policy for additional information.

Business Assumptions Definition

Business assumptions refer to the expected financial and operational projections a business makes about future market conditions, business environment, and internal company dynamics that influence business decisions and strategy. They are yet-to-be-proven elements considered true for the purposes of planning and budgeting.

Types of Business Assumptions

Some key types of business assumptions that can play a significant role in shaping an entrepreneur’s business model and strategy include revenue assumptions, market size assumptions, and operational expense assumptions.

Revenue Assumptions

Revenue assumptions guide a company’s sales expectations, based on factors like pricing strategies and the volume of products or services they expect to sell. For instance, an ecommerce business may anticipate selling 1,000 units of a product every month, priced at $50 each. This results in a monthly revenue assumption of $50,000. It’s crucial to note that revenue assumptions should be realistic, grounded in market research and business analytics.

Market Size Assumptions

Market size is a critical factor in business forecasting. Market size assumptions can help a company estimate the total demand for their product or service within the target market. For companies launching a new product or venture, this might involve assuming the population size and demographic that will use their product. Similarly, for companies expanding into a new region, market size assumptions would include the potential customer base in that area. Misjudging the market size can lead to either overestimating or underestimating the potential for sales, both of which can negatively affect business planning and financial projections.

Operational Expense Assumptions

Operational expense assumptions encompass the anticipated costs required to maintain business operations, including rent, utilities, wages and salaries, maintenance, and technological infrastructure costs. These assumptions are crucial to controlling costs, planning for growth, and ensuring profitability. For example, a startup in the tech industry may anticipate needing large sums of capital for software development, tech hardware, and skilled personnel. On the other hand, a small retail business would focus more on rent and product costs. Understanding these operational costs will contribute to more accurate financial planning and prevent budget overruns.

The Role of Business Assumptions in Financial Planning

Business assumptions play a pivotal role in the entire financial planning process. They form the backbone of the strategic decision-making process and significantly impact budgeting, forecasting, and strategic planning initiatives of any business.

Budgeting refers to a financial plan that quantifies the expectations of revenues that a business wants to achieve for a future period. It uses business assumptions as a foundation to estimate both income and expenditure for a certain period. For example, a business might assume a specific rate of growth in sales based on factors like past trends, marketing strategies in place, and market research data. These assumptions, in turn, dictate how much can be spent on different business activities within the set budget.

Forecasting

Forecasting, on the other hand, is an estimation or prediction of future developments in business such as sales, expenditures, and profits. Given its predictive nature, forecasting heavily relies on business assumptions. Forecasting might involve assumptions on variables like future demand for the company’s products or services, price changes, cost inflation, or possible changes in the economy or industry. These assumptions help gauge what future performance might look like and guide decision making on matters such as investment in new projects.

Strategic Planning

Strategic planning is a process of setting long-term goals for the business and determining the best approach to achieve these goals. Business assumptions are used in this stage to consider various scenarios and their potential outcomes. For instance, a business might assume a particular market growth rate based on trends, competitor analysis, and industry insights. Depending on these assumptions, strategies are then formulated to achieve set objectives, such as entering a new market, launching a new product, or improving market share.

In conclusion, the role of business assumptions in financial planning cannot be overstated. They provide a well-defined path for budgeting, forecasting, and strategic planning, enabling businesses to make informed financial decisions and strategic choices. They act as a bridge between the present state of a company and its future vision, helping in efficient capital allocation and risk management.

The Impact of Business Assumptions on Risk Assessment

Business assumptions and risk assessment.

When conducting risk assessment exercises, the influence of business assumptions can be substantial. Assumptions help to create a framework for anticipating potential scenarios, providing a sort of guide or roadmap for decision-making. However, these guiding assumptions can color the ways in which risks are perceived and managed.

Consider a company planning a new product launch. It may hold certain assumptions about customer demand, manufacturing capabilities, and market trends. These assumptions will shape how the company perceives potential risks associated with the launch. It might focus on tackling risks that align with its assumptions while neglecting those that don’t.

The Pitfall of Over-Optimism

An overly optimistic business assumption could lead to underestimation of potential risks. If a company anticipates high demand for its new product, it may neglect to adequately consider the risks of low customer demand, poor product reception, or the presence of competent competitors. This, in turn, may result in an insufficient contingency plan, increasing the company’s vulnerability to unforeseen circumstances.

Similarly, a business that assumes a seamless manufacturing process may fail to take into account possible challenges or disruptions. It may not adequately prepare for supply chain disruption, equipment failure, or manpower shortage, all of which increase operational risk.

The Danger of Over-Pessimism

On the other hand, overly pessimistic business assumptions may lead to an over-focus on avoiding negative outcomes. This could stifle innovation and aggressive strategic moves, limiting the business’s ability to seize growth opportunities.

A company expecting extremely low demand for its new product might overestimate the potential risks, devote excessive resources to contingency planning, and divert capital from investments in growth-driving activities such as research and development or marketing. This overly conservative approach could lead to missed opportunities and prevent the business from achieving its full potential.

In conclusion, striking a balance between optimism and pessimism in business assumptions is key in risk assessment. A well-considered, realistic assumption can help businesses navigate potential obstacles while still keeping sight of growth opportunities.

Criticality of Validating Business Assumptions

Ensuring the validity of business assumptions is a critical step in strategic planning and decision making. Assumptions, by definition, are subject to scrutiny and must be verified to establish their accuracy. The consequences of unverified or inaccurately-based assumptions can have far-reaching impacts, potentially jeopardizing a business’s competitiveness and overall success.

Methods for Validating Business Assumptions

There are various approaches to validating business assumptions. The choice of method often depends on the nature of the assumption and the context in which it is being applied.

Market Research

One of the most common methods is market research. This may involve surveys, focus groups, interviews, or analysis of secondary data like existing research reports and public market data. For instance, if the business assumption is about customer preferences or behavior, conducting a survey or organizing focus groups may provide insights to either validate or question the assumption.

Furthermore, market research is particularly useful in analyzing external business environment factors. It provides data on market trends, demographics, consumer preferences, and competitor analysis that can help in forming accurate assumptions.

Example of Markdown for Market Research

Hypothesis Testing

Another approach is through hypothesis testing. Essentially, this consists of establishing a null hypothesis that opposes the business assumption. Subsequently, relevant data is collected and analyzed to either accept or reject the null hypothesis.

For example, if a business assumes that a new product will increase sales by 10%, the null hypothesis would state that the new product will not lead to any change in sales. Following this, the company can monitor sales to confirm or disprove their assumption.

Example of Markdown for Hypothesis Testing

These methods, coupled with a persistent and critical approach to the validation process, can prevent the costly implications of inaccurate assumptions, enhancing the decision-making process. It’s vital to remember that business conditions are continually changing, necessitating regular reviews and validations of our business assumptions.

Business Assumptions in Startup Ecosystems

Startups operate in volatile environments with varying degrees of uncertainty, and business assumptions form the structural framework on which their financial modeling and investment pitches are built. Financial models for startups are primarily created to forecast potential revenues and expenditures, identify integral key drivers for growth, calculate the necessity and timing for external funding, and, in the process, model possible financial performance based on a set of assumptions.

Let’s first look at Financial Modeling . In this context, important assumptions usually revolve around the total addressable market size, product pricing, estimated customer acquisition costs, churn rates, revenue growth, and cost structure. It also includes assumptions concerning the competitive landscape and how the startup’s offering would fare against it. These assumptions are quite critical to forecasting the startup’s revenues, costs, cash flow and hence, its profitability and financial viability in the long run.

Parallelly, Investor presentations and Pitches rely heavily on the credibility of these business assumptions. Investors scrutinize these assumptions for their validity, robustness, and flexibility under changing circumstances. The quality and realistic nature of business assumptions act as a mirror, reflecting the strategic acumen and forward-thinking capability of the entrepreneurial team. However, it’s important for founders to balance ambition with pragmatism. While it’s essential to show potential for high growth and attractive returns, over-ambitious or unrealistic assumptions might raise skepticism among investors and might hinder their chances of securing investment.

The implication of business assumptions for early-stage entrepreneurs are far reaching. Not only do they guide the strategic decisions but also help in foreseeing challenges and planning for contingencies. It’s quite common for initial business assumptions to be off-target since they are based on limited information and insights. Over time though, with increasing market knowledge and operational experiences, these assumptions should evolve to become more accurate and reliable. Consequently, it’s critical for startups to regularly re-visit and update their business assumptions, aligning them with their real-time learnings and changing market dynamics.

Furthermore, it’s crucial for entrepreneurs to clearly communicate the basis of these business assumptions to their team and investors. This transparency fosters trust, promotes collective understanding and provides the foundation for strategic alignment across the organization. It also demonstrates to potential investors the team’s ability to critically analyze their business environment, thereby strengthening their confidence in the entrepreneurial team and hence, the startup.

At the end, it’s important to remember, business assumptions are just assumptions. They serve as a guide rather than the absolute truth. Thus, while they can drastically improve the chances of startup success, they should be utilized with caution, flexibility, and a good degree of open-minded skepticism.

Link Between Business Assumptions and Sustainable Business Models

Understanding the link between business assumptions and sustainable business models is crucial for business longevity.

The Role of Business Assumptions in Creating Sustainable Business Models

In creating a sustainable business model, it is critical for businesses to establish accurate business assumptions. This is because the underlying assumptions will carve the path for the business’s approach to maintain economic, social, and environmental value over the long term.

For instance, assumptions about customer preferences can influence the business’s strategy in offering eco-friendly products. If the business assumes that the customer base values environmental stewardship, it might adopt a model based on the offer of sustainable goods. This impacts resource utilization, easing pressure on finite resources by supporting more ethical supply chains.

Business Assumptions Impact on Long-term Viability

Moreover, business assumptions regarding costs, revenues, and market dynamics can greatly influence long-term viability. If a firm assumes steady growth and stable market conditions, it is likely to focus on expanding operations and increasing revenues. However, these assumptions might not hold in times of economic downturns. So businesses need to constantly rethink and reevaluate their assumptions, adapting their strategies to reflect the realities of their operating environment.

The Influence on Corporate Social Responsibility

Business assumptions also play a considerable role in shaping a business’s Corporate Social Responsibility (CSR) initiatives. If a firm assumes that their stakeholders value CSR, the business model might incorporate CSR initiatives to drive sustainability. This impacts not only environmental sustainability but also social sustainability. By making such strategic decisions, businesses can enhance their reputation, drive customer loyalty and ultimately secure their market position.

In summary, the assumptions a business operates under may significantly affect the formulation and success of their sustainable business models. Regular review and adjustment of these assumptions allow for a more accurate, resonate, and ultimately successful approach to sustainability.

Guidelines for Making Reasonable Business Assumptions

When crafting business assumptions, the ultimate goal is making them as reasonable and realistic as possible. A well-reasoned assumption lies at the heart of any prudent business decision. Here are effective guidelines to follow:

Adopt a Conservative Approach

It is wise to err on the side of caution. Over-optimistic assumptions can spiral into unattainable goals and failed operational plans. Therefore, a conservative approach is often best. For instance, overestimate your costs and underestimate your revenues. This stance creates a buffer for unpredictable market events and uncontrollable factors that might increase your costs or decrease revenues.

Consider Current Market Trends

To make the most realistic assumptions, current market trends must be considered. This means regularly monitoring and familiarly understanding your industry trends while keeping an eye on the broader economic landscape. Your assumptions should align with these trends. For instance, if the trend shows a decline in the market segment that corresponds to your product, it would be unrealistic to assume robust growth in your sales.

Regular Review and Update of Assumptions

Business assumptions should never be stagnant. As you gather more data, and as the business climate evolves, your assumptions should, too. Regular reviews and updates of your assumptions can help significantly in keeping your business strategy relevant and realistic. It also allows you to assess view your business situation from different angles and make swift pivots when necessary.

Sound Underlying Logic

Every business assumption you make should have a sound underlying logic. It shouldn’t merely be a number picked out of thin air. When setting assumptions, make sure to document the reasoning behind each one. This approach allows for healthy discussion and challenge of the figures and underlying methodologies.

Adopting these guidelines helps create business assumptions that reflect reality and are defensible, increasing the likelihood of creating a viable and successful business strategy.

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Planning, Startups, Stories

Tim berry on business planning, starting and growing your business, and having a life in the meantime., the value of business plan assumptions.

Identifying assumptions is extremely important for getting real business benefits from your business planning. Planning is about managing change, and in today’s world, change happens very fast. Assumptions solve the dilemma about managing consistency over time, without banging your head against a brick wall.

Assumptions might be different for each company. There is no set list. What’s best is to think about those assumptions as you build your twin action plans.

If you can, highlight product-related and marketing-related assumptions. Keep them in separate groups or separate lists.

The key here is to be able to identify and distinguish, later (during your regular reviews and revisions, in Section 3), between changed assumptions and the difference between planned and actual performance. You don’t truly build accountability into a planning process until you have a good list of assumptions that might change.

Some of these assumptions go into a table, with numbers, if you want. For example, you might have a table with interest rates if you’re paying off debt, or tax rates, and so on.

Many assumptions deserve special attention. Maybe in bullet points. Maybe in slides. Maybe just a simple list. Keep them on top of your mind, where they’ll come up quickly at review meetings.

Maybe you’re assuming starting dates of one project or another, and these affect other projects. Contingencies pile up. Maybe you’re assuming product release, or seeking a liquor license, or finding a location, or winning the dealership, or choosing a partner, or finding the missing link on the team.

Maybe you’re assuming some technology coming on line at a certain time. You’re probably assuming some factors in your sales forecast, or your expense budget; if they change, note it, and deal with them as changed assumptions. You may be assuming something about competition. How long do you have before the competition does something unexpected? Do you have that on your assumptions list?

The illustration below shows the simple assumptions in a bicycle shop sample business plan.

Sample List of Assumptions

Thanks for the good read, Tim. This will be helpful to small businesses to minimize and manage future risks.

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The value of business plan assumptions.

Assumptions might be different for each company. There is no set list. What’s best is to think about those assumptions as you build your twin action plans.

If you can, highlight product-related and marketing-related assumptions. Keep them in separate groups or separate lists.

Some of these assumptions go into a table, with numbers, if you want. For example, you might have a table with interest rates if you’re paying off debt, or tax rates, and so on.

Many assumptions deserve special attention. Maybe in bullet points. Maybe in slides. Maybe just a simple list. Keep them on top of your mind, where they’ll come up quickly at review meetings.

The illustration below shows the simple assumptions in a bicycle shop sample business plan.

Ivey Business Journal

Strategic assumptions: the essential (and missing) element of your strategic plan.

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Stakeholders often approve a strategic plan without scrutinizing the strategic assumptions, the very foundation on which the plan has been built (Sound familiar? As in, “…the value of this derivative, which we call a Collaterized Debt Obligation, is built on the value of the underlying securities.” (which we have looked at…but uh..not very closely). This author sees an inherent danger in such a practice and states that stakeholders need to start scrutinizing the strategic assumptions that underlie the very plan they are being asked to approve.

In the field of strategy, the admission that assumptions are being made in the preparation of strategic plans needs to be acknowledged. Moreover, transparency and discussion surrounding these assumptions need to be viewed as key elements and the responsibility of the strategy creators.

In doing so, the practitioners themselves – be they CEOs, consultants, Chief Strategy Officers, or employees in the Strategy Management Office – will be forced to elevate both their own performance standards and the rigor of the strategy process to a level comparable to that exercised in the fields of science, economics and finance, where the publication and debate of assumptions are the norm. This will pave the way for strategy creators to gain greater credibility and build a stronger voice on executive teams. Finally, it will provide them with the opportunity to increase their contributions in determining direction and forecasting the future performance of the organization.

The reality is that strategic assumptions form an identical, underlying foundation for the strategic plan. They underpin everything contained therein – and hence reflect the vision, strategic map, performance targets and project portfolio which subsequently follow. The problem is that in the field of strategic planning, the assumptions that have been made are almost never clearly documented or highlighted. As a consequence, they are rarely scrutinized or challenged as they should be.

Too often, shareholders, employees and other major stakeholders unnecessarily invest time, money and energy in supporting an organization’s vision and strategic plan, not recognizing that the vision and plan were doomed to fail from the day they were conceived.

This article posits that the identification and in-depth analysis of an organization’s strategic assumptions need to become an integral part of the strategic planning process, and that the presentation of these underlying strategic assumptions should become an implied and required part of any written strategic plan.

The rationale for preparing a set of strategic assumptions

Financial analysts examining a set of projections insist on seeing a complete and detailed set of financial assumptions. These assumptions represent the raw material — the opinions, beliefs and more often, the hopes, of the management team — on which the projections are based. They usually receive very close scrutiny, especially since financial projections are only as valid as the assumptions upon which they are based. If the assumptions are deemed unrealistic or otherwise questionable, so are the projections. Analysts also understand that while financial projections can be manipulated, clearly presented financial assumptions cannot.

It is not just in the realm of finance that stakeholders demand to see assumptions. In almost all other fields, be they marketing and sales, or even engineering, science and economics, the assumptions used for future predictions are the first element to be examined and rigorously challenged.

Generally, this is not due to management duplicity – although in certain cases that cannot be ruled out. After all, it is easier to defend a set of financial projections when the financial assumptions are not attached; that is the reason financial analysts insist on receiving them. Likewise, it is easier to defend a strategy, business model, value proposition, value chain network, etc. when interlocutors are not aware of the underlying assumptions.

A major reason for the absence of a set of strategic assumptions is that often senior management does not recognize that assumptions are, indeed, being made. They genuinely believe that future markets, competition, customer needs, etc. will evolve exactly as they are expected to. The resulting “group think” – valid and well-founded or not – is therefore not viewed as a set of assumptions at all. It is viewed as fact, the most dangerous assumption of all!

Given today’s shift towards greater transparency, tighter governance, greater accountability for board members, and most importantly, the high levels of uncertainty about tomorrow, next quarter or next year, the business community requires a new paradigm for preparing and certifying a plan as “strategic.” Quite clearly, the moment has come to recognize that the content of any organization’s strategic plan is incomplete unless a complete set of strategic assumptions are included.

Preparing a set of strategic assumptions

The contents of an organization’s business plan often reflect the difficult choices made by management during the strategic planning process. The identification and discussion of the key issues are not intended to generate right or wrong “answers;” rather, they represent choices and shared points-of-view about what the team believes will happen. Together, they form a set of approximately 12-15 strategic assumptions upon which management intends to build its strategic plan and business.

Because all markets and organizations are unique, there is no universal set of strategic questions that must be posed when assembling a business plan. Indeed, a major challenge in strategic planning is the identification of the major questions an organization needs to address. Likewise, there is no universal set of strategic assumptions that must absolutely be generated and covered in every organization’s strategic plan. There are, however, generic areas where strategic assumptions generally must be made and which stakeholders should realistically expect management to disclose:

The category “Background of Shared Obviousness” makes explicit the existing, but often hidden strategic assumptions (or shared beliefs) that emerge from conversations and discussions that take place during the strategic planning process.

Shared beliefs about who the company is and beliefs on how it must operate in order to be successful are often seen as “obvious” by the participants and are rarely challenged, unless captured in real-time – often by a consultant, facilitator, or other outsider present –during the strategic planning sessions. Simple examples include:

These types of assumptions are very powerful and can be the sources of best practices, historical wisdom, norms of positive organizational culture or, alternatively, barriers to change. They can epitomize strategic and organizational rigidity, and guarantee that mistakes of the past are likely to be repeated. As with all strategic assumptions, this category of assumptions is not, by definition, positive or negative. It is, however, crucial that they be identified and recognized as being merely assumptions, not fact. They should also be made explicit, challenged, and only retained if they remain valid in the context of the future of the market and not as remnants of the past.

An example: The importance of a single strategic assumption

Let’s consider a simple example and examine the role of just one key strategic assumption: the strategic assumption about the future structure of an industry.

Imagine that we are considering investing in a relatively small steel company, “X”. There are major differences in the strategic assumptions X’s management team might make about the future development of the global steel industry. Will the business plan for the company be built upon the strategic assumption that:

The steel market will be dominated by a few global players, with all other contenders seeking to partner or avoid direct competition?
There will be regional consolidation, with key (different) players dominating markets in Asia, Europe and the Americas?
The high-margin steel businesses of the future will lie in specialty steel that serves one or several specific industries (i.e. automotive, aerospace, medical, etc.), thereby allowing for “niche” players?
There is no future in the steel industry for small players; the company needs to reposition itself as a supplier of “materials” (i.e. a supplier of composites, plastics, rubber as well steel) as opposed to being a supplier of steel products exclusively?
All trading of commodity steel products will soon be done through one global web site?

The contents of the strategic plan – and the future success of the company – will largely depend upon which of these, and perhaps a dozen other, strategic assumptions are made.

Lakshmi Mittal, President of Arcelor Mittal Steel, made his own personal strategic assumption about the future structure of the steel industry very clear in the following quote:

“I strongly believe that in the steel industry, scale is a crucial ingredient in the pursuit of value. Arcelor Mittal will be three times the size of its nearest competitor. The steel industry consolidation is under way and I have repeatedly said that by 2015, I expect each of the two to three largest global players to produce 150 million to 200 million tons of steel a year. This compares to 116 million tons produced by Arcelor and Mittal today.” Wall Street Journal, August 3, 2006

In this quote, Mr. Mittal clearly communicates one of his strategic assumptions about the future of the steel industry. The company’s corporate strategy, M&A activities, global distribution and marketing strategies, are all built upon this fundamental strategic assumption.

As potential investors in steel company “X”, we need to know whether and why its CEO agrees or disagrees with Mittal’s strategic assumption. We also need to know which other strategic assumptions that he is making. If he provides us with a complete list, we should be able to do a very accurate and thorough initial screening of the company’s request for funds – before we invest more of our time and energy examining the contents of the business plan.

Other examples of powerful strategic assumptions

In 2002, when one Canadian dollar was worth approximately US $0.65, a shared strategic assumption of almost all Canadian manufacturers was that parity between the Canadian/US dollar was simply unthinkable. In 2008, how have their beliefs changed? What is their strategic assumption of exchange rates for 2013? It is a crucial assumption that will form the foundation of their production strategy for the next five years.
An Asian hydro-electricity corporation built many facilities based upon two strategic assumptions: that there would always be glacial melt waters, and that there would be a predictable monsoon season each year. These strategic assumptions are no longer valid.
One of Jack Welch’s major strategic assumptions while at GE was that the company could not compete in commodity markets. Therefore, during his entire tenure, he moved GE in the direction of product differentiation and value-added services. This “Background of Shared Obviousness” strategic assumption drove GE’s strategic direction for many years.
What is a wine merchant’s strategic assumption around packaging? Will bottles prevail? Will the green movement see Tetrapak packaging make significant penetration in the market? Investment in manufacturing lines will rely on this assumption. Based on these assumptions, will the company perceive itself as a “packager of liquids” or as an “exclusive wine packager”?
What are the strategic assumptions envisioned by a university? Is it a research-based university? Does it serve the global market or is it focused on local population needs? Does it see e-learning as the way of the future or does it believe that students will always choose to “come to class”? The types of professors recruited, courses offered and delivery mechanisms all depend on the answers to these questions.
Does the mayor of a town located close to a major urban centre see itself as a bedroom-community or as a fast–growing potential rival which should attempt to attract new industry to locate within its boundaries?
Is the strategic assumption of a country based upon the assumption that economic growth (GNP) is paramount or does it subscribe to the theory of Gross National Happiness (GNH)?

Examples of the strategic assumptions adopted by the individuals, teams, organizations and nations in the above cases will determine their future plans and all the actions, projects, programs that will follow. We, as stakeholders in any of them, should be able to identify the strategic assumptions that have been made without having to try to read between the lines of a strategic plan. They should be clearly and proudly highlighted for all to see, for Strategic Assumptions show how we view the world, how we view ourselves, and who we really are.

Publicizing strategic Assumptions: The tipping point

It is unlikely that all CEOs will voluntarily choose to publish their strategic assumptions for evaluation overnight. Divulgence will only occur when important stakeholders demand to see them included as outcomes of the strategic-planning process and included as a separate item in the contents page of the plan.

There are several benefits which result from demanding to see the set of strategic assumptions included in a strategic plan:

Inclusion facilitates the analysis of any organization’s business plan by a financial institution, venture capitalist or angel investor. The risk of making a bad investment will be reduced if the investors understand and share the strategic assumptions of the organization’s management team.
Differences in points-of-view about strategic assumptions are the source of many of the conflicts that arise between investors and company management – and within a management team itself. Strategic assumptions represent the shared values, beliefs and vision of the management team. Demanding that they be included in a strategic plan will force management teams to hold the difficult internal conversations required and that allow them to uncover, challenge, and capture their shared assumptions.
Knowing they need to exit a strategic planning process with a complete, shared set of strategic assumptions forces a management team to use a much more rigorous strategic planning process.
Face-to-face, it is very difficult for most people to defend strategic assumptions which are ungrounded or that they do not believe or share.
Developing and debating strategic assumptions with groups of employees is an excellent way to gain buy-in and commitment to the organization. Having to declare and justify the assumptions upon which a plan is built means that it is difficult for a CEO to impose his or her views. With increased levels of employee buy-in, there is a greater probability that the strategic plan will actually be implemented.
By presenting strategic assumptions for rigorous debate and analysis, the probability is minimized that investors, employees, management and any other stakeholders will waste time, money and energy on trying to implement plans that have little chance of generating the promised results.

Strategic assumptions have been missing from the strategic planning lexicon for too long. It is time to put them in their rightful place.

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Business Plan Assumptions

Financial projections business plan assumptions.

All financial projections are based on business plan assumptions. Listed below is a selection of the most important assumptions which need to be considered and decided upon when using the Financial Projections Template to produce the financials section of your business plan.

Business Plan Assumptions List

Inflation rates and foreign exchange rates, sales and marketing, cash collection, distribution, research and development, fixed assets, gross margin, operating expenses, depreciation.

You need to prepare a business plan assumptions sheet as part of your plan, however, the important point to remember is that the assumptions should be kept simple and to a minimum, to avoid over complicating the financial projection. Remember this is planning not accounting. The calculation of key assumptions is further discussed in our financial projection assumptions post.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

Strategic planning: managing assumptions, risks and impediments

Assumptions Introduce Risk

At a minimum, the planning process must involve an evaluation of the impacts that the strategy will have on the business to determine if it will actually help accomplish the outcomes intended. That is the absolute minimum requirement.

The strategic planing process is the one key point to get in front of idle supposition and truly manage assumptions, risks and impediments. When strategy is well developed, there will be an actual plan for implementation associated with the strategy. A holistic plan defines goals that support the strategy and addresses the operational tactics that will accomplish the goals. No business possesses a crystal ball to know exactly what will happen in the economy, financial markets or competitors next bold moves. That means that business assumptions are a necessary evil.

Given that we must rely upon certain assumptions to put strategic plans together and that risk will always be present (as will natural impediments to execution of strategy), the following sections will explore each of these factors at the planning level…beginning with a definition of terms and ending with approaches to better manage process.

What is an assumption in strategic planning?

The dictionary defines an assumption as follows: “ something taken for granted; a supposition ”.

Assumptions form the basis of strategies, and those underlying assumptions must all be fully vetted. Testing strategic assumptions requires allowing those involved with planning to back away from the “givens” and challenge them to ensure the team is not assuming the rosiest of scenarios on which to base strategy.

Considering that the synonyms for the word “assumption” includes words like “hypothesis”, “conjecture”, “guess”, “postulate” and “theory” the concept takes on a more weighty meaning in the strategic planning process. Yes, assumptions are beliefs we take for granted, but they can be no better than guesses in many cases.

Assumptions are not always justifiable. Defending an assumption may be difficult, as facts are not always available to support the belief. That does not mean that they are incorrect, but it does underscore the challenge assumptions present in planning. In fact, assumptions are particularly difficult to even identify because they are usually unconscious beliefs.

An assumption about assumptions:

One can safely assume that if an assumption is sound, the inferences and conclusions associated with the assumption will also be sound. Unfortunately, the reverse is also safe to assume.

What is a risk in strategic planning?

As a noun, risk means something that may cause injury or harm or the chance of loss or the perils to the subject matter. As a transitive verb, risk means to “expose to hazard or danger” or “to incur the risk or danger of”.

In strategic planning, the definitions applying to both the noun and the transitive verb usage are relevant. A risk might be an event or condition that might occur in the future. Likewise, we may risk financial losses if we bet on an assumption that is incorrect.

An unmitigated risk can become an impediment, so risks must be evaluated in terms of the likelihood they will occur and the impact they will have if they do occur. If the impact/likelihood of a risk is high “enough”, we should identify a mitigation path – as an unmitigated risk can become an impediment later on.

All risk can never be removed from a strategic plan, therefore business planning teams must approach risk management from a Cost / Benefit perspective. Business risk mitigation in planning can cost speed, but if risks are addressed early the organization can avoid future impediments.

What is an impediment in strategic planning?

An impediment is something that makes movement or progress difficult. It differs from being a risk in that risks are future-based and an impediment is something that is occurring now.

During the strategic planning process, impediments might be grouped into macro or micro categories. Macro impediments might include: poor culture, business process inefficiencies, lack of job descriptions, no performance metrics and many other general types of issues. Micro impediments might include: core competency gaps, having people in the wrong roles, lack of sufficient tools to support business functions and technology / infrastructure issues.

Knowing business impediments and factoring them into the planning process adds realism to the strategy being developed and the operational tactics needed to implement it.

How should risks, assumptions and impediments be identified?

Identification of assumptions.

Strategic planning is a team sport, so working in teams is a great way to approach the identification of assumptions. In small groups, conduct a “round robin” to identify the assumptions within each strategic theme of the plan. Review the assumptions compiled by each team and discuss. This same approach can be used to identify impediments and risks.

The following are questions that assist to identify assumptions:

Is there anything being taken for granted?
Are there beliefs that we are ignoring that we shouldn’t?
What beliefs are leading us to this conclusion?
What is… (this project, strategy, explanation) assuming?
Why are we assuming…?

Identification of Risks

Risks are about events that, when triggered, cause problems. Hence, risk identification can start with the source of problems, or with the problem itself. Remember, risk sources may be internal or external to the organization. Examples of risk sources are: external stakeholders, employees, finance, political and even weather.

Risks are related to the identified threats from SWOT analysis, so that is another valuable reference during the identification process. For example: the threat of losing money, the threat of a major planned product launch being delayed or the threat of a labor strike disrupting critical manufacturing operations. The threats may exist with various entities, most importantly with shareholders, customers and legislative bodies such as the government.

When either source or problem is known, the events that a source may trigger or the events that can lead to a problem can be investigated. For example: banks withdrawing funding support for expansion; confidential information may be stolen by employees; weather delaying construction projects, etc.

Additionally, other methods of risk identification may be applied, dependent upon culture, industry practice and compliance. For instance, objectives-based risk identification can focus on any potential threats to achieving strategic objectives. Any event that may endanger achieving an objective partly or completely can be identified as risk. Scenario-based risk identification – In scenario analysis different scenarios are created. The scenarios may be the alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle. Any event that triggers an undesired scenario alternative is identified as risk. As a final example, a taxonomy-based risk identification can be utilized, where the taxonomy is a breakdown of possible risk sources. Based on the taxonomy and knowledge of best practices, a questionnaire can be compiled and the answers to the questions used to reveal risks.

How should risks, assumptions and impediments be dealt with?

Dealing with identified assumptions essentially becomes a task of translating the assumption to a risk. Once all risks have been identified, they must then be assessed as to their potential severity of impact (generally a negative impact, such as damage or loss) and to the probability of occurrence.

The assessment of risk is critical to make the best educated decisions in order to mitigate known risks properly. Once risks have been identified and assessed, the strategies to manage them typically include transferring the risk to another party, avoiding the risk, reducing the negative effect or probability of the risk, or even accepting some or all of the potential or actual consequences of a particular risk.

Taking the time and caution to identify, asses and deal with the risks and other factors will always be a worthy investment, even when time is of the essence. The vetting of these factors will pay off in smooth implementation of the strategic plan down the line. Your plan can proceed, free of the potholes and other roadblocks that, with a little planning, might well have derailed the best-laid plans.

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Since 2006, Joe Evans has been President & CEO of Method Frameworks, one of the world's leading strategy and operational planning management consultancies. The firm provides services for a diverse field of clients, ranging …

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What Are the Financial Assumptions on a Business Plan?

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How to Obtain Short-Term Financing for a Business

Keys to a successful business pitch, how to write the perfect business plan.

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Business plans are required for all small businesses seeking loans or investors. Financial assumptions and projections are critical components of all business plans. Three universal financial presentations are expected in all business plans.

You must include a projected income statement, balance sheet and cash flow statement for the coming three to five years. Along with the numbers, include a narrative that explains your assumptions and how the line items were computed.

Financial assumptions and projections are critical components of all business plans. They include income and expense assumptions, as well as the inventory and accounts receivable in the balance sheet. Assumptions for balance sheet presentations should be conservative and based on reasonable expectations of asset acquisitions in the coming five years. These will help to construct the assumptions in the cash flow statement.

Construct an Income Statement

Construct your income statement on a month-to-month basis for the first one to two years. You can then switch to quarterly projections for years three through five. One key item dominates this presentation. Base your income and expense assumptions on factual, verifiable information.

For example, if your product competitively sells for $25 to $40, refrain from using a $60 selling price to craft your sales projections. Also, base your sales volume assumptions on realistic statistics, easily verified by a quick market analysis.

Balance Sheet Presentations

Assumptions for balance sheet presentations should be conservative and based on reasonable expectations of asset acquisitions in the coming five years. Of particular concern to lenders and investors are inventory and accounts receivable. Both are functions of sales. Therefore, carefully match your inventory assumptions with your gross income projections.

Unless accounts receivable are typically large in your industry, do not project high balances. Because cash is usually in short supply for small businesses, tying up this precious resource in excessive inventory or accounts receivable can be damaging.

Cash Flow Statement

If you have a new small business or a modest company needing financing or investment, the projected cash flow Statement may be the most important financial assumption you make. While both lenders and investors want your small business to generate solid net income and have a strong balance sheet, cash flow is more important. It is from cash flow that you can repay loans or distribute cash to investors from profits.

Warning when Making Assumptions

Making financial projections based on solid assumptions is wonderful. But you must explain the derivation and calculations to give business plan readers confidence in your data. Don't commit newer entrepreneur mistakes. Many spend hours pouring over data and create reasonable financial projections.

However, newbies often forget or feel inadequate to explain their assumptions in text format. Assuming that loan officers are experts in reading business plans is smart. However, assuming they are experts in your industry is a mistake. Write as detailed a narrative as possible for your financial assumptions, with references that your loan officer can verify.

Diligent Research and Expert Insight

Making valid financial assumptions, and explaining them clearly, can make the difference in receiving the funds you need or suffering rejection by lenders or investors. Often, the primary reason for approval or rejection relates to your display of expertise in your industry. Perform your industry and competition research diligently and with a total focus on becoming an expert. You must then make financial assumptions based on this expertise – and communicate this clearly in your business plan. Your financial assumptions will be challenged. Have knowledgeable answers ready for these challenges.

Growthink: How to Develop Reasonable Financial Assumptions
Inc.: How to Write the Financial Section of a Business Plan
Rodgers Associates: Three Key Assumptions To Make in Financial Planning
PlanWare: Software to Make Good Financial Projections

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Understanding the Role of Business Plan Assumptions in Success

Business plans are the strategic blueprints for entrepreneurs and business proprietors, forming the basis for a successful venture. However, the underlying building stones of these plans – the assumptions, are often neglected. These inferences, drawn based on market trends, consumer behaviour, and financial forecasts, play a pivotal role in determining a business’s feasibility.

Comprehending and analyzing these assumptions becomes a crucial part of strategic planning, equipping entrepreneurs tomake informed decisions and boosting the probability of accomplishing their goals.

Grasping Frequent Usage of Business Plan Assumptions

Financial assumptions serve as the foundation for a foolproof business plan . They assist in estimating costs, revenue, return on investment, and expenses. To maintain credibility, it is vital to make assumptions that are both accurate and realistic. It’s advisable to formulate conservative assumptions to exhibit operational stability and reliability. These assumptions should be rooted in real outcomes, industry standards, and personal experience.

Inclusion of cash flow suppositions in the balance sheet and their explanation in the notes to financial statements is crucial. Sensitivity analysis lets us gauge the impact of diverse scenarios.

Illustration of Assumptions Usage

Financial assumptions are a fundamental element of a well-prepared business plan. These assumptions pave the way for predicting revenue, costs, return on investment, and expenses. It is vital to ensure that the assumptions are precise and align with the evidence provided in the business plan. For maintaining credibility with investors, it’s preferable to formulate prudent assumptions. They need to be based on actual outcomes or industry standards.

It’s essential to include cash flow suppositions on the balance sheet and clarify the usage of funds. To explain your assumptions, the notes to financial statements should provide detailed analysis . Using spreadsheet programs like Microsoft Excel for data analysis can prove beneficial. Adequately communicating these financial assumptions is a sign of a well-structured business plan.

Delving into Financial Assumptions in Business Plan

Value of financial assumptions in plan development.

Financial assumptions form the backbone of business plan development. They guide in calculating costs, revenue, return on investment, and expenses. Assumptions that are accurate and realistic help a business plan in demonstrating reliability and operational experience to potential investors. The basis for these predictions should be actual outcomes from the company or industry standards, and they should be corroborated by historical data and personal expertise.

Sensitivity analysis can reveal how different scenarios could affect these assumptions. To maintain transparency, it is recommended to enumerate the financial assumptions separately or incorporate them within the business narrative.

Contrasting Financial Assumptions with Projections

Financial assumptions are a fundamental component in a meticulously composed business plan. They guide in estimating costs, revenue, ROI, and expenses. For credibility, it is crucial to ensure that assumptions align accurately with the data displayed in the plan. Prudent suppositions are recommended to establish trust with financiers. These predictions should be rooted in real experiences of your own firm or other industry standards, including all cash flows.

Using spreadsheet software like Microsoft Excel along with historical pointers, industry benchmarks, and personal knowledge, you can prepare precise financial assumptions. Performing sensitivity analysis helps in grasping the effect of different situations, thereby enhancing the plan’s efficiency. Communication of financial assumptions is integral for a triumphant business plan.

Examining Key Assumptions for Various Financial Statement

Income statement assumptions.

Financial assumptions play a central role in formulating a comprehensive business plan. The purpose is to aid in predicting costs, revenue, return on investment, and expenses. These suppositions should match the data presented in the plan. It’s advisable to lean towards a conservative approach when presenting assumptions to uphold credibility. Demonstration of practical assumptions can strengthen the trust of potential investors.

It’s critical to base assumptions on real scenarios from your owncompany or industry standards. Tools like Microsoft Excel can simplify the calculation and presentation of financial suppositions and sensitivity analysis can reveal the impact of variable scenarios.

Balance Sheet Assumptions

Financial assumptions form a vital part of a business plan, offering direction for revenue projections, cost forecasts, and return calculations. These assumptions should parallel the information in the plan to ensure credibility. Adopting conservative suppositions illustrates operational stability and helps foster investor confidence. Inferences should ideally stem from your company’s history or industry standards, supported by past data and individual expertise.

Software like Microsoft Excel can efficiently organize and display these suppositions. Explicit communication of these assumptions can effectively convey the company’s financial strategy and outlook.

Cash Flow Statement Assumptions

Financial suppositions are an integral part of a well-curated business plan. They aid in predicting costs, revenue, return on investment, and expenses. Ensuring we use conservative assumptions based on factual data from your firm or industry standards is a critical component in maintaining investor trust. Realistic assumptions about potential operations underpin financial sections of a business plan.

Considering software tools for preparing your assumptions and sensitivity analysis for examining various situations can be beneficial in achieving a well-rounded business plan.

Notes on Assumptions for Financial Statements

Financial assumptions are pivotal in composing a robust business plan. They function as a roadmap for predicting revenue, costs, return on investment, and expenses. Authenticity of assumptions and their alignment with the business plan data can maintain credibility. Prudent assumptions portray operational stability and trustworthiness. These assumptions should be rooted in your personal company experience or that of others in the same sector.

Software programs like Microsoft Excel can simplify the task of preparing financial predictions. Sensitivity analysis lets you explore the impact of varying situations.

Identifying Assumptions Crucial in Developing a Financial Model

Financial assumptions form the cornerstone of a meticulously crafted business plan, offering directions for revenue and cost forecasts, return on investment, and expenses. Assumptions need to accurately mirror the information outlined in the plan. Conservative suppositions are advisable to sustain credibility. Realistic assumptions are central to the financial portion of a firm’s business plan as scrutinization from investors is common.

Relying on actual results from market analogues or similarorganizations is optimal. Assumptions about the flow of money into and out of the organization should feature in balance sheet related data, while cash flow assumptions should highlight areas of expenditure. Employing spreadsheet applications for accurate assumption management and analysis is advisable. The notes to financial statements should offer insight into the reasoning behind assumptions. Sensitivity analysis can elucidate the influence of diverse circumstances.

Effective assumption communication within the narrative or a dedicated financial section contributes significantly to an accomplished business plan.

Steps to Prepare Your Business Financial Assumptions

Examining current financials.

Financial assumptions offer the blueprints needed to forecast various facets of a business plan such as costs, revenue, ROI, and expenses. Ensuring the credibility and accuracy of these suppositions is imperative. They should be derived from empirical data from your organization or industry standards. Customer trust is maintained when balance sheet inclusions cover all aspects of cash flow, and there is a clear outline of fund utilization.

Using applications like Microsoft Excel and offering detailed explanations in the notes to financial statements, you can conveniently communicate the fiscal details of your business plan.

Establishing Financial Assumptions

Financial suppositions provide a roadmap for forecasting the economy of a business plan, like costs, revenue, ROI, and expenses. Accuracy and reflection of the business plan information are integral to building credible suppositions. It’s important to portray realistically calculated assumptions in the financial section of a business plan to establish investor trust; these should be based on your own company experience or industry benchmarks including both types of cash flows.

Spreadsheet software can assist in preparing these assumptions accurately, and sensitivity analysis can elucidate the outcome of diverse scenarios. Assurance of effective financial assumption communication within the narrative or financial section of the plan is key to success.

Projecting Cash Flow Statement and Balance Sheet

Financial assumptions lay the groundwork for well-crafted business plans, serving as guides to calculate costs, revenue, ROI, and expenses. Assumptions need to be both precise and credible in their formulation. All cash flows should feature on the balance sheet, while expenditure must be highlighted in the cash flow assumptions. Detailed explanations of these suppositions in the notes to financial statements are also necessary.

Leveraging tools like Microsoft Excel for analysis and sensitivity evaluation can boost the reliability of your financial assumptions. Concise communication of these assumptions forms an essential part of a comprehensive business plan.

Visualizing Future Financials

Financial assumptions form an important part of a detailed business plan. These predictions aid in estimating costs, revenue, ROI, and expenses. By offering conservative assumptions, businesses can uphold investor credibility. Suppositions should ideally stem from your company’s history or industry standards, backed by past data and personal expertise.

Utilizing bullet points or a separate financial section can enhance understanding of these financial assumptions, depicting operational maturityand boosting reliability.

Conducting Calculations for Assumptions

Financial suppositions form the bedrock of a well-composed business plan, guiding the forecast of costs, revenue, ROI, and expenses. Ensuring these assumptions align with the information in the plan maintains investor trust. Basing assumptions on your company’s performance or industry standards is recommended. Detailed cash flow model and accurate financial statement notes help demonstrate fund allocation.

Spreadsheet programs and sensitivity analysis can help fine-tune the prediction of these assumptions.

Performing Sensitivity Analysis

Sensitivity analysis is a crucial step in developing a business plan. By observing the effects of different scenarios, businesses can dig deeper into the possible risks and uncertainties tied to their assumptions. Take a tech startup analyzing the effect of varying market penetration levels or customer acquisition costs on their revenue projections. Sensitivity analysis allows ventures to evaluate the feasibility of their business model and make more knowledgeable decisions.

These analyses helpbusinesses spot potential challenges and adjust their blueprints accordingly, guaranteeing more trustworthy and pragmatic business plans.

Highlighting Section Offers

Financial suppositions form a crucial element of a well-composed business plan. They provide a basis for forecasting costs, revenue, ROI and expenses. To fortify investor credibility, assumptions should be rooted in your personal company experience and industry standards. Detailed cash flow assumptions and prescriptive financial statement notes serve to showcase potential fund utilization. Sensitivity analysis enhances the understanding of diverse scenarios.

To achieve a successful business plan, it’s recommended to use a spreadsheet program for proper financial management and include these assumptions in the narrative or a dedicated financial section.

Summarizing Financial Aspects

In any well-constructed business plan, the role of financial assumptions is pivotal. These suppositions guide cost and revenue estimates, return on investment, and expense forecasts. Accuracy and realism in these predictions are essential to maintain credibility. Investors often scrutinize the financial section of a business plan – hence, it’s advisable to use realistic assumptions. Basing predictions on your own company records or industry standards ensures significant credibility.

Clarity canbe achieved by including cash flow predictions and detailed explanations in the financial statements. Software like Microsoft Excel can be used for managing these assumptions.

Finally, ensuring lucid communication of the financial suppositions forms a significant part of a successful business plan.

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#5 Common Assumptions Made About Businesses Even after making profits, it often takes months or even years to pay off the initial investments

By Baishali Mukherjee • Nov 4, 2017

Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

Assumptions are ideas that we presume to be true before taking decisions. Assumptions are also made in businesses for developing a strategy, planning and making decisions. These conjectures are generally standardized as disclosure of uncertainty and risk.

Business, in most cases, occurs in an unsure setting and assumptions are necessary to move ahead with stratagem. Documenting assumptions help in recognizing threats.

Often, you come up with fresh ideas after brainstorming probable assumptions that will help you in improvising your business strategies.

Here are some of the common types of business assumptions:

Even after making profits, it often takes months or even years to pay off the initial investments. Nilesh Biswas, Founder of Calcutta Skyline, a realty consulting firm and My Classroom, an education startup, believes enterprises fail because owners feel they can support the business operations on sales.

"Imagining sales volumes to be more than adequate for making a profit in next few years thereby helping you meet your debt service obligations, is a chimera. If you have sufficient capital to run the business until break-even, reveal that information in the plan. Otherwise, give the investment figures or loan amount you'll require to start off the business," he advised.

Customer Base

The next major assumption is the belief that consumers will be keen to buy your products or services, generating sufficient sales to make profit for the long run. Biswas wants your business plans to exhibit more figures as potential customers than required, as all will not buy from you and many will buy from rivals.

"Definite formulae do not exist to calculate this number; the surplus potential buyer base should be substantially more than the sales need. If 100 people are needed to buy from you each day, plan on the requirement of an exponential number, about five to 10 times the number wanted," he informed.

The assumption that key talent will be available is a dangerous one. According to Anuj Dhawan, Founder of Ridenest, an app targeted to ensuring women safety on public places, quality talent pool becomes a challenge. "The VC-funded fat pay-checks have made getting talent for bootstrapped companies quite a struggle. We have spent significant time in curating the people who would like to work with us," he shared.

Profitability

Profitability is the ambition of every entrepreneur. However, the assumption must be validated by market research, financial planning and sales projections as sales is not the only factor determining profitability.

"After calculating the development and overhead costs, reassess the price to pay off your start-up costs and then start thinking of profit. Either decide on a pricing strategy to create high sales volumes by selling at a low price or capitalize on profit margins with a higher price," he explained.

Management Expertise

Products are not created automatically and companies do not run themselves. Proceeding on a plan that the founders alone can run a business profitably leads invariably to disappointment. According to R. K. Agrawal , an independent business consultant who was the Managing Partner in S. R. Batliboi & Co ., the creators can make the brightest of products or gadgets that exist in the market but that doesn't mean they are armed with organizing, accounting, marketing, finance, legal, tax and other skills required to run a business.

"A business plan should lay bare that the founders while excelling in product making or service delivery, have planned for resources to manage other verticals of their business," added Agarwal, who has over 40 exposures in industries, including Steel, Paper, Cement, Automobiles, Textile, Milk & Dairy Products, etc. both in India and abroad.

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How Financial Assumptions Can Make Or Break Your Business Plan

May 9, 2022

Adam Hoeksema

A business plan is only as good as its financial assumptions. These are the key input data that your financial projections will extrapolate from and will form a picture of the future of your company. With a robust method of researching for these assumptions, and then the corresponding analysis of the available data, you’re left with more accurate assumptions, leading to a more realistic picture of your financial future.

Conversely, with weak assumptions from lack of sufficient research or bad analysis, you can get a dramatically different output that doesn’t remotely reflect reality. When looking for outside investment, these are the skills a savvy investor is going to value in an entrepreneur. So how best to improve your assumptions? Keep reading for the answer.

Financial Assumptions

Any entrepreneur, startup founder, or young company is going to need to form detailed financial reports, including forecasts and projections of the financial situation to come. These documents rely entirely on input data to extrapolate from, and these data are based on historical records and key assumptions .

The accuracy of these financial assumptions determines the accuracy of the output of these projections, and since the divergence from reality increases over time, it’s important for them to be as accurate as possible to precisely depict a realistic situation in the future.

The importance of these assumptions comes into play significantly when trying to attract capital from outside. These investors or lenders will be looking closely at your assumptions as a metric of your credibility; strong assumptions show you’ve done your due diligence and you know what you’re talking about. Weak ones will greatly harm your chances of success.

Here we’re going to go over the basics of financial assumptions, what they’re for, and common mistakes people make with them.

The Role of Financial Assumptions in Forecasting

In business planning, forecasting is a crucial step in visualizing how a company will perform in the future. Companies forecast future outcomes based on past and current data, using assumptions.

Forecasted elements of a financial plan include revenue, margin, and expenses, among others. When done accurately, these forecasts allow businesses to:

Predict future expenses
Make budgets
Make informed decisions about the direction of the company
Plan growth and financing options

However, accuracy requires more than just historical data; it’s important to input the rate of change over time correctly, and this is where assumptions come in.

Essentially, assumptions are educated guesses about the nature of your business and its market, and how these will affect future outcomes in your forecasts. As projections reach further into the future, the need for accuracy of the input assumptions increases. Small mistakes become significantly larger over time, and this skews projections to the point of making them worthless.

For investors to take notice, you’ll need accurate and well-thought-out assumptions that aren’t plucked from thin air. We’ll go into more detail about how to find these assumptions shortly, but first, let’s consider why accuracy is so important.

The Importance of Accuracy in Financial Assumptions

The financial statements of a business plan are an indication of the company’s profitability. They are the strongest display of the worthiness of investment that your company has, therefore, they’re going to need to be founded on accurate assumptions.

Even with relatively accurate initial figures, long-term projections can still be way off the mark. Essentially, any forecast is a calculation with decreasing accuracy over time, which is why they usually don’t project out past time frames of longer than around five years. Take the following example:

Let’s say you’ve done the research into the market, into the reducing costs of production over time, the rapid expected growth of your company, and the increase in value you’re going to make to your product or service over the next few years. What comes out is an assumed increase in revenue projected into the future.

If you assume your total revenue will increase by 20% over 5 years with a starting revenue of $20,000, the first-year outcome will be $24,000, an increase of four thousand dollars. The fifth-year outcome will be $49,767; an increase of almost thirty thousand dollars.

If your initial assumption is off by only 5% in either direction, the first year will show a difference from the above forecast of $1000 , either returning $23,000 or $25,000 at the low and high ends, respectively.

This isn’t a huge amount of money at this stage, so a misjudgment of 5% seems reasonable. However, if we extend this effect to the fifth year, an error of 5% brings a difference of either $9,500 or $11,268 to what you had projected, depending on whether your assumption was low or high.

If you’re smart or lucky enough to have made a conservative assumption, you’re now $11k better off. On the other hand, if you were too hasty and overestimated in your assumption, you may now owe somebody over $9k.

So, the effect of an assumption is greater with distance from the starting point. This means that when you’re designing a business plan to show to potential investors, they’re going to be very critical of your assumptions in order to assess the chances of their ROI in your company.

Regardless of whether you assumed low or high, if there’s a discrepancy that becomes obvious to investors, it will make them question the rest of your estimates and how accurate you will be in future calculations.

Therefore, accurate assumptions are critically Important to not only the precise understanding of the state of your company in the future but any chances of investors taking you seriously. Without good assumptions there is no forecast. Without a forecast, there’s not going to be any investment.

If your business is going to be relying on VC or other investors helping out, you’re going to find yourself out of luck. So, with that in mind, let’s take a look at some of the classic assumptions you’ll need to make when designing your forecasts and projections.

Key Financial Assumptions Examples

Building a business plan relies on numerous assumptions. These are the where, when, and how’s of your company, and will create projections in order for you to know where to direct your energy. The most important assumptions are called key assumptions, and without these, it’s going to be impossible to make informed decisions on the direction of your company.

Changes in assumptions can dramatically alter the outcomes of your forecasts. If you assume, for example, that your product or service is going to have a decreasing churn rate - or loss of customers - over the coming years of service improvement, you have to know what that rate is going to decrease by each year for your forecast to be of any use.

It’s worth thinking about these assumptions in terms of how you will persuade investors to commit. Here is a list of some of the areas in which key assumptions are needed for financial planning, for use as financial assumptions examples:

Market – There’s no business without a market. This assumption isn’t so much a financial one as a general business one, but it has strong financial implications.

By the time you come to financial planning for your startup, you should know who your ideal customer is and how you’re addressing their pain points.

You should also know how much they’re willing to spend on your product or service, which will come in handy for your income statement and cash flow projections.

Cost of production - Production cost changes over time. Even if it’s simply an increase in outgoings to match an increase in demand, this needs to be assumed. Usually, production costs can be reduced as economies of scale come into play, but regardless, it’s easy to overlook some data here.

Calculating production costs involves covering rent for manufacturing spaces, materials, utilities such as power and water, and essentially every little thing that goes into the manufacture of your product or provision of your service. Obviously, these will be more or less complicated depending on the type of business you’re running.

This step is crucial for the following revenue and costs to be accurate.

Cost of Sales – This one is closely related to the cost of production and there may be some overlap in these costs such as labor, so separate them as you wish, however, make sure to calculate the cost of distribution; shipping, handling, marketing, etc. it’s possible to combine these assumptions under production and sales for convenience.
Cost of Administration – This is a monthly expenditure covering all the outgoings related to your workforce and company maintenance. Payroll needs to be financially covered by any income or capital funding you’re expecting and this includes any bonuses you’re expecting to put out. One key assumption regarding bonuses will be in their timing, should you choose to pay them, and this needs to be factored into projections for costs.
Pricing – This assumption should be made with detailed research backing it up. Since pricing alone can make or break your company, investors are going to want to see how you came up with your figures here. The costs of sales and production are going to determine your range of pricing options.

To accurately calculate prices, you’re going to need to understand how much value your product or service has to your customers, which is where the key assumptions from the Market section above come in. Pricing needs to match the value of what you’re offering, so this is the opposing force to the production and distribution costs, since it will always be pulling your price down towards its value, while costs of production and distribution will be pushing it up.

Sales Forecast – For every different service or product that you’re offering, a sales forecast needs to be calculated. For an accurate sales forecast, you’re going to need to know the desired sales funnel in detail and how long the conversion process will take. These assumptions need to be backed up by your market research.

Further, you’re going to have to make assumptions on when your sales will complete; this means how long banking processes will take, etc. These assumptions will be critical to accurately forecast your profits in your financial plan.

Cash Flow – This section will involve numerous key assumptions. Capital will hopefully be flowing into the company from numerous streams, and these need to be calculated well in order to project financial coverage of the aforementioned costs.

Timings of loan payments, loan repayments, cash equity, and others need to be reliably assumed to make sound predictions in these cases. Interest adjustments or early repayment fees are also things to take into consideration, and if you will be offering customer credit, this will create more complexities to look into in terms of when you’ll see that capital again.

These are some of the major areas in which financial assumptions are necessary, and their need for accuracy is obvious. An accurate assumption comes down to reliable and robust research and analysis practices, and for these, it’s important to follow the best practices of business planning, and consider expert help where needed.

Of course, the specifics of these areas and their significance to your company will depend entirely on the type of service, product, business, or market you’re involved with. As such, there’s no standard template, but there are some key practices worth following.

Find Your Industry Specific Projections Template to Help Create Assumptions:

Why There are no one-size-fits-all Financial Assumptions

Startup founders and entrepreneurs need to provide convincing projections of the financial state of the company over the following years to reassure investors that their capital will be returned. They do this by creating robust assessments of their current state and the state of company and market metrics as accurately as possible and factoring them into projection calculations as assumptions.

The best way to begin building your financial assumptions is to consider them from the perspective of an investor. If you’re looking to put down a significant investment in a project you’re going to want to guarantee your ROI, and to do that, you need to be persuaded of the project’s profitability.

Every company is different, and every market has its own needs and challenges. This is why there’s no strict financial assumptions template to follow, but by following these four basic principles, you’ll be closer to developing more accurate assumptions.

At the planning stage of a company, the historical financial data simply won’t exist. This reduces the power of the financial assumptions, and even further necessitates their precision. The trouble is, this is a lengthy process. AQPC showed that even financial analysts spend almost half their time collecting and validating data, and they’re experts at it.

This means you have to expect a grind. If you’re going it alone with this process, make sure to get a handle on your research methods, and which areas to focus on and in the right order. This is a topic for its very own article, but the point is, expect to dedicate and schedule a lot of time for this part of the process.

So we know the research is important, but how do you go about it? For costs of manufacturing, meeting with suppliers is essential to get written quotes for supplies covering any wholesale discounts that might be available. Then, for marketing and distribution, studying your market in depth is crucial to making accurate assumptions about the value of what you’re offering and how much it’ll cost to get it out there.

Find out exactly where and how to look, and gather the necessary data on all the elements your company needs to be able to predict. From this, you will work on the analysis.

Outsourcing

There are definitely ways to go this alone, especially if this relates to a field you’re familiar with, but the option to use outside help shouldn’t be overlooked. ProjectionHub offers a range of services that can help with the financial planning process. From basic projection templates to detailed, expert guidance and tailored forecasting spreadsheets specifically designed for your business, there are a lot of useful options that can help speed up the process and improve your accuracy.

Demonstration

Finally, show your workings! If you’ve spent the due time and energy collecting and analyzing the data, it’s not going to matter if you can’t demonstrate how you came to the conclusions you did. Putting in the work is how you get accurate assumptions, but describing your process is how you persuade others to trust them.

Financial forecasts are the backbone of a business plan for investors. They’re a demonstration that you’ve done your homework and you know what you’re doing, and with bold claims, there comes the need for strong evidence.

Making assumptions is the key to any projection. Assumptions about change over time, consistency over time, and any other incomings and outgoings that you anticipate as part of the process. The accuracy of these assumptions is what makes or breaks a business plan, as they hold the key to future, long-term investment as well as countless other business choices made by decision-makers.

If this seems like a daunting task, don’t’ worry. There are countless opportunities to take advantage of expert help with services like ours at ProjectionHub , which provides templates and expert advice to get you started.

Accurate assumptions should not be underestimated. Putting in the work at this stage of your financial projections will pay dividends and command great respect from investors.

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 40,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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How to Buy a Business with No Money Down

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Financial Plan Assumptions

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on July 11, 2023

Get Any Financial Question Answered

Table of contents, what are financial plan assumptions.

Financial plan assumptions are the key variables, estimates, and predictions used to develop a company's financial projections and strategy. They serve as the foundation for forecasting revenues , costs, investments, and taxes , among other elements.

Assumptions are critical in financial planning because they help businesses set realistic goals, allocate resources efficiently, and identify potential risks and opportunities. They also enable management to make informed decisions based on the best available data and industry insights.

Financial plan assumptions aim to create a comprehensive picture of a company's future financial performance by incorporating a range of factors.

These assumptions are designed to be flexible and adaptable, allowing for adjustments as new information becomes available or market conditions change.

Key Financial Plan Assumptions

Revenue assumptions, sales growth rate.

The sales growth rate is a crucial revenue assumption that estimates the percentage increase in a company's sales over a specific period. This rate takes into account factors such as historical sales data, market trends, and promotional efforts.

Pricing Strategies

Pricing strategies help determine the prices of a company's products or services. Assumptions related to pricing may include competitor pricing, price elasticity of demand, and the company's overall pricing objectives.

Market Share

Market share assumptions predict a company's percentage of total sales within a specific market. Estimations consider factors such as target customer segments, marketing strategies, and product or service differentiation.

Customer Acquisition and Retention

Customer acquisition and retention assumptions estimate the number of new customers acquired and existing customers retained. These assumptions depend on factors such as marketing efforts, customer service quality, and competitive positioning.

Cost Assumptions

Fixed and variable costs.

Fixed and variable costs are essential components of a company's financial plan . Fixed costs include expenses that remain constant, regardless of production levels or sales, such as rent and salaries. Variable costs vary with production or sales, including raw materials and shipping costs.

Cost of Goods Sold (COGS)

COGS is the total cost of producing goods or services sold by a company. Key assumptions for COGS may include production costs , labor costs, and manufacturing overheads.

Operating Expenses

Operating expenses are the costs associated with running a business, excluding COGS. Assumptions for operating expenses may include marketing costs, administrative expenses, and research and development expenditures .

Inflation Rate

The inflation rate assumption estimates the increase in the general price level over time. This assumption affects various cost projections, such as wages, raw materials, and utilities.

Investment Assumptions

Capital expenditures.

Capital expenditures represent the funds a company invests in long-term assets, such as property, plant, and equipment. Assumptions for capital expenditures may include the anticipated level of investment , the useful life of assets , and depreciation methods.

Working Capital Requirements

Working capital assumptions estimate the funds needed to cover short-term operating expenses and maintain sufficient liquidity . These assumptions may include projections for inventory levels, accounts receivable , and accounts payable .

Financing Sources and Costs

Financing assumptions help determine how a company will fund its operations and investments. These assumptions include the mix of debt and equity financing, interest rates , and repayment terms.

Tax Assumptions

Corporate tax rates.

Corporate tax rate assumptions estimate the percentage of a company's profits subject to taxation. These assumptions take into account federal, state, and local tax rates, as well as any changes to tax laws.

Tax Credits and Incentives

Tax credits and incentives are reductions in tax liability offered by governments to encourage specific business activities. Assumptions related to tax credits may include eligibility criteria, application deadlines, and the expected amount of tax savings.

Tax Planning Strategies

Tax planning strategies are methods used by companies to minimize their tax liabilities. Assumptions related to tax planning may include the use of tax-efficient structures, deductions, and loss carryforwards.

Economic and Industry Assumptions

Macroeconomic factors.

Gross domestic product (GDP) growth rate assumptions estimate the overall economic growth of a country or region. These assumptions impact a company's revenue projections, as they help gauge the general health of the economy and consumer spending.

Interest Rates

Interest rate assumptions estimate the cost of borrowing or lending money. These rates affect a company's financing costs, investment decisions, and overall financial performance.

Unemployment Rates

Unemployment rate assumptions predict the percentage of the labor force without jobs. High unemployment rates can impact consumer spending and may indicate a sluggish economy, affecting a company's sales projections.

Macroeconomic Factors in Economic and Industry Assumptions

Industry Trends and Competition

Market size and growth.

Market size and growth assumptions help estimate the overall potential of an industry and the opportunities it presents for a company. Factors considered may include historical data, demographic trends, and technological advancements.

Technological Advancements

Technological advancements can disrupt industries and create new markets. Assumptions related to technology may include the adoption of new technologies, the impact of innovations on the market, and the potential for competitive advantage.

Regulatory Changes

Regulatory changes can significantly impact a company's operations and financial performance. Assumptions related to regulation may include potential changes in laws, compliance requirements, and the effects on the industry landscape.

Competitive Landscape

Competitive landscape assumptions evaluate a company's position within its industry and the level of competition it faces. These assumptions may consider factors such as market share, competitor strategies, and barriers to entry.

Sensitivity Analysis and Scenario Planning

Identifying key variables and uncertainties.

Sensitivity analysis and scenario planning involve identifying key variables and uncertainties in a company's financial plan. These variables may include economic factors, industry trends, or company-specific factors.

Developing Scenarios and Assumptions

Scenario planning involves creating alternative future scenarios based on varying assumptions. Companies develop multiple scenarios to explore the potential impact of different events, trends, and risks on their financial performance.

Analyzing the Impact on Financial Performance

Companies analyze the impact of different scenarios on their financial performance to identify potential risks and opportunities. This analysis helps management make informed decisions and adapt their strategies as needed.

Risk Mitigation and Contingency Planning

Based on the results of sensitivity analysis and scenario planning, companies develop risk mitigation and contingency plans. These plans help companies prepare for potential challenges and capitalize on emerging opportunities.

Regular Review and Update of Assumptions

Importance of ongoing monitoring.

Regularly reviewing and updating financial plan assumptions is essential to ensure their continued relevance and accuracy. Ongoing monitoring helps companies stay informed of market changes and adapt their strategies accordingly.

Frequency of Assumption Updates

The frequency of assumption updates depends on the nature of the company and its industry. Companies operating in rapidly changing environments may need to update their assumptions more frequently than those in more stable industries.

Incorporating New Information and Data

As new information and data become available, companies should incorporate them into their financial plan assumptions. This ensures that the assumptions remain relevant and provide an accurate basis for decision-making.

Adjusting Financial Plans as Needed

Based on updated assumptions, companies may need to adjust their financial plans to reflect changes in market conditions, industry trends, or company-specific factors. Regular adjustments help maintain the accuracy and relevance of financial projections.

Financial plan assumptions play a crucial role in the development of a company's financial strategy and projections. By incorporating a wide range of factors and estimates, assumptions help create a comprehensive picture of a company's future financial performance.

Regularly reviewing and updating financial plan assumptions is essential for ensuring their continued relevance and accuracy. As new information becomes available or market conditions change, companies must adapt their assumptions and adjust their financial plans accordingly.

Sensitivity analysis and scenario planning are valuable tools for managing risks and identifying potential opportunities.

By analyzing the impact of different scenarios on a company's financial performance, management can make informed decisions and develop risk mitigation and contingency plans.

In conclusion, financial plan assumptions are critical components of a company's financial planning process.

By incorporating a wide range of factors and regularly reviewing and updating these assumptions, companies can create accurate financial projections, identify potential risks and opportunities, and make informed decisions that drive their long-term success.

Financial Plan Assumptions FAQs

What are financial plan assumptions, and why are they important.

Financial plan assumptions are the underlying estimates and predictions that a financial plan is based upon. They are essential because they provide the framework for determining how much money you need to save, how much you can expect to earn on your investments, and how long your money will last in retirement.

How do I choose the right financial plan assumptions for my personal financial plan?

The right financial plan assumptions will depend on your personal circumstances, financial goals, and risk tolerance. You should consider your current income, expenses, debts, and assets when selecting your assumptions. Additionally, you should consider factors such as inflation, investment returns, and life expectancy.

What are some common financial plan assumptions used by financial planners?

Common financial plan assumptions used by financial planners include assumptions about inflation rates, investment returns, life expectancy, and tax rates. Other assumptions may include future expenses such as college tuition or medical costs, changes in income or employment, and changes in interest rates.

How often should I review and update my financial plan assumptions?

You should review and update your financial plan assumptions regularly, at least annually, and whenever there are significant changes in your life circumstances, such as a new job, a significant change in income or expenses, or a change in your investment portfolio.

What are the potential risks of relying on incorrect financial plan assumptions?

Relying on incorrect financial plan assumptions can lead to a variety of risks, including not saving enough for retirement, running out of money in retirement, or being unable to meet other financial goals. Additionally, incorrect assumptions can lead to poor investment decisions, resulting in lower investment returns and higher taxes. It is essential to ensure that your financial plan assumptions are as accurate as possible to help you achieve your financial goals.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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How to Highlight Risks in Your Business Plan

Male entrepreneur working in a machine shop on cutting through a piece of metal with sparks flying out. This is just one of the physical risks to address in his business.

Tallat Mahmood

5 min. read

Updated October 25, 2023

One of the areas constantly dismissed by business owners in their business plan is an articulation of the risks in the business.

This either suggests you don’t believe there to be any risks in your business (not true), or are intentionally avoiding disclosing them.

Either way, it is not the best start to have with a potential funding partner. In fact, by dismissing the risks in your business, you actually make the job of a lender or investor that much more difficult.

Why a funder needs to understand your business’s risks:

Funding businesses is all about risk and reward.

Whether it’s a lender or an investor, their key concern will be trying to balance the risks inherent in your business, versus the likelihood of a reward, typically increasing business value. An imbalance occurs when entrepreneurs talk extensively about the opportunities inherent in their business, but ignore the risks.

The fact is, all funders understand that risks exist in every business. This is just a fact of running a business. There are risks that exist with your products, customers, suppliers, and your team. From a funder’s perspective, it is important to understand the nature and size of risks that exist.

There are two main reasons why funders want to understand business risks:

Firstly, they want to understand whether or not the key risks in your business are so fundamental to the investment proposition that it would prevent them from funding you.

Some businesses are not at the right stage to receive external funding and placate funder concerns. These businesses are best off dealing with key risk factors prior to seeking funding.

The second reason why lenders and investors want to understand the risk in your business is so that they can structure a funding package that works best overall, despite the risk.

In my experience, this is an opportunity that many business owners are wasting, as they are not giving funders an opportunity to structure deals suitable for them.

Here’s an example:

Assume your business is seeking equity funding, but has a key management role that needs to be filled. This could be a key business risk for a funder.

Highlighting this risk shows that you are aware of the appointment need, and are putting plans in place to help with this key recruit. An investor may reasonably decide to proceed with funding, but the funding will be released in stages. Some will be released immediately and the remainder will be after the key position has been filled.

The benefit of highlighting your risks is that it demonstrates to investors that you understand the danger the risks pose to your company, and are aware that it needs to be dealt with. This allows for a frank discussion to take place, which is more difficult to do if you don’t acknowledge this as a problem in the first place.

Ultimately, the starting point for most funders is that they want to invest in you, and want to validate their initial interest in you.

Highlighting your business risks will allow the funder to get to the nub of the problem, and give them a better idea of how they may structure their investment in order to make it work for both parties. If they are unsure of the risks or cannot get clear explanations from the team, it is unlikely they will be forthcoming when it comes to finding ways to make a potential deal work.

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The right way to address business risks:

The main reason many business owners don’t talk about business risks with potential funders is because they don’t want to highlight the weaknesses in their business.

This is a fair concern to have. However, there is a right way to address business risk with funders, without turning lenders and investors off.

The solution is to focus on how you mitigate the risks.

In other words, what are the steps you are taking in your business as a direct reaction to the risks that you have identified? This is very powerful in easing funder fears, and in positioning you as someone who has a handle on their business.

For example, if a business risk you had identified was a high level of customer concentration, then a suitable mitigation plan would be to market your products or services targeting new clients, as opposed to focusing all efforts on one client.

Having net profit margins that are lower than average for your market would raise eyebrows and be considered a risk. In this instance, you could demonstrate to funders the steps you are putting in place over a period of time to help increase those margins to at least market norms for your niche.

The process of highlighting risks—and, more importantly, outlining key mitigating actions—not only demonstrates honesty, but also a leadership quality in solving the problems in your business. Lenders and investors want to see both traits.

The impact on your credibility:

Any lender or investor backs the leadership team of a business first, and the business itself second.

This is because they realize that it is you, the management team, who will ultimately deliver value and grow the business for the benefit for all. As such, it is imperative that they have the right impression about you.

The consequence of highlighting business risks in your business plan with mitigations is that it provides funders a real insight into you as a business leader. It demonstrates that not only do you have an understanding of their need to understand risk in your business, but you also appreciate that minimizing that risk is your job.

This will have a massive impact on your credibility as a business owner and management team. This impact is more acute when compared to the hundreds of businesses they will meet that omit discussing the risks in their business.

The fact is, funders have seen enough businesses and business plans in all sectors to instinctively know what risks to expect. It’s just more telling if they hear it from you first.

What does this mean for you going forward?

Funders rely on you to deliver on your inherent promise to add value to your business for all stakeholders. The weight of this promise becomes much stronger if they can believe in the character of the team, and that comes from your credibility.

A business plan that discusses business risks and mitigations is a much more complete plan, and will increase your chances of securing funding.

Not only that, but highlighting the risks your business faces also has a long-term impact on your character and credibility as a business leader.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Tallat Mahmood is founder of The Smart Business Plan Academy, his flagship online course on building powerful business plans for small and medium-sized businesses to help them grow and raise capital. Tallat has worked for over 10 years as a small and medium-sized business advisor and investor, and in this period has helped dozens of businesses raise hundreds of millions of dollars for growth. He has also worked as an investor and sat on boards of companies.

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Table of Contents

Why a funder needs to understand your business’s risks:

4 Min. Read

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Financial assumptions are the guidelines you give your business plan to follow. They can range from financial forecasts about costs, revenue, return on investment, and operating and startup expenses. Basically, financial assumptions serve as a forecast of what your business will do in the future.
What Are Key Assumptions of a Business Plan?
Key assumptions are the underlying beliefs and assumptions that shape the way a business operates and makes decisions. They can be related to various aspects of the business, including its target market, competitive landscape, revenue streams, and financial projections. These assumptions serve as the foundation of a business plan, and they help ...
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A SWOT analysis, which stands for Strengths, Weaknesses, Opportunities, and Threats and is a popular strategic framework for business planners, is a great tool for questioning assumptions. The first two items refer to qualities that are internal to the business. The second two items are external factors. Consider the following in questioning ...
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Most business plans also include financial forecasts for the future. These set sales goals, budget for expenses, and predict profits and cash flow. A good business plan is much more than just a document that you write once and forget about. It's also a guide that helps you outline and achieve your goals. After completing your plan, you can ...
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Identifying assumptions is extremely important for getting real business benefits from your business planning. Planning is about managing change, and in today's world, change happens very fast. Assumptions solve the dilemma about managing consistency over time, without banging your head against a brick wall. Assumptions might be different for ...
The value of business plan assumptions
Identifying assumptions is extremely important for getting real business benefits from your business planning. Planning is about managing change, and in today's world, change happens very fast. Assumptions solve the dilemma about managing consistency over time, without banging your head against a brick wall. Assumptions might be different for ...
STRATEGIC ASSUMPTIONS: THE ESSENTIAL (AND ...
Divulgence will only occur when important stakeholders demand to see them included as outcomes of the strategic-planning process and included as a separate item in the contents page of the plan. There are several benefits which result from demanding to see the set of strategic assumptions included in a strategic plan:
Business Plan Assumptions
Funding. You need to prepare a business plan assumptions sheet as part of your plan, however, the important point to remember is that the assumptions should be kept simple and to a minimum, to avoid over complicating the financial projection. Remember this is planning not accounting. The calculation of key assumptions is further discussed in ...
Strategic planning: managing assumptions, risks and impediments
The strategic planing process is the one key point to get in front of idle supposition and truly manage assumptions, risks and impediments. When strategy is well developed, there will be an actual plan for implementation associated with the strategy. A holistic plan defines goals that support the strategy and addresses the operational tactics ...
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Challenging of assumptions makes you aware of what the real picture should be. Of course, buoyant numbers and optimistic timelines can remain in the model :). They make for a better sales pitch ...
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The Role of Financial Assumptions in Forecasting. In business planning, forecasting is a crucial step in visualizing how a company will perform in the future. Companies forecast future outcomes based on past and current data, using assumptions. Forecasted elements of a financial plan include revenue, margin, and expenses, among others.
Financial Plan Assumptions
Financial plan assumptions are the key variables, estimates, and predictions used to develop a company's financial projections and strategy. They serve as the foundation for forecasting revenues, costs, investments, and taxes, among other elements. Assumptions are critical in financial planning because they help businesses set realistic goals ...
How to Highlight Risks in Your Business Plan
Here's an example: Assume your business is seeking equity funding, but has a key management role that needs to be filled. This could be a key business risk for a funder. Highlighting this risk shows that you are aware of the appointment need, and are putting plans in place to help with this key recruit.
How to Make Accurate Financial Assumptions For Your Business
3. Assess Current Performance. Now it's time to analyze your current and historical financial performance for each of your assumptions. For instance, if you want to make an assumption for monthly revenue growth, look at your performance year-to-date (YTD) to give you a baseline before you start making future assumptions.
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What Are the Key Assumptions of a Business Plan?

Key Assumptions Definition

Key Assumption 1: Finances

Key Assumptions 2: Consumer Base

Key Assumptions 3: Need

Key Assumptions 4: Resources

Key Assumptions 5: Profitability

Financial Assumptions and Your Business Plan

What are Financial Assumptions?

Why are Financial Assumptions Important?

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Key Assumptions By Financial Statement

Income Statement

Balance Sheet

Cash Flow Statement

Notes to Financial Statements

What are the Assumptions Needed in Preparing a Financial Model?

Properly Preparing Your Financial Assumptions

Part 1 – Current Financials

Part 2 – Financial Assumptions

Part 3 – Projected Cash Flow Statement and Balance Sheet

Part 4 – Future Financials

Part 5 – Calculations

Part 6 – Sensitivity Analysis

Part 7 – Section Highlights

Part 8 – Financial Summary

How to Finish Your Business Plan in 1 Day!

OR, Let Us Develop Your Plan For You

Other Resources for Writing Your Business Plan

Other Helpful Business Plan Articles & Templates

What Are Key Assumptions of a Business Plan?

What are key assumptions?

Why are key assumptions important in a business plan?

Examples of key assumptions in a business plan

Target market assumptions

Competitive landscape assumptions

Revenue stream assumptions

Financial projections

Considerations for making key assumptions in a business plan

Conservatism

Flexibility

Tips for reviewing and updating key assumptions in a business plan

Regularly review and assess the accuracy of your assumptions

Be open to revising your assumptions

Communicate updates to your team

Use your updated assumptions to inform your decision-making

Questioning Key Assumptions in Your Business Plan

Is There a Need for Your Product or Service?

Key Takeaways

Opportunities

What is a SWOT analysis?

What percent of businesses fail within the first year?

Business Assumptions: Understanding Key Predictions in Entrepreneurship

Business Assumptions Definition

Types of Business Assumptions

Revenue Assumptions

Market Size Assumptions

Operational Expense Assumptions

The Role of Business Assumptions in Financial Planning

Forecasting

Strategic Planning

The Impact of Business Assumptions on Risk Assessment

The Pitfall of Over-Optimism

The Danger of Over-Pessimism

Criticality of Validating Business Assumptions

Methods for Validating Business Assumptions

Market Research

Hypothesis Testing

Business Assumptions in Startup Ecosystems

Link Between Business Assumptions and Sustainable Business Models

The Role of Business Assumptions in Creating Sustainable Business Models

Business Assumptions Impact on Long-term Viability

The Influence on Corporate Social Responsibility

Guidelines for Making Reasonable Business Assumptions

Adopt a Conservative Approach

Consider Current Market Trends

Regular Review and Update of Assumptions

Sound Underlying Logic

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