key assumptions business plan

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.

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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. A business plan generator can help you in creating your financial projections.

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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

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.

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 ."

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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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:

Generic Areas	Possible Strategic Questions: What is the Strategic Assumption about?
1) Macro-Environmental Forces
e.g. Technological Forces
e.g. Socio-demographic Forces
2) Markets
e.g. Substitutes
e.g. Potential Competitors
e.g. Market Rivalry
3) Customers
4) Stakeholders
5) Financial Management
6) Internal Processes
7) Asset Management
8) The Workforce
9) Background of Shared Obviousness

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:

Strategic Assumptions “Background of Shared Obviousness”	Possible Negative Consequences
“Industry winners always manufacture in-house – so we manufacture in-house.”	Opportunities to partner or out-source are never explored. Higher capital costs are incurred. Migration into new areas of the value-chain is avoided.
“Customers want face-to-face contact with us.”	Automated orders are limited. Internet sales are not explored. Sales costs on repeat business are potentially higher than required.
“We only acquire companies with tangible assets.”	Service or knowledge-based businesses are not acquired. Branding opportunities are not fully explored.
“We do not partner on R&D projects.”	Many opportunities to reduce R&D risks and lever R&D funding are never explored. Competencies must be built-up internally.
“We only hire people with engineering backgrounds.”	The organization remains production-and design-focused. The recruitment pool and employee diversity is limited.

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.

Lean Business Planning

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List Business Plan Assumptions

Identify and list business plan assumptions. You will get real business benefits from the assumptions list in your business plan. 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.

You will use your business plan assumptions often

Some of these business plan assumptions 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. Have a bullet point list. Maybe in slides. Maybe just a simple list. Keep them on top of your mind, where they’ll come up quickly at review meetings.

An Assumptions Example

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

12 Key Elements of a Business Plan (Top Components Explained)

Starting and running a successful business requires proper planning and execution of effective business tactics and strategies .

You need to prepare many essential business documents when starting a business for maximum success; the business plan is one such document.

When creating a business, you want to achieve business objectives and financial goals like productivity, profitability, and business growth. You need an effective business plan to help you get to your desired business destination.

Even if you are already running a business, the proper understanding and review of the key elements of a business plan help you navigate potential crises and obstacles.

This article will teach you why the business document is at the core of any successful business and its key elements you can not avoid.

Let’s get started.

Why Are Business Plans Important?

Business plans are practical steps or guidelines that usually outline what companies need to do to reach their goals. They are essential documents for any business wanting to grow and thrive in a highly-competitive business environment .

1. Proves Your Business Viability

A business plan gives companies an idea of how viable they are and what actions they need to take to grow and reach their financial targets. With a well-written and clearly defined business plan, your business is better positioned to meet its goals.

2. Guides You Throughout the Business Cycle

A business plan is not just important at the start of a business. As a business owner, you must draw up a business plan to remain relevant throughout the business cycle .

During the starting phase of your business, a business plan helps bring your ideas into reality. A solid business plan can secure funding from lenders and investors.

After successfully setting up your business, the next phase is management. Your business plan still has a role to play in this phase, as it assists in communicating your business vision to employees and external partners.

Essentially, your business plan needs to be flexible enough to adapt to changes in the needs of your business.

3. Helps You Make Better Business Decisions

As a business owner, you are involved in an endless decision-making cycle. Your business plan helps you find answers to your most crucial business decisions.

A robust business plan helps you settle your major business components before you launch your product, such as your marketing and sales strategy and competitive advantage.

4. Eliminates Big Mistakes

Many small businesses fail within their first five years for several reasons: lack of financing, stiff competition, low market need, inadequate teams, and inefficient pricing strategy.

Creating an effective plan helps you eliminate these big mistakes that lead to businesses' decline. Every business plan element is crucial for helping you avoid potential mistakes before they happen.

5. Secures Financing and Attracts Top Talents

Having an effective plan increases your chances of securing business loans. One of the essential requirements many lenders ask for to grant your loan request is your business plan.

A business plan helps investors feel confident that your business can attract a significant return on investments ( ROI ).

You can attract and retain top-quality talents with a clear business plan. It inspires your employees and keeps them aligned to achieve your strategic business goals.

Key Elements of Business Plan

Starting and running a successful business requires well-laid actions and supporting documents that better position a company to achieve its business goals and maximize success.

A business plan is a written document with relevant information detailing business objectives and how it intends to achieve its goals.

With an effective business plan, investors, lenders, and potential partners understand your organizational structure and goals, usually around profitability, productivity, and growth.

Every successful business plan is made up of key components that help solidify the efficacy of the business plan in delivering on what it was created to do.

Here are some of the components of an effective business plan.

1. Executive Summary

One of the key elements of a business plan is the executive summary. Write the executive summary as part of the concluding topics in the business plan. Creating an executive summary with all the facts and information available is easier.

In the overall business plan document, the executive summary should be at the forefront of the business plan. It helps set the tone for readers on what to expect from the business plan.

A well-written executive summary includes all vital information about the organization's operations, making it easy for a reader to understand.

The key points that need to be acted upon are highlighted in the executive summary. They should be well spelled out to make decisions easy for the management team.

A good and compelling executive summary points out a company's mission statement and a brief description of its products and services.

An executive summary summarizes a business's expected value proposition to distinct customer segments. It highlights the other key elements to be discussed during the rest of the business plan.

Including your prior experiences as an entrepreneur is a good idea in drawing up an executive summary for your business. A brief but detailed explanation of why you decided to start the business in the first place is essential.

Adding your company's mission statement in your executive summary cannot be overemphasized. It creates a culture that defines how employees and all individuals associated with your company abide when carrying out its related processes and operations.

Your executive summary should be brief and detailed to catch readers' attention and encourage them to learn more about your company.

Components of an Executive Summary

Here are some of the information that makes up an executive summary:

The name and location of your company
Products and services offered by your company
Mission and vision statements
Success factors of your business plan

2. Business Description

Your business description needs to be exciting and captivating as it is the formal introduction a reader gets about your company.

What your company aims to provide, its products and services, goals and objectives, target audience , and potential customers it plans to serve need to be highlighted in your business description.

A company description helps point out notable qualities that make your company stand out from other businesses in the industry. It details its unique strengths and the competitive advantages that give it an edge to succeed over its direct and indirect competitors.

Spell out how your business aims to deliver on the particular needs and wants of identified customers in your company description, as well as the particular industry and target market of the particular focus of the company.

Include trends and significant competitors within your particular industry in your company description. Your business description should contain what sets your company apart from other businesses and provides it with the needed competitive advantage.

In essence, if there is any area in your business plan where you need to brag about your business, your company description provides that unique opportunity as readers look to get a high-level overview.

Components of a Business Description

Your business description needs to contain these categories of information.

Business location
The legal structure of your business
Summary of your business’s short and long-term goals

3. Market Analysis

The market analysis section should be solely based on analytical research as it details trends particular to the market you want to penetrate.

Graphs, spreadsheets, and histograms are handy data and statistical tools you need to utilize in your market analysis. They make it easy to understand the relationship between your current ideas and the future goals you have for the business.

All details about the target customers you plan to sell products or services should be in the market analysis section. It helps readers with a helpful overview of the market.

In your market analysis, you provide the needed data and statistics about industry and market share, the identified strengths in your company description, and compare them against other businesses in the same industry.

The market analysis section aims to define your target audience and estimate how your product or service would fare with these identified audiences.

Market analysis helps visualize a target market by researching and identifying the primary target audience of your company and detailing steps and plans based on your audience location.

Obtaining this information through market research is essential as it helps shape how your business achieves its short-term and long-term goals.

Market Analysis Factors

Here are some of the factors to be included in your market analysis.

The geographical location of your target market
Needs of your target market and how your products and services can meet those needs
Demographics of your target audience

Components of the Market Analysis Section

Here is some of the information to be included in your market analysis.

Industry description and statistics
Demographics and profile of target customers
Marketing data for your products and services
Detailed evaluation of your competitors

4. Marketing Plan

A marketing plan defines how your business aims to reach its target customers, generate sales leads, and, ultimately, make sales.

Promotion is at the center of any successful marketing plan. It is a series of steps to pitch a product or service to a larger audience to generate engagement. Note that the marketing strategy for a business should not be stagnant and must evolve depending on its outcome.

Include the budgetary requirement for successfully implementing your marketing plan in this section to make it easy for readers to measure your marketing plan's impact in terms of numbers.

The information to include in your marketing plan includes marketing and promotion strategies, pricing plans and strategies , and sales proposals. You need to include how you intend to get customers to return and make repeat purchases in your business plan.

5. Sales Strategy

Sales strategy defines how you intend to get your product or service to your target customers and works hand in hand with your business marketing strategy.

Your sales strategy approach should not be complex. Break it down into simple and understandable steps to promote your product or service to target customers.

Apart from the steps to promote your product or service, define the budget you need to implement your sales strategies and the number of sales reps needed to help the business assist in direct sales.

Your sales strategy should be specific on what you need and how you intend to deliver on your sales targets, where numbers are reflected to make it easier for readers to understand and relate better.

6. Competitive Analysis

Providing transparent and honest information, even with direct and indirect competitors, defines a good business plan. Provide the reader with a clear picture of your rank against major competitors.

Identifying your competitors' weaknesses and strengths is useful in drawing up a market analysis. It is one information investors look out for when assessing business plans.

The competitive analysis section clearly defines the notable differences between your company and your competitors as measured against their strengths and weaknesses.

This section should define the following:

Your competitors' identified advantages in the market
How do you plan to set up your company to challenge your competitors’ advantage and gain grounds from them?
The standout qualities that distinguish you from other companies
Potential bottlenecks you have identified that have plagued competitors in the same industry and how you intend to overcome these bottlenecks

In your business plan, you need to prove your industry knowledge to anyone who reads your business plan. The competitive analysis section is designed for that purpose.

7. Management and Organization

Management and organization are key components of a business plan. They define its structure and how it is positioned to run.

Whether you intend to run a sole proprietorship, general or limited partnership, or corporation, the legal structure of your business needs to be clearly defined in your business plan.

Use an organizational chart that illustrates the hierarchy of operations of your company and spells out separate departments and their roles and functions in this business plan section.

The management and organization section includes profiles of advisors, board of directors, and executive team members and their roles and responsibilities in guaranteeing the company's success.

Apparent factors that influence your company's corporate culture, such as human resources requirements and legal structure, should be well defined in the management and organization section.

Defining the business's chain of command if you are not a sole proprietor is necessary. It leaves room for little or no confusion about who is in charge or responsible during business operations.

This section provides relevant information on how the management team intends to help employees maximize their strengths and address their identified weaknesses to help all quarters improve for the business's success.

8. Products and Services

This business plan section describes what a company has to offer regarding products and services to the maximum benefit and satisfaction of its target market.

Boldly spell out pending patents or copyright products and intellectual property in this section alongside costs, expected sales revenue, research and development, and competitors' advantage as an overview.

At this stage of your business plan, the reader needs to know what your business plans to produce and sell and the benefits these products offer in meeting customers' needs.

The supply network of your business product, production costs, and how you intend to sell the products are crucial components of the products and services section.

Investors are always keen on this information to help them reach a balanced assessment of if investing in your business is risky or offer benefits to them.

You need to create a link in this section on how your products or services are designed to meet the market's needs and how you intend to keep those customers and carve out a market share for your company.

Repeat purchases are the backing that a successful business relies on and measure how much customers are into what your company is offering.

This section is more like an expansion of the executive summary section. You need to analyze each product or service under the business.

9. Operating Plan

An operations plan describes how you plan to carry out your business operations and processes.

The operating plan for your business should include:

Information about how your company plans to carry out its operations.
The base location from which your company intends to operate.
The number of employees to be utilized and other information about your company's operations.
Key business processes.

This section should highlight how your organization is set up to run. You can also introduce your company's management team in this section, alongside their skills, roles, and responsibilities in the company.

The best way to introduce the company team is by drawing up an organizational chart that effectively maps out an organization's rank and chain of command.

What should be spelled out to readers when they come across this business plan section is how the business plans to operate day-in and day-out successfully.

10. Financial Projections and Assumptions

Bringing your great business ideas into reality is why business plans are important. They help create a sustainable and viable business.

The financial section of your business plan offers significant value. A business uses a financial plan to solve all its financial concerns, which usually involves startup costs, labor expenses, financial projections, and funding and investor pitches.

All key assumptions about the business finances need to be listed alongside the business financial projection, and changes to be made on the assumptions side until it balances with the projection for the business.

The financial plan should also include how the business plans to generate income and the capital expenditure budgets that tend to eat into the budget to arrive at an accurate cash flow projection for the business.

Base your financial goals and expectations on extensive market research backed with relevant financial statements for the relevant period.

Examples of financial statements you can include in the financial projections and assumptions section of your business plan include:

Projected income statements
Cash flow statements
Balance sheets
Income statements

Revealing the financial goals and potentials of the business is what the financial projection and assumption section of your business plan is all about. It needs to be purely based on facts that can be measurable and attainable.

11. Request For Funding

The request for funding section focuses on the amount of money needed to set up your business and underlying plans for raising the money required. This section includes plans for utilizing the funds for your business's operational and manufacturing processes.

When seeking funding, a reasonable timeline is required alongside it. If the need arises for additional funding to complete other business-related projects, you are not left scampering and desperate for funds.

If you do not have the funds to start up your business, then you should devote a whole section of your business plan to explaining the amount of money you need and how you plan to utilize every penny of the funds. You need to explain it in detail for a future funding request.

When an investor picks up your business plan to analyze it, with all your plans for the funds well spelled out, they are motivated to invest as they have gotten a backing guarantee from your funding request section.

Include timelines and plans for how you intend to repay the loans received in your funding request section. This addition keeps investors assured that they could recoup their investment in the business.

12. Exhibits and Appendices

Exhibits and appendices comprise the final section of your business plan and contain all supporting documents for other sections of the business plan.

Some of the documents that comprise the exhibits and appendices section includes:

Legal documents
Licenses and permits
Credit histories
Customer lists

The choice of what additional document to include in your business plan to support your statements depends mainly on the intended audience of your business plan. Hence, it is better to play it safe and not leave anything out when drawing up the appendix and exhibit section.

Supporting documentation is particularly helpful when you need funding or support for your business. This section provides investors with a clearer understanding of the research that backs the claims made in your business plan.

There are key points to include in the appendix and exhibits section of your business plan.

The management team and other stakeholders resume
Marketing research
Permits and relevant legal documents
Financial documents

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Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.

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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.

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How to Write the Perfect Business Plan: A Comprehensive Guide

Thinking of starting a business here's the best step-by-step template for writing the perfect business plan when creating your startup..

Maybe you think you don't need a step-by-step guide to writing a great business plan . Maybe you think you don't need a template for writing a business plan. After all, some entrepreneurs succeed without writing a business plan. With great timing, solid business skills, entrepreneurial drive, and a little luck , some founders build thriving businesses without creating even an informal business plan .

But the odds are greater that those entrepreneurs will fail.

Does a business plan make startup success inevitable? Absolutely not. But great planning often means the difference between success and failure. Where your entrepreneurial dreams are concerned, you should do everything possible to set the stage for success.

And that's why a great business plan is one that helps you succeed .

The following is a comprehensive guide to creating a great business plan. We'll start with an overview of key concepts. Then we'll look at each section of a typical business plan:

Executive Summary

Overview and objectives, products and services, market opportunities, sales and marketing.

Competitive Analysis

Management Team

Financial analysis.

So first let's gain a little perspective on why you need a business plan.

Key Concepts

Many business plans are fantasies. That's because many aspiring entrepreneurs see a business plan as simply a tool--filled with strategies and projections and hyperbole--that will convince lenders or investors the business makes sense.

That's a huge mistake.

First and foremost, your business plan should convince you that your idea makes sense--because your time, your money, and your effort are on the line.

So a solid business plan should be a blueprint for a successful business . It should flesh out strategic plans, develop marketing and sales plans, create the foundation for smooth operations, and maybe--just maybe--persuade a lender or investor to jump on board.

For many entrepreneurs, developing a business plan is the first step in the process of deciding whether to actually start a business. Determining if an idea fails on paper can help a prospective founder avoid wasting time and money on a business with no realistic hope of success.

So, at a minimum, your plan should:

Be as objective and logical as possible. What may have seemed like a good idea for a business can, after some thought and analysis, prove not viable because of heavy competition, insufficient funding, or a nonexistent market. (Sometimes even the best ideas are simply ahead of their time.)
Serve as a guide to the business's operations for the first months and sometimes years, creating a blueprint for company leaders to follow.
Communicate the company's purpose and vision, describe management responsibilities, detail personnel requirements, provide an overview of marketing plans, and evaluate current and future competition in the marketplace.
Create the foundation of a financing proposal for investors and lenders to use to evaluate the company.

A good business plan delves into each of the above categories, but it should also accomplish other objectives. Most of all, a good business plan is convincing . It proves a case. It provides concrete, factual evidence showing your idea for a business is in fact sound and reasonable and has every chance of success.

Who must your business plan convince?

First and foremost, your business plan should convince you that your idea for a business is not just a dream but can be a viable reality. Entrepreneurs are by nature confident, positive, can-do people. After you objectively evaluate your capital needs, products or services, competition, marketing plans, and potential to make a profit, you'll have a much better grasp on your chances for success.

And if you're not convinced, fine: Take a step back and refine your ideas and your plans.

Who can your business plan convince?

1. Potential sources of financing. If you need seed money from a bank or friends and relatives, your business plan can help you make a great case. Financial statements can show where you have been. Financial projections describe where you plan to go.

Your business plan shows how you will get there. Lending naturally involves risk, and a great business plan can help lenders understand and quantity that risk, increasing your chances for approval.

2. Potential partners and investors. Where friends and family are concerned, sharing your business plan may not be necessary (although it certainly could help).

Other investors--including angel investors or venture capitalists--generally require a business plan in order to evaluate your business.

3. Skilled employees . When you need to attract talent, you need something to show prospective employees since you're still in the startup phase. Early on, your business is more of an idea than a reality, so your business plan can help prospective employees understand your goals--and, more important, their place in helping you achieve those goals.

4. Potential joint ventures. Joint ventures are like partnerships between two companies. A joint venture is a formal agreement to share the work--and share the revenue and profit. As a new company, you will likely be an unknown quantity in your market. Setting up a joint venture with an established partner could make all the difference in getting your business off the ground.

But above all, your business plan should convince you that it makes sense to move forward.

As you map out your plan, you may discover issues or challenges you had not anticipated.

Maybe the market isn't as large as you thought. Maybe, after evaluating the competition, you realize your plan to be the low-cost provider isn't feasible since the profit margins will be too low to cover your costs.

Or you might realize the fundamental idea for your business is sound, but how you implement that idea should change. Maybe establishing a storefront for your operation isn't as cost-effective as taking your products directly to customers--not only will your operating costs be lower, but you can charge a premium since you provide additional customer convenience.

Think of it this way. Successful businesses do not remain static. They learn from mistakes, and adapt and react to changes: changes in the economy, the marketplace, their customers, their products and services, etc. Successful businesses identify opportunities and challenges and react accordingly.

Creating a business plan lets you spot opportunities and challenges without risk. Use your plan to dip your toe in the business water. It's the perfect way to review and revise your ideas and concepts before you ever spend a penny.

Many people see writing a business plan as a "necessary evil" required to attract financing or investors. Instead, see your plan as a no-cost way to explore the viability of your potential business and avoid costly mistakes.

Now let's look at the first section of your business plan: The Executive Summary.

The Executive Summary is a brief outline of the company's purpose and goals. While it can be tough to fit on one or two pages, a good Summary includes:

A brief description of products and services
A summary of objectives
A solid description of the market
A high-level justification for viability (including a quick look at your competition and your competitive advantage)
A snapshot of growth potential
An overview of funding requirements

I know that seems like a lot, and that's why it's so important you get it right. The Executive Summary is often the make-or-break section of your business plan.

A great business solves customer problems. If your Summary cannot clearly describe, in one or two pages, how your business will solve a particular problem and make a profit, then it's very possible the opportunity does not exist--or your plan to take advantage of a genuine opportunity is not well developed.

So think of it as a snapshot of your business plan. Don't try to "hype" your business--focus on helping a busy reader get a great feel for what you plan to do, how you plan to do it, and how you will succeed.

Since a business plan should above all help you start and grow your business, your Executive Summary should first and foremost help you do the following.

1. Refine and tighten your concept.

Think of it as a written elevator pitch (with more detail, of course). Your Summary describes the highlights of your plan, includes only the most critical points, and leaves out less important issues and factors.

As you develop your Summary, you will naturally focus on the issues that contribute most to potential success. If your concept is too fuzzy, too broad, or too complicated, go back and start again. Most great businesses can be described in several sentences, not several pages.

2. Determine your priorities.

Your business plan walks the reader through your plan. What ranks high in terms of importance? Product development? Research? Acquiring the right location? Creating strategic partnerships?

Your Summary can serve as a guide to writing the rest of your plan.

3. Make the rest of the process easy.

Once your Summary is complete, you can use it as an outline for the rest of your plan. Simply flesh out the highlights with more detail.

Then work to accomplish your secondary objective by focusing on your readers. Even though you may be creating a business plan solely for your own purposes, at some point you may decide to seek financing or to bring on other investors, so make sure your Summary meets their needs as well. Work hard to set the stage for the rest of the plan. Let your excitement for your idea and your business shine through.

In short, make readers want to turn the page and keep reading. Just make sure your sizzle meets your steak by providing clear, factual descriptions.

How? The following is how an Executive Summary for a bicycle rental store might read.

Introduction

Blue Mountain Cycle Rentals will offer road and mountain bike rentals in a strategic location directly adjacent to an entrance to the George Washington National Forest. Our primary strategy is to develop Blue Mountain Cycle Rentals as the most convenient and cost-effective rental alternative for the thousands of visitors who flock to the area each year.

Once underway, we will expand our scope and take advantage of high-margin new equipment sales and leverage our existing labor force to sell and service those products. Within three years we intend to create the area's premier destination for cycling enthusiasts.

Company and Management

Blue Mountain Cycle Rentals will be located at 321 Mountain Drive, a location providing extremely high visibility as well as direct entry and exit from a primary national park access road. The owner of the company, Marty Cycle, has over 20 years experience in the bicycle business, having served as a product manager for Acme Cycles as well as the general manager of Epic Cycling.

Because of his extensive industry contacts, initial equipment inventory will be purchased at significant discounts from OEM suppliers as well by sourcing excess inventory from shops around the country.

Because of the somewhat seasonal nature of the business, part-time employees will be hired to handle spikes in demand. Those employees will be attracted through competitive wages as well as discounts products and services.

460,000 people visited the George Washington National Forest during the last 12 months. While the outdoor tourism industry as a whole is flat, the park expects its number of visitors to grow over the next few years.

The economic outlook indicates fewer VA, WV, NC, and MD cycling enthusiasts will travel outside the region
The park has added a camping and lodging facilities that should attract an increased number of visitors
The park has opened up additional areas for trail exploration and construction, ensuring a greater number of single-track options and therefore a greater number of visitors

The market potential inherent in those visitors is substantial. According to third-party research data, approximately 30 percent of all cyclists would rather rent than transport their own bicycles, especially those who are visiting the area for reasons other than cycling.

Competitive Advantages

The cycling shops located in Harrisonburg, VA, are direct and established competitors. Our two primary competitive advantages will be location and lower costs.

Our location is also a key disadvantage where non-park rentals are concerned. We will overcome that issue by establishing a satellite location in Harrisonburg for enthusiasts who wish to rent bicycles to use in town or on other local trails.

We will also use online tools to better engage customers, allowing them to reserve and pay online as well as create individual profiles regarding sizes, preferences, and special needs.

Financial Projections

Blue Mountain Cycle Rentals expects to earn a modest profit by year two based on projected sales. Our projections are based on the following key assumptions:

Initial growth will be moderate as we establish awareness in the market
Initial equipment purchases will stay in service for an average of three to four years; after two years we will begin investing in "new" equipment to replace damaged or obsolete equipment
Marketing costs will not exceed 14 percent of sales
Residual profits will be reinvested in expanding the product and service line

We project first-year revenue of $720,000 and a 10 percent growth rate for the next two years. Direct cost of sales is projected to average 60 percent of gross sales, including 50 percent for the purchase of equipment and 10 percent for the purchase of ancillary items. Net income is projected to reach $105,000 in year three as sales increase and operations become more efficient.

And so on ...

Keep in mind this is just a made-up example of how your Summary might read. Also keep in mind this example focused on the rental business, so a description of products was not included. (They'll show up later.) If your business will manufacture or sell products, or provide a variety of services, then be sure to include a Products and Services section in your Summary. (In this case the products and services are obvious, so including a specific section would be redundant.)

Bottom line: Provide some sizzle in your Executive Summary, but make sure you show a reasonable look at the steak, too.

Providing an overview of your business can be tricky, especially when you're still in the planning stages. If you already own an existing business, summarizing your current operation should be relatively easy; it can be a lot harder to explain what you plan to become .

So start by taking a step back.

Think about what products and services you will provide, how you will provide those items, what you need to have in order to provide those items, exactly who will provide those items, and most important, whom you will provide those items to.

Consider our bicycle rental business example. It's serves retail customers. It has an online component, but the core of the business is based on face-to-face transactions for bike rentals and support.

So you'll need a physical location, bikes, racks and tools and supporting equipment, and other brick-and-mortar related items. You'll need employees with a very particular set of skills to serve those customers, and you'll need an operating plan to guide your everyday activities.

Sound like a lot? It boils down to:

What you will provide
What you need to run your business
Who will service your customers, and
Who your customers are.

In our example, defining the above is fairly simple. You know what you will provide to meet your customer's needs. You will of course need a certain quantity of bikes to service demand, but you will not need a number of different types of bikes. You need a retail location, furnished to meet the demands of your business. You need semi-skilled employees capable of sizing, customizing, and repairing bikes.

And you know your customers: cycling enthusiasts.

In other businesses and industries, answering the above questions can be more difficult. If you open a restaurant, what you plan to serve will in some ways determine your labor needs, the location you choose, the equipment you need to purchase. And, most important, it will help define your customer. Changing any one element may change other elements; if you cannot afford to purchase expensive kitchen equipment, you may need to adapt your menu accordingly. If you hope to attract an upscale clientele, you may need to invest more in purchasing a prime location and creating an appealing ambience.

So where do you start? Focus on the basics first:

Identify your industry. Retail, wholesale, service, manufacturing, etc. Clearly define your type of business.
Identify your customer. You cannot market and sell to customers until you know who they are.
Explain the problem you solve. Successful businesses create customer value by solving problems. In our rental example, one problem is cycling enthusiasts who don't--or can't--travel with bikes. Another problem is casual cyclists who can't--or choose not to--spend significant sums on their own bikes. The rental shop will solve that problem by offering a lower-cost and convenient alternative.
Show how you will solve that problem. Our rental shop will offer better prices and enhanced services like remote deliveries, off-hours equipment returns, and online reservations.

If you are still stuck, try answering these questions. Some may pertain to you; others may not.

Who is my average customer? Who am I targeting? (Unless you plan to open a grocery store, you should be unlikely to answer, "Everyone!")
What pain point do I solve for my customers?
How will I overcome that paint point?
Where will I fail to solve a customer problem, and what can I do to overcome that issue? (In our rental example, one problem is a potential lack of convenience; we will overcome that issue by offering online reservations, on-resort deliveries, and drive-up equipment returns.)
Where will I locate my business?
What products, services, and equipment do I need to run my business?
What skills do my employees need, and how many do I need?
How will I beat my competition?
How can I differentiate myself from my competition in the eyes of my customers? (You can have a great plan to beat your competition, but you also must win the perception battle among your customers. If customers don't feel you are different, then you aren't truly different. Perception is critical.)

Once you work through this list you will probably end up with a lot more detail than is necessary for your business plan. That is not a problem: Start summarizing the main points. For example, your Business Overview and Objectives section could start something like this:

History and Vision

Blue Mountain Cycle Rentals is a new retail venture that will be located at 321 Mountain Drive, directly adjacent to an extremely popular cycling destination. Our initial goal is to become the premier provider for bicycle rentals. We will then leverage our customer base and position in the market to offer new equipment sales as well as comprehensive maintenance and service, custom equipment fittings, and expert trail advice.

Achieve the largest market share bicycle rentals in the area
Generate a net income of $235,000 at the end of the second year of operation
Minimize rental inventory replacement costs by maintaining a 7 percent attrition rate on existing equipment (industry average is 12 percent)

Keys to Success

Provide high-quality equipment, sourcing that equipment as inexpensively as possible through existing relationships with equipment manufacturers and other cycling shops
Use signage to attract visitors traveling to the national forest, highlighting our cost and service advantage
Create additional customer convenience factors to overcome a perceived lack of convenience for customers planning to ride roads and trails some distance away from our shop
Develop customer incentive and loyalty programs to leverage customer relationships and create positive word of mouth

You could certainly include more detail in each section; this is simply a quick guide. And if you plan to develop a product or service, you should thoroughly describe the development process as well as the end result.

The key is to describe what you will do for your customers--if you can't, you won't have any customers.

In the Products and Services section of your business plan, you will clearly describe--yep--the products and services your business will provide.

Keep in mind that highly detailed or technical descriptions are not necessary and definitely not recommended. Use simple terms and avoid industry buzzwords.

On the other hand, describing how the company's products and services will differ from the competition is critical. So is describing why your products and services are needed if no market currently exists. (For example, before there was Federal Express, overnight delivery was a niche business served by small companies. FedEx had to define the opportunity for a new, large-scale service and justify why customers needed--and would actually use --that service.)

Patents, copyrights, and trademarks you own or have applied for should also be listed in this section.

Depending on the nature of your business, your Products and Services section could be very long or relatively short. If your business is product-focused, you will want to spend more time describing those products.

If you plan to sell a commodity item and the key to your success lies in, say, competitive pricing, you probably don't need to provide significant product detail. Or if you plan to sell a commodity readily available in a variety of outlets, the key to your business may not be the commodity itself but your ability to market in a more cost-effective way than your competition.

But if you're creating a new product (or service), make sure you thoroughly explain the nature of the product, its uses, and its value, etc.--otherwise your readers will not have enough information to evaluate your business.

Key questions to answer:

Are products or services in development or existing (and on the market)?
What is the timeline for bringing new products and services to market?
What makes your products or services different? Are there competitive advantages compared with offerings from other competitors? Are there competitive disadvantages you will need to overcome? (And if so, how?)
Is price an issue? Will your operating costs be low enough to allow a reasonable profit margin?
How will you acquire your products? Are you the manufacturer? Do you assemble products using components provided by others? Do you purchase products from suppliers or wholesalers? If your business takes off, is a steady supply of products available?

In the cycling rental business example we've been using, products and services could be a relatively simple section to complete or it could be fairly involved. It depends on the nature of the products the company plans to rent to customers.

If Blue Mountain Cycling Rentals plans to market itself as a provider of high-end bikes, describing those bikes--and the sources for those bikes--is important, since "high-end cycling rentals" is intended to be a market differentiation. If the company plans to be the low-cost provider, then describing specific brands of equipment is probably not necessary.

Also, keep in mind that if a supplier runs out of capacity--or goes out of business altogether--you may not have a sufficient supply to meet your demand. Plan to set up multiple vendor or supplier relationships, and describe those relationships fully.

Remember, the primary goal of your business plan is to convince you that the business is viable--and to create a road map for you to follow.

The Products and Services section for our cycling rental business could start something like this:

Product Description

Blue Mountain Cycle Rentals will provide a comprehensive line of bicycles and cycling equipment for all ages and levels of ability. Since the typical customer seeks medium-quality equipment and excellent services at competitive prices, we will focus on providing brands like Trek bikes, Shimano footwear, and Giro helmets. These manufacturers have a widespread reputation as mid- to high-level quality, unlike equipment typically found in the rental market.

The following is a breakdown of anticipated rental price points, per day and per week:

Bicycle $30/$120
Helmet $6/$30
Customers can extend the rental term online without visiting the store.
A grace period of two hours will be applied to all rentals; customers who return equipment within that two-hour period will not be charged an additional fee.

Competition

Blue Mountain Cycle Rentals will have clear advantages over its primary competitors, the bike shops located in Harrisonburg, VA:

Newer equipment inventory with higher perceived quality
Price points 15 percent below the competition
Online renewals offering greater convenience
A liberal return grace period that will reinforce our reputation as a customer-friendly rental experience

Future Products

Expansion will allow us to move product offerings into new equipment sales. We will also explore maintenance and fitting services, leveraging our existing maintenance staff to provide value-added services at a premium price.

When you draft your Products and Services section, think of your reader as a person who knows little to nothing about your business. Be clear and to the point.

Think of it this way: The Products and Services section answers the "what" question for your business. Make sure you fully understand the "what" factor; you may run the business, but your products and services are its lifeblood.

Market research is critical to business success. A good business plan analyzes and evaluates customer demographics, purchasing habits, buying cycles, and willingness to adopt new products and services.

The process starts with understanding your market and the opportunities inherent in that market. And that means you'll need to do a little research. Before you start a business you must be sure there is a viable market for what you plan to offer.

That process requires asking, and more importantly answering, a number of questions. The more thoroughly you answer the following questions, the better you will understand your market.

Start by evaluating the market at a relatively high level, answering some high-level questions about your market and your industry:

What is the size of the market? Is it growing, stable, or in decline?
Is the overall industry growing, stable, or in decline?
What segment of the market do I plan to target? What demographics and behaviors make up the market I plan to target?
Is demand for my specific products and services rising or falling?
Can I differentiate myself from the competition in a way customers will find meaningful? If so, can I differentiate myself in a cost-effective manner?
What do customers expect to pay for my products and services? Are they considered to be a commodity or to be custom and individualized?

Fortunately, you've already done some of the legwork. You've already defined and mapped out your products and services. The Market Opportunities section provides a sense-check of that analysis, which is particularly important since choosing the right products and services is such a critical factor in business success.

But your analysis should go further: Great products are great, but there still must be a market for those products. (Ferraris are awesome, but you're unlikely to sell many where I live.)

So let's dig deeper and quantify your market. Your goal is to thoroughly understand the characteristics and purchasing ability of potential customers in your market. A little Googling can yield a tremendous amount of data.

For the market you hope to serve, determine:

Your potential customers. In general terms, potential customers are the people in the market segment you plan to target. Say you sell jet skis; anyone under the age of 16 and over the age of 60 or so is unlikely to be a customer. Plus, again in general terms, women make up a relatively small percentage of jet ski purchasers. Determining the total population for the market is not particularly helpful if your product or service does not serve a need for the entire population. Most products and services do not.
Total households. In some cases determining the number of total households is important depending on your business. For example, if you sell heating and air conditioning systems, knowing the number of households is more important than simply knowing the total population in your area. While people purchase HVAC systems, "households" consume those systems.
Median income. Spending ability is important. Does your market area have sufficient spending power to purchase enough of your products and services to enable you to make a profit? Some areas are more affluent than others. Don't assume every city or locality is the same in terms of spending power. A service that is viable in New York City may not be viable in your town.
Income by demographics. You can also determine income levels by age group, by ethnic group, and by gender. (Again, potential spending power is an important number to quantify.) Senior citizens could very well have a lower income level than males or females age 45 to 55 in the prime of their careers. Or say you plan to sell services to local businesses; in that case, try to determine the amount they currently spend on similar services.

The key is to understand the market in general terms and then to dig deeper to understand whether there are specific segments within that market--the segments you plan to target--that can become customers and support the growth of your business.

Also keep in mind that if you plan to sell products online the global marketplace is incredibly crowded and competitive. Any business can sell a product online and ship that product around the world. Don't simply assume that just because "the bicycle industry is a $62 billion business" (a number I just made up) that you can capture a meaningful percentage of that market.

On the other hand, if you live in an area with 50,000 people and there's only one bicycle shop, you may be able to enter that market and attract a major portion of bicycle customers in your area.

Always remember it's much easier to serve a market you can define and quantify.

After you complete your research you may feel a little overwhelmed. While data is good, and more data is great, sifting through and making sense of too much data can be daunting.

For the purposes of your business plan, narrow your focus and focus on answering these main questions:

What is your market? Include geographic descriptions, target demographics, and company profiles (if you're B2B). In short: Who are your customers?
What segment of your market will you focus on? What niche will you attempt to carve out? What percentage of that market do you hope to penetrate and acquire?
What is the size of your intended market? What is the population and spending habits and levels?
Why do customers need and why will they be willing to purchase your products and services?
How will you price your products and services? Will you be the low cost provider or provide value-added services at higher prices?
Is your market likely to grow? How much? Why?
How can you increase your market share over time?

The Market Opportunities section for our cycling rental business could start something like this:

Market Summary

Consumer spending on cycling equipment reached $9,250,000 in the states of VA, WV, MD, and NC last year. While we expect sales to rise, for the purposes of performing a conservative analysis we have projected a zero growth rate for the next three years.

In those states 2,500,000 people visited a national forest last year. Our target market includes customers visiting the Shenandoah National Forest; last year 120,000 people visited the area during spring, summer, and fall months.

Over time, however, we do expect equipment rentals and sales to increase as the popularity of cycling continues to rise. In particular we forecast a spike in demand in 2015 since the national road racing championships will be held in Richmond, VA.

Market Trends

Participation and population trends favor our venture:

Recreational sports in general and both family-oriented and "extreme" sports continue to gain in exposure and popularity.
Western VA and eastern WV have experienced population growth rates nearly double that of the country as a whole.
Industry trends show cycling has risen at a more rapid rate than most other recreational activities.

Market Growth

According to the latest studies, recreation spending in our target market has grown by 14 percent per year for the past three years.

In addition, we anticipate greater than industry-norm growth rates for cycling in the area due to the increase in popularity of cycling events like the Alpine Loop Gran Fondo.

Market Needs

Out target market has one basic need: The availability to source bicycle rentals at a competitive price. Our only other competition are the bike shops in Harrisonburg, VA, and our location will give us a competitive advantage over those and other companies who try to serve our market.

You may want to add other categories to this section based on your particular industry.

For example, you might decide to provide information about Market Segments. In our case, the cycling rental business does not require much segmentation. Rentals are typically not broken down into segments like "inexpensive," "midrange," and "high-end." For the most part rental bikes are more of a commodity. (Although you'll notice in our Products and Services section, we decided to provide "high-end" rentals.)

But say you decide to open a clothing store. You could focus on high fashion, or children's clothes, or outdoor wear, or casual--you could segment the market in a number of ways. If that's the case, provide detail on segmentation that supports your plan.

The key is to define your market--and then show how you will serve your market.

Providing great products and services is wonderful, but customers must actually know those products and services exist. That's why marketing plans and strategies are critical to business success. (Duh, right?)

But keep in mind marketing is not just advertising. Marketing--whether advertising, public relations, promotional literature, etc.--is an investment in the growth of your business.

Like any other investment you would make, money spent on marketing must generate a return. (Otherwise why make the investment?) While that return could simply be greater cash flow, good marketing plans result in higher sales and profits.

So don't simply plan to spend money on a variety of advertising efforts. Do your homework and create a smart marketing program .

Here are some of the basic steps involved in creating your marketing plan:

Focus on your target market. Who are your customers? Who will you target? Who makes the decisions? Determine how you can best reach potential customers.
Evaluate your competition. Your marketing plan must set you apart from your competition, and you can't stand out unless you know your competition. (It's hard to stand out from a crowd if you don't know where the crowd stands.) Know your competitors by gathering information about their products, service, quality, pricing, and advertising campaigns. In marketing terms, what does your competition do that works well? What are their weaknesses? How can you create a marketing plan that highlights the advantages you offer to customers?
Consider your brand. How customers perceive your business makes a dramatic impact on sales. Your marketing program should consistently reinforce and extend your brand. Before you start to market your business, think about how you want your marketing to reflect on your business and your products and services. Marketing is the face of your to potential customers--make sure you put your best face forward.
Focus on benefits. What problems do you solve? What benefits do you deliver? Customers don't think in terms of products--they think in terms of benefits and solutions. Your marketing plan should clearly identify benefits customers will receive. Focus on what customers get instead of on what you provide. (Take Dominos; theoretically they're in the pizza business, but really they're a delivery business.)
Focus on differentiation. Your products and services have to stand out from the competition in some way. How will you compete in terms of price, product, or service?

Then focus on providing detail and backup for your marketing plan.

What is your budget for sales and marketing efforts?
How will you determine if your initial marketing efforts are successful? In what ways will you adapt if your initial efforts do not succeed?
Will you need sales representatives (inside or external) to promote your products?
Can you set up public relations activities to help market your business?

The Sales and Marketing section for our cycling rental business could start something like this:

Target Market

The target market for Blue Mountain Cycling Rentals is western VA, eastern WV, southwestern MD, and northern NC. While customers in the counties surrounding the George Washington National Forest make up 35 percent of our potential customer base, much of our market travels from outside that geographic area.

Marketing Strategy

Our marketing strategy will focus on three basic initiatives:

Road signage. Access to the forest is restricted to a few primary entrances, and visitors reach those entrances after traveling on one of several main roadways. Since customers currently rent bicycles in the local town of Harrisonburg, road signage will communicate our value proposition to all potential customers.
Web initiatives. Our website will attract potential visitors to the resort. We will partner with local businesses that serve our target market to provide discounts and incentives.
Promotional events. We will hold regular events with professional cyclists, like demonstrations and autograph signings, to bring more customers to the store as well as to extend the athletes' "brand" to our brand.

Pricing Strategy

We will not be the low-cost provider for our target market. Our goal is to provide mid- to high-end equipment. However, we will create web-based loyalty programs to incent customers to set up online profiles and reserve and renew equipment rentals online, and provide discounts for those who do. Over time we will be able to market specifically to those customers.

Just as in the Market Opportunity section, you may want to include a few more categories. For example, if your business involves a commission-compensated sales force, describe your Sales Programs and incentives. If you distribute products to other companies or suppliers and those distribution efforts will impact your overall marketing plans, lay out your Distribution Strategy.

The key is to show you understand your market and you understand how you will reach your market. Marketing and promotions must result in customers--your goal is to thoroughly describe how you will acquire and keep your customers.

Also keep in mind you may want to include examples of marketing materials you have already prepared, like website descriptions, print ads, web-based advertising programs, etc. While you don't need to include samples, taking the time to create actual marketing materials might help you better understand and communicate your marketing plans and objectives.

Make sure your Sales and Marketing section answers the "How will I reach my customers?" question.

Competitive Advantage

The Competitive Analysis section of your business plan is devoted to analyzing your competition--both your current competition and potential competitors who might enter your market.

Every business has competition. Understanding the strengths and weaknesses of your competition--or potential competition--is critical to making sure your business survives and grows. While you don't need to hire a private detective, you do need to thoroughly assess your competition on a regular basis even if you plan to run only a small business.

In fact, small businesses can be especially vulnerable to competition, especially when new companies enter a marketplace.

Competitive analysis can be incredibly complicated and time-consuming, but it doesn't have to be. Here is a simple process you can follow to identify, analyze, and determine the strengths and weaknesses of your competition.

Profile Current Competitors

First, develop a basic profile of each of your current competition. For example, if you plan to open an office supply store, you may have three competing stores in your market.

Online retailers will also provide competition, but thoroughly analyzing those companies will be less valuable unless you also decide you want to sell office supplies online. (Although it's also possible that they--or, say, Amazon--are your real competition. Only you can determine that.)

To make the process easier, stick to analyzing companies you will directly compete with. If you plan to set up an accounting firm, you will compete with other accounting firms in your area. If you plan to open a clothing store, you will compete with other clothing retailers in your area.

Again, if you run a clothing store, you also compete with online retailers, but there is relatively little you can do about that type of competition other than to work hard to distinguish yourself in other ways: great service, friendly salespeople, convenient hours, truly understanding your customers, etc.

Once you identify your main competitors, answer these questions about each one. And be objective. It's easy to identify weaknesses in your competition, but less easy (and a lot less fun) to recognize how they may be able to outperform you:

What are their strengths? Price, service, convenience, and extensive inventory are all areas where you may be vulnerable.
What are their weaknesses? Weaknesses are opportunities you should plan to take advantage of.
What are their basic objectives? Do they seek to gain market share? Do they attempt to capture premium clients? See your industry through their eyes. What are they trying to achieve?
What marketing strategies do they use? Look at their advertising, public relations, etc.
How can you take market share away from their business?
How will they respond when you enter the market?

While these questions may seem like a lot of work to answer, in reality the process should be fairly easy. You should already have a feel for the competition's strengths and weaknesses--if you know your market and your industry.

To gather information, you can also:

Check out their websites and marketing materials. Most of the information you need about products, services, prices, and company objectives should be readily available. If that information is not available, you may have identified a weakness.
Visit their locations. Take a look around. Check out sales materials and promotional literature. Have friends stop in or call to ask for information.
Evaluate their marketing and advertising campaigns. How a company advertises creates a great opportunity to uncover the objectives and strategies of that business. Advertising should help you quickly determine how a company positions itself, who it markets to, and what strategies it employs to reach potential customers.
Browse. Search the Internet for news, public relations, and other mentions of your competition. Search blogs and Twitter feeds as well as review and recommendation sites. While most of the information you find will be anecdotal and based on the opinion of just a few people, you may at least get a sense of how some consumers perceive your competition. Plus you may also get advance warning about expansion plans, new markets they intend to enter, or changes in management.

Keep in mind competitive analysis does more than help you understand your competition. Competitive analysis can also help you identify changes you should make to your business strategies. Learn from competitor strengths, take advantage of competitor's weaknesses, and apply the same analysis to your own business plan.

You might be surprised by what you can learn about your business by evaluating other businesses.

Identify Potential Competitors

It can be tough to predict when and where new competitors may pop up. For starters, regularly search for news on your industry, your products, your services, and your target market.

But there are other ways to predict when competition may follow you into a market. Other people may see the same opportunity you see. Think about your business and your industry, and if the following conditions exist, you may face competition does the road:

The industry enjoys relatively high profit margins
Entering the market is relatively easy and inexpensive
The market is growing--the more rapidly it is growing the greater the risk of competition
Supply and demand is off--supply is low and demand is high
Very little competition exists, so there is plenty of "room" for others to enter the market

In general terms, if serving your market seems easy you can safely assume competitors will enter your market. A good business plan anticipates and accounts for new competitors.

Now distill what you've learned by answering these questions in your business plan:

Who are my current competitors? What is their market share? How successful are they?
What market do current competitors target? Do they focus on a specific customer type, on serving the mass market, or on a particular niche?
Are competing businesses growing or scaling back their operations? Why? What does that mean for your business?
How will your company be different from the competition? What competitor weaknesses can you exploit? What competitor strengths will you need to overcome to be successful?
What will you do if competitors drop out of the marketplace? What will you do to take advantage of the opportunity?
What will you do if new competitors enter the marketplace? How will you react to and overcome new challenges?

The Competitive Analysis section for our cycling rental business could start something like this:

Primary Competitors

Our nearest and only competition is the bike shops in Harrisonburg, VA. Our next closest competitor is located over 100 miles away.

The in-town bike shops will be strong competitors. They are established businesses with excellent reputations. On the other hand, they offer inferior-quality equipment and their location is significantly less convenient.

Secondary Competitors

We do not plan to sell bicycles for at least the first two years of operation. However, sellers of new equipment do indirectly compete with our business since a customer who buys equipment no longer needs to rent equipment.

Later, when we add new equipment sales to our operation, we will face competition from online retailers. We will compete with new equipment retailers through personalized service and targeted marketing to our existing customer base, especially through online initiatives.

Opportunities

By offering mid- to high-end quality equipment, we provide customers the opportunity to "try out" bikes they may wish to purchase at a later date, providing additional incentive (besides cost savings) to use our service.
Offering drive-up, express rental return services will be seen as a much more attractive option compared with the hassle of renting bikes in Harrisonburg and transporting them to intended take-off points for rides.
Online initiatives like online renewals and online reservations enhances customer convenience and positions us as a cutting-edge supplier in a market largely populated, especially in the cycling segment, by customers who tend to be early technology adapters.
Renting bikes and cycling equipment may be perceived by some of our target market as a commodity transaction. If we do not differentiate ourselves in terms of quality, convenience, and service, we could face additional competition from other entrants to the market.
One of the bike shops in Harrisonburg is a subsidiary of a larger corporation with significant financial assets. If we, as hoped, carve out a significant market share, the corporation may use those assets to increase service, improve equipment quality, or cut prices.

While your business plan is primarily intended to convince you that your business makes sense, keep in mind most investors look closely at your competitive analysis. A common mistake made by entrepreneurs is assuming they will simply "do it better" than any competition.

Experienced businesspeople know you will face stiff competition: showing you understand your competition, understand your strengths and weaknesses relative to that competition, and that you understand you will have to adapt and change based on that competition is critical.

And, even if you do not ever plan to seek financing or bring in investors, you absolutely must know your competition.

The Competitive Analysis section helps you answer the "Against whom?" question.

The next step in creating your business plan is to develop an Operations Plan that will serve your customers, keep your operating costs in line, and ensure profitability . Your ops plan should detail strategies for managing, staffing, manufacturing, fulfillment, inventory--all the stuff involved in operating your business on a day-to-day basis.

Fortunately, most entrepreneurs have a better handle on their operations plan than on any other aspect of their business. After all, while it may not seem natural to analyze your market or your competition, most budding entrepreneurs tend to spend a lot of time thinking about how they will run their businesses.

Your goal is to answer the following key questions:

What facilities, equipment, and supplies do you need?
What is your organizational structure? Who is responsible for which aspects of the business?
Is research and development required, either during start up or as an ongoing operation? If so, how will you accomplish this task?
What are your initial staffing needs? When and how will you add staff?
How will you establish business relationships with vendors and suppliers? How will those relationships impact your day-to-day operations?
How will your operations change as the company grows? What steps will you take to cut costs if the company initially does not perform up to expectations?

Operations plans should be highly specific to your industry, your market sector, and your customers. Instead of providing an example like I've done with other sections, use the following to determine the key areas your plan should address:

Location and Facility Management

In terms of location, describe:

Zoning requirements
The type of building you need
The space you need
Power and utility requirements
Access: Customers, suppliers, shipping, etc.
Specialized construction or renovations
Interior and exterior remodeling and preparation

Daily Operations

Production methods
Service methods
Inventory control
Sales and customer service
Receiving and Delivery
Maintenance, cleaning, and re-stocking
Licenses and permits
Environmental or health regulations
Patents, trademarks, and copyrights

Personnel Requirements

Typical staffing
Breakdown of skills required
Recruiting and retention
Policies and procedures
Pay structures
Anticipated inventory levels
Turnover rate
Seasonal fluctuations in demand
Major suppliers
Back-up suppliers and contingency plans
Credit and payment policies

Sound like a lot? It can be, but not all of the above needs to be in your business plan.

You should think through and create a detailed plan for each category, but you won't need to share the results with the people who read your business plan

Working through each issue and developing concrete operations plans helps you in two major ways:

If you don't plan to seek financing or outside capital, you can still take advantage of creating a comprehensive plan that addresses all of your operational needs.
If you do seek financing or outside capital, you may not include all the detail in your business plan--but you will have answers to any operations questions at your fingertips.

Think of Operations as the "implementation" section of your business plan. What do you need to do? How will you get it done? Then create an overview of that plan to make sure your milestones and timeline make sense.

That way the operations section answers the "How?" question.

Many investors and lenders feel the quality and experience of the management team is one of the most important factors used to evaluate the potential of a new business.

But putting work into the Management Team section will not only benefit people who may read your plan. It will also help you evaluate the skills, experiences, and resources your management team will need . Addressing your company's needs during implementation will make a major impact on your chances for success.

Who are the key leaders? (If actual people have not been identified, describe the type of people needed.) What are their experiences, educational backgrounds, and skills?
Do your key leaders have industry experience? If not, what experience do they bring to the business that is applicable?
What duties will each position perform? (Creating an organization chart might be helpful.) What authority is granted to and what responsibilities are expected in each position?
What salary levels will be required to attract qualified candidates for each position? What is the salary structure for the company, by position?

The Management Team section for our cycling rental business could start something like this:

Jim Rouleur, Owner and Manager

Joe has over 20 years experience in the cycling business. He served for 10 years as a product manager for Acme Bikes. After that he was the operations manager of Single Track Cycles, a full-service bike shop located in Bend, Oregon. He has an undergraduate degree in marketing from Duke University and an MBA from Virginia Commonwealth University. (A complete resume for Mr. Rouleur can be found in the Appendix.)

Mary Gearset, Assistant Manager

Mary was the 2009 U.S. Mountain Biking National Champion. She worked in product development for High Tec frames, creating custom frames and frame modifications for professional cyclists. She also has extensive customer service and sales experience, having worked for four years as the online manager of Pro Parts Unlimited, an online retailer of high-end cycling equipment and accessories.

In some instances you may also wish to describe your staffing plans.

For example, if you manufacture a product or provide a service and will hire a key skilled employee, describe that employee's credentials. Otherwise, include staffing plans in the Operations section.

One key note: Don't be tempted to add a "name" to your management team in hopes of attracting investors. Celebrity management team members may attract the attention of your readers, but experienced lenders and investors will immediately ask what role that person will actually play in the running of the business--and in most cases those individuals won't play any meaningful role.

If you don't have a lot of experience--but are willing to work hard to overcome that lack of experience--don't be tempted to include people in your plan who will not actually work in the business.

If you can't survive without help, that's okay. In fact, that's expected; no one does anything worthwhile on their own. Just make plans to get help from the right people.

Finally, when you create your Management section, focus on credentials but pay extra attention to what each person actually will do . Experience and reputation are great, but action is everything.

That way your Management section will answer the "Who is in charge?" question.

Numbers tell the story. Bottom line results indicate the success or failure of any business.

Financial projections and estimates help entrepreneurs, lenders, and investors or lenders objectively evaluate a company's potential for success. If a business seeks outside funding, providing comprehensive financial reports and analysis is critical.

But most important, financial projections tell you whether your business has a chance of being viable--and if not let you know you have more work to do.

Most business plans include at least five basic reports or projections:

Balance Sheet: Describes the company cash position including assets, liabilities, shareholders, and earnings retained to fund future operations or to serve as funding for expansion and growth. It indicates the financial health of a business.
Income Statement: Also called a Profit and Loss statement, this report lists projected revenue and expenses. It shows whether a company will be profitable during a given time period.
Cash Flow Statement: A projection of cash receipts and expense payments. It shows how and when cash will flow through the business; without cash, payments (including salaries) cannot be made.
Operating Budget: A detailed breakdown of income and expenses; provides a guide for how the company will operate from a "dollars" point of view.
Break-Even Analysis: A projection of the revenue required to cover all fixed and variable expenses. Shows when, under specific conditions, a business can expect to become profitable.

It's easy to find examples of all of the above. Even the most basic accounting software packages include templates and samples. You can also find templates in Excel and Google Docs. (A quick search like "google docs profit and loss statement" yields plenty of examples.)

Or you can work with an accountant to create the necessary financial projections and documents. Certainly feel free to do so, but first play around with the reports yourself. While you don't need to be an accountant to run a business, you do need to understand your numbers, and the best way to understand your numbers is usually to actually work with your numbers.

But ultimately the tools you use to develop your numbers are not as important as whether those numbers are as accurate as possible--and whether those numbers help you decide whether to take the next step and put your business plan into action.

Then Financial Analysis can help you answer the most important business question: "Can we make a profit?"

Some business plans include less essential but potentially important information in an Appendix section. You may decide to include, as backup or additional information:

Resumes of key leaders
Additional descriptions of products and services
Legal agreements
Organizational charts
Examples of marketing and advertising collateral
Photographs of potential facilities, products, etc.
Backup for market research or competitive analysis
Additional financial documents or projections

Keep in mind creating an Appendix is usually only necessary if you're seeking financing or hoping to bring in partners or investors. Initially the people reading your business plan don't wish to plow through reams and reams of charts, numbers, and backup information. If one does want to dig deeper, fine--he or she can check out the documents in the Appendix.

That way your business plan can share your story clearly and concisely.

Otherwise, since you created your business plan, you should already have the backup.

Tying It All Together

While you may use your business plan to attract investors, partners, suppliers, etc., never forget that the goal of your business plan is to convince you that your idea makes sense.

Because ultimately it's your time, your money, and your effort on the line.

The Daily Digest for Entrepreneurs and Business Leaders

What Are the Financial Assumptions on a Business Plan?

Small Business
Business Planning & Strategy
Financial Business Plans
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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.

How to Start a Candy Store Business
How to Write a One-Year Profit Projection Letter

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

How to present business plans to donors, differences between forecasting & budgeting, why is it important for entrepreneurs to develop financial plans for their companies, how to sell business ideas, how to write your business proposal, business objectives in designing reports, what factors make the difference between a good business plan & an excellent one, how to design a corporate financial plan, what are the key assumptions of a business plan, most popular.

1 How to Present Business Plans to Donors
2 Differences Between Forecasting & Budgeting
3 Why Is It Important for Entrepreneurs to Develop Financial Plans for Their Companies?
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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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Your Initial Business Plan is a Huge List of Assumptions

What sort of assumptions am I talking about? Below are a handful of examples related to the Founders Academy video library I produced and sell to make a little money:

I believe that most first-time entrepreneurs are missing both the skills and experience needed for building and growing a successful startup venture
I believe that most first-time entrepreneurs have a strong desire to educate themselves on topics related to building and growing a startup venture
I believe that streaming videos can be produced to deliver educational insights about successfully building/growing a startup
I believe that entrepreneurs prefer educational information to be delivered via streaming videos either instead of or in addition to written content
I believe that 20 minute topic-specific video modules are more digestible and, therefore, desirable versus longer compilation videos with broader coverage
I believe that most startup founders will be willing to pay $39 to rent a foundational set of 15 video modules
I believe that some startup founders will be willing to pay as much as $99 to rent a more comprehensive set of 50 video modules
I believe that videos can be self-produced and hosted in a manner that delivers a high-quality viewing experience
I believe that the content in individual video modules can be updated or enhanced with minimal effort

You get the idea. I could go on and on when the videos will be first available, how I will make founders aware of them, how they are better than other videos currently on the market, what sort of reviews I will get, etc, etc. Also notice how there are assumptions related to each of the 3 phases of the viability lifecycle. More traditional startup ventures will also include assumptions related to the team they will recruit and the partnerships they will secure.

In fact, here is a starting list of categories to help you identify as many assumptions as possible:

The problem you are solving
The alternatives your customers have to solving the problem
The market you are serving
The competition you will encounter
The customer(s) you plan to sell to
The solution you are building
The methods you will use to attract customers
The way(s) you will make money
The team you will recruit

Avoiding Chaos

If you simply have a random list of 38 assumption statements it’s not going to serve as a valuable management tool. Following are some actions you can take to avoid a chaotic mess.

Group the Assumptions

While in brainstorming mode with your co-founder, just go with the flow and write down as many assumptive statements as you can think of. You can refine them later. And at some point you’ll want to organize the assumptions into groups to better help determine completeness and also to later record your evidence of validation. I typically recommend grouping by phase of the viability lifecycle but you might have a better way to group for your situation.

Not All Assumptions are of Equal Significance

While some assumptions are fundamental to success, others might have a workaround if they aren’t validated. Another way to think about it is the significance of the needed pivot if a given assumption isn’t validated. This might be obvious but you want to prioritize your work and associated validation activities on the ones rated high in significance. To support this, include a column labeled “Significance” in your master, grouped list.

Evidence of Validation

Validation is rarely evident from a single action or observation. If you look at my example list above for the Founders Academy video library, only the last one can be validated with a single action. It’s the one that states “I believe that the content in individual video modules can be updated or enhanced with minimal effort”. The first time I discover a simple method for making a change to a video, this assumption is validated. But all the other assumptions require multiple observed actions or outcomes in order to evidence validation.

Rather than wait for full validation, it is often valuable to track hints of validation. You might refer to it as “initial validation” versus officially “validated”, which is more definitive. In this way, you will take actions to initially validate as many assumptions as possible (with priority on the ones of high significance) and then proceed until you gain full validation for as many as possible.

Alternative Approaches

The method I’ve described in this article represent just one approach to capturing all of the assumptions that make up your initial business plan. Below are two alternatives to explore, if interested.

Business Model Canvas Categories

If you have produced (or plan to produce) a business model canvas or similar, you could use those categories as a guide. Evaluate to make sure you’re getting full coverage of the important aspects of your future business plan, but it should work well with little or no modification.

Back of Napkin Approach to Tracking Progress

I describe this in another article titled “ A Simple Back-of-Napkin Approach to Tracking Company Progress ”. The objective is less on listing and prioritizing the assumptions as described here and more on tracking validation progress on a weekly or monthly basis and also capturing the issues that have been identified along the way.

Taking the List out for a Test Drive

This topic is a full article by itself but is a very important aspect of this exercise. Listing your various assumptions without attempting to validate them is like developing a full set of blueprints to build a new house but not reviewing them with a carpenter, electrician, plumber and other specialists that will actually build your house.

Educate yourself on the topics of Customer Discovery and Design Thinking, then put them to use. And if you’re a customer of my Founders Academy video library, make sure to check out the module titled “ Developing Your Idea ”. I sometimes offer this particular video module for free as a promotion. If so, it will be listed at the top of my Videos page.

Don’t randomly wander through my blog. Take my free online courses instead!!!

I’ve created three online courses, comprised of multiple lesson modules, each including a logically-structured sequence of articles to read, short streaming videos to watch and downloadable resources for your use. The self-paced courses listed below can be accessed on my COURSES page.

Funding the Early Stages (3 lesson modules)
Launching Your Venture (4 lesson modules)
Growing Your Venture (6 lesson modules)

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Strategic Planning

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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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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The In-Depth Guide to Project Assumptions with Examples

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Project assumptions provide a foundation for decision-making, risk management, and project planning. In this guide, we provide expert insight on project assumptions, and you can download helpful templates to effectively gather and manage assumptions.

Included in this article, you’ll find key information, such as the importance of project assumptions , methods for identifying project assumptions , examples of different types of assumptions , and a downloadable project assumptions starter kit .

What Are Assumptions in Project Management?

In project management, assumptions are factors that are believed to be true or certain, though their certainty cannot be fully confirmed. While assumptions come with risks, they serve as a foundation for progress in the face of uncertainty.

No one would ever start a project if they waited to eliminate all uncertainty, but a mistaken assumption can derail project strategy. "Therefore,” says Alan Zucker, founding principal of Project Management Essentials , “you need to document assumptions and validate or confirm them as soon as reasonable. Unvalidated assumptions get you in trouble because you make decisions on bad or partial information."

Everyone makes assumptions on a regular basis. Here are some assumptions we make in everyday life:

The faucet will dispense water when turned on.
The grocery store will have the items on your shopping list in stock.
The internet connection at your office will be available and reliable.
The alarm clock will wake you up at the time you set.
There will be tea bags in the pantry for your morning tea.

If you rely on tea to get you going in the morning, you should regularly check your tea supply before you do your weekly shopping. Similarly, if you have an important meeting early in the morning, you might double-check your alarm or set an additional alarm before going to sleep.

In project management, key assumptions encompass such factors as assuming that there will be uninterrupted power supply at the office every workday or you’ll have an adequate supply of paper for the printer. Assumption analysis , a component of risk management in project planning, involves identifying these assumptions. Inaccurate assumptions can impact the triple constraint of time, money, and scope.

In their International Journal of Project Risk Management article, “ Assumption Surfacing and Monitoring as a Tool in Project Risk Management ,” Nils O. E. Olsson and Ingrid Spjelkavik use case studies to emphasize the importance of project assumptions as fundamental factors influencing the decision to initiate a project. They suggest identifying key assumptions upon which a project is based and presenting them in a format that allows comparison with the current situation.

Project managers derive project assumptions from educated guesses, past experience, and available information. While these factors are typically beyond a manager’s control, it is essential to closely monitor them in order to make quick, accurate adjustments as needed.

Ideally, project assumptions are gathered during the project initiation phase . The project manager lists assumptions in various project documents, such as the business case, project charter , contracts, proposals, scopes of work, and project plans . In contracts, the inclusion of an assumptions list establishes a mutual understanding between the client and vendor. Documenting assumptions ensures that all stakeholders are on the same page and can track these factors through the project lifecycle.

Risks, Issues, Constraints, and Dependencies

Risks are possible events that could have negative effects, whereas issues are problems or challenges that have already happened. Constraints are limitations or restrictions that impact project execution, and dependencies are the connections between tasks or deliverables in a project.

Assumptions provide a foundation for project planning and decision-making, while risks, issues, constraints, and dependencies are factors that can impact the project's progress, execution, and outcomes. Here is more information about each item:

Risk: A risk refers to a potential event or circumstance that might occur in the future and could impact a project's objectives, schedule, budget, or overall success. A risk that could have a positive impact on a project is called an opportunity .
Issue: An issue refers to a problem, challenge, or concern that has already arisen and requires attention and resolution.
Constraint: Every project has constraints , which are inherent limitations or conditions that affect the project’s scope, time, budget, or resources. Project managers might not have direct control over a constraint and must work within it.
Dependency: Certain constraints may give rise to dependencies. A task is dependent on another when its start or completion relies on the start or completion of another task.

Assumptions can introduce risks because they involve uncertainty and the potential for being incorrect. If an assumption turns out to be inaccurate or invalid, it can pose risks to the project's success. Therefore, it is crucial to identify, monitor, and manage project assumptions as part of the overall risk management process.

Why Do We Need Project Assumptions?

Teams use project assumptions to ensure everyone understands key project factors. By documenting assumptions, teams can establish a starting point for future resource and schedule adjustments. This practice enables them to effectively manage uncertainties.

In their International Journal of Project Risk Management article, Olssen and Spjelkavik explain that when the assumptions upon which a project is built cease to be valid, the project might encounter difficulties. Changes associated with these assumptions should be considered significant early warning signs that necessitate quick action.

Highlighting the investment perspective of projects, the authors emphasize the importance of ensuring that the outcomes of a project justify the associated costs and caution that any changes to the assumptions underlying the business case could hinder the project's ability to deliver the expected benefits.

"Projects can be perceived as investments,” they write. “As investments, the effects of the project should justify the costs involved.” They go on to conclude that project risk management should encompass the clarification and monitoring of the assumptions on which the business case relies.

"This name ‘project assumptions’! It's such a milquetoast little title for what is really at the core of getting successful outcomes," says René Ffrench. As a Master Black Belt, Operations Lean Master, and Principal at Firefly Consulting , Ffrench has a unique view of managing assumptions. "Most of the time, we try to do more proactive stuff to get ahead. But sadly, that is not nearly as effective in creating progress as understanding and handling the limitations and constraints. If we remove the barriers, the troops can make it to the front line. It doesn't help much to push the troops faster and further if there are still barriers. Leadership must handle those barriers."

Additionally, generating, sharing, and documenting assumptions as a team helps foster a common understanding of project foundations, which can reveal unknown risks, constraints, and new premises.

"It's funny how we all say the same word, we all hear the same word, we spell it the same, but we have different associations with it," says Michele Barry , who worked as a Principal Consultant at Frontis for more than 13 years. "You could meet to discuss budget, scope, and temperature. People assume they're talking about the same things. You have people with similar backgrounds or people who come together for a common purpose. You assume they have the same goal or the same interpretation of the goal, but it is often not the case."

Ensuring common definitions is especially critical in cross-functional teams because different departments or disciplines may have varying interpretations or terminology for key concepts.

The following example from Zucker’s experience as a project manager highlights the value of surfacing and documenting assumptions. In November, just a month before his project was due for handoff, it was announced that delivery would be delayed because the organization needed a new production server. Flummoxed, Zucker asked why this requirement had surfaced at such a late stage, since discussions about server capacity had been ongoing since May. "They were talking about it, but it was never formalized,” he says. “It slipped through the cracks until the last minute, though there would've been plenty of time to develop alternative approaches."

How Do You Identify Project Assumptions?

Identify assumptions by brainstorming with your team and stakeholders in meetings or individual conversations. Additionally, you can uncover assumptions by researching project documents, regulations, and industry publications. Assess the risk level of each assumption to prioritize them in your project.

"Doing an assumptions bash at the beginning of the project is great. I also think that as the project manager, you need to listen when meeting with your team or teams. People will say things, and you'll think, OK, you've just identified a risk or an assumption," says Zucker.

Follow these steps to identify as many assumptions as possible:

Brainstorm and Seek Stakeholder Input: During the project initiation phase, the project leader should hold brainstorming sessions to gather assumptions. Consider using brainstorming techniques to facilitate the process. Actively engage experienced employees who participated in similar projects or have rich domain knowledge. By seeking their input on what can and can't be assumed, you can tap into valuable expertise and uncover assumptions that might otherwise be overlooked.
Review Documentation: Add to your existing list of assumptions by consulting a range of documents. This includes reviewing risk assessments , risk registers , project issues , constraints , lessons-learned databases, and existing assumptions listed in charters, contracts, and other documentation. Look beyond internal resources and explore industry practices, design specifications, company and business unit history, site requirements, and regulations. Additionally, consider reviewing technical bulletins and other external documents that might contain dynamic factors influencing the project.
Conduct Stakeholder Interviews: Engaging key stakeholders through interviews is a valuable step in identifying assumptions. Interview key stakeholders to get their impression of your preliminary assumptions list. The insights from stakeholders provide a broader understanding of the project context and can reveal assumptions specific to their roles or areas of expertise.
Involve Vendors and Other Third Parties: In addition to internal stakeholders, involving vendors and relevant third parties is crucial for capturing comprehensive assumptions. Solicit vendors and third parties to document their assumptions. Their unique perspective and expertise can contribute to identifying assumptions that might impact the project's success.
Create an Assumptions Log: Use an assumption log template to organize and compile your assumptions, or add them to a RAID template to track them alongside risks, issues, and dependencies. Ensure that each assumption is clearly documented, including relevant details such as the assumption statement, rationale, and potential impact.
Prioritize and Track Assumptions: After compiling assumptions, it is crucial to prioritize them based on their potential impact and level of risk. Consider assigning confidence ratings to assess the likelihood of assumptions being true. Identify assumptions that have high impact or pose significant risks to the project's success. Regularly review and update the assumptions log as the project progresses.

While identifying assumptions, it is important to create an environment where individuals feel comfortable expressing and challenging assumptions without fear of being judged or proven wrong. "We never apologize for learning in Lean Six Sigma ," says Ffrench. "Most learning in Lean Six Sigma and other projects is because of scrapes and difficulties. We're going to put those learnings into our toolbox. We need to celebrate the learning and move on."

Another important consideration is the need to take a broad view and remain attentive to potential unknown factors. For example, take recent supply chain issues that impact projects today. "You can't make the same assumptions you did a few years ago,” says Barry. “Who would have counted on an actual supply chain disruption? Who would have imagined a global pandemic? Things we didn't think twice about before have changed. Now we must question: Are the supplies still there? What are the alternatives? What are their costs? What are their timelines?"

Barry gives an example of a project where a new supplier started packaging goods differently, resulting in the need for a different delivery truck and storage facility. "That's the assumption that no one would have considered because it was a standard item, not anything unique,” she explains. “That's also about good quality control measurements that should be in your project anyway.”

Project Assumption Log Template

Download a Project Assumption Log Template for Excel | Microsoft Word

Use this dedicated project assumption log to effectively manage your assumptions. Record the date of entry, description, verification responsibility, and verification deadline for each assumption. Finally, note any special circumstances or workarounds for problems in the comments section.

Assumption logs don't need to be complicated. "They don't need more than five or six columns," says Zucker. "When did we close it? Who did we assign it to? How close is it to being resolved? Then you can either reuse that status field for the resolution or have a separate field for the resolution."

For more resources, check out this expanded collection of free, printable project assumptions templates .

How to Use an Assumptions Matrix to Prioritize Assumptions

Collect and prioritize assumptions using an assumptions matrix. A typical matrix consists of a 2x2 grid with axes for categorizing assumptions as important or unimportant and likely or unlikely. This matrix helps in prioritizing assumptions based on their impact and likelihood.

Conduct an assumptions bash by inviting stakeholders to a collaborative meeting, either onsite or virtually. Work through the following steps quickly:

Draw a matrix on a physical or digital whiteboard.
Provide real or virtual sticky notes, and prompt participants to quickly write down their assumptions about the project.
Collect the sticky notes, and with input from participants, place each note in one of the four quadrants of the matrix.
Engage in brief discussions regarding any disputed entries until consensus is reached on their prioritization.

Tip: To maintain a focused conversation and prevent prolonged deliberation or unnecessary debate, limit the duration of the exercise to a maximum of two hours.

The quadrant with assumptions deemed important but uncertain deserves special attention. It is crucial to assess the likelihood of these assumptions. However, as Zucker suggests, you shouldn’t completely ignore assumptions assigned to other quadrants, unless they have both low impact and likelihood.

Project Assumption Surfacing Matrix Template

Download a Project Assumption Surfacing Matrix Template for Excel | Microsoft Word

Templates take away the worry about formatting so that you and your team can get down to work. This project assumptions matrix helps your team collect and prioritize assumptions based on likelihood and impact. Simply plot each assumption on the matrix by placing them in the corresponding quadrant based on their importance and certainty ratings. You can customize the axes on this template with your choice of terms.

How to Write Assumptions for a Project

When writing assumptions for a project, include them as you create the business case and project plan. Additionally, document and track all assumptions in an assumption log for reference and monitoring purposes.

An assumption log is an essential tool for writing assumptions and provides a centralized document for tracking assumptions as the project develops. With an assumption log, you enter any changes to those assumptions, decisions, and justifications. Everyone on the team should use the assumption log, explains Ffrench: “It allows us to communicate and validate assumptions with stakeholders and the project team."

An assumption log can also be a critical management tool, especially when there are personnel changes during a project. A well-maintained log will allow anyone to read assumptions at any time during the project. (Note: An assumption log is not a substitute for a risk register .)

Here are the steps to writing assumptions for a project:

Identify Key Factors: Determine the critical factors or variables that are essential for the success of your project.
Frame Assumptions: Formulate assumptions as statements that reflect your beliefs or expectations about the identified factors.
Be Specific and Concise: Ensure that each assumption is clear, specific, and directly related to the project. Avoid ambiguity or vague language.
Consider Different Perspectives: Take into account the viewpoints of project stakeholders and team members to capture a comprehensive range of assumptions.
Document Assumptions: Record the identified assumptions in a structured format, such as an assumption log or document.
Review and Validate: Review the assumptions with relevant stakeholders to ensure accuracy and alignment with project goals and objectives.
Update as Needed: As the project progresses, revisit and update assumptions when new information or insights emerge, or when circumstances change.

When documenting assumptions in your log, be sure to include the following information for each assumption:

Identity Number: Assign a unique ID to each assumption for easy identification.
Log Date: Enter the date the assumption was first logged.
Category: Note which category each assumption falls under, such as budget, scheduling, or product.
Name and Description: Include a name and a brief description of the assumption.
Likelihood Rating: Determine a rating for the certainty of the assumption happening, whether high, medium, or low.
Impact Rating: Determine an impact rating for the assumption, whether high risk, low risk, or no risk.
Owner: Assign an owner for the assumption. The owner is anyone who validates the assumption.
Action Plan: Include a reference to an action plan to mitigate the impact of the assumption should it prove untrue.
Validation Date: Enter the date the owner validated the assumption.
Status: Indicate whether the assumption is open or closed.

What is the best way to ensure that people remember and manage assumptions? "The practical way is the right way to do it," says Ffrench. Both Barry and Ffrench emphasize that any leader or consultant must "first seek to understand" before imposing definitions, templates, tools, or anything else.

"Whatever template you use that the crew is familiar with is probably the best," explains Barry. "My firm message is to consider the user experience and not overengineer it.”

RAID Log Template

Download the RAID Template With Example Data for Excel Download the Blank Project RAID Log Template for Excel

A RAID log is a powerful tool for managing risks, assumptions, issues, and dependencies. With our downloadable RAID log template, you can customize the template to your organization's needs or use the sample template to guide your efforts. Categorize each item, prioritize its urgency, specify the item owner, and include identification and verification dates.

How to Manage Assumptions

To manage project assumptions, start by identifying and documenting them with your project team. Throughout the project lifecycle, regularly review and verify the assumptions in your log, adjusting plans and actions accordingly.

An important part of the verification process is actively involving and interacting with relevant stakeholders and team members while reviewing and assessing project assumptions. This process is commonly called engagement .

Engagement can be as simple as making a phone call to a stakeholder and asking them to validate or challenge an assumption. It might also mean emailing internal resources or contacting people in their homes. "Include the engagement piece and stakeholder mapping in your tracking tool," suggests Barry.

In addition, having a dedicated physical or virtual space for the team allows them to track assumptions alongside contextualizing project information. "The team needs a home base or a nest,” says Ffrench. “Assumptions need to go up on the wall. We've also got the project plan where we're tracking the project as it moves along. We also need to know where these assumptions are woven into all this activity. Probably the most powerful, single tool in project activity that was ever invented is called the RACI." To learn more about this essential project management tool, see this comprehensive guide to RACI matrices .

Tracking and managing assumptions allows you to consider how to mitigate risks before they become issues. If you can’t verify every part of the plan now, form backup plans for critical assumptions and record these contingencies. "It's not magic or rocket science. It's just about being structured or rigorous in following up," says Zucker. As assumptions become less important to goals, you can remove or deprioritize them.

In summary, these are the two key components of managing assumptions:

Track Assumptions: Pay particular attention to high-risk, high-impact assumptions and validate their accuracy. For instance, if the assumption is that coffee supply will be available before a workshop, verify its arrival and mark the assumption as closed.
Adjust as Needed: Assumptions can change. Note the changes and communicate them to the rest of the team to ensure their plans are updated accordingly.

See this complete collection of project management plan templates to find the right project planning template for your project or business.

Examples of Project Assumptions

Project assumptions can apply to all aspects of business development. We’ve created a list of project assumption examples for a website design assignment. Review the list to better understand what various assumptions look like.

Here are several sample assumptions for a team that has been tasked with creating a website for a new business:

Budget: The client will have enough income to pay for the website design and development.
Market Demand: There will be a sufficient demand for the products or services offered on the website to justify the development expense.
Project Scope: The project will focus only on creating an attractive design and establishing the necessary technical infrastructure for online presence.
Timely Launch: The site will be ready in time to promote and support the opening of a brick-and-mortar location.
Stakeholder Engagement: Key stakeholders will actively participate and provide timely feedback throughout the website design project.
Content Availability: The necessary content, such as text, images, and videos, will be readily available and provided by the stakeholders in a timely manner.
Hosting and Server Performance: The selected hosting provider or server will have sufficient capacity and reliability to support the website's traffic and performance requirements.

Types of Project Assumptions

Common types of project assumptions encompass cost, scope, resources, time, quality, environment, and stakeholders. Among these, core assumptions revolve around the iron triangle of scope, cost, and time.

Here are some examples of common assumptions, broken down by type, as well as suggestions for how to mitigate them:

These include assumptions made about the availability, allocation, and utilization of various project resources. Resources can include tangible assets such as equipment, materials, facilities, and technology, as well as intangible resources such as human resources and expertise.

Skilled human resources will be available to fulfill project roles and responsibilities.	Maintain a resource pool with a mix of internal and external talent, allowing for flexibility in staffing.
The necessary technology infrastructure, including hardware and software, will be accessible and compatible with project requirements.	Conduct a thorough technology assessment early in the project to identify potential compatibility issues.
Required raw materials and supplies will be readily available from approved suppliers.	Maintain strong relationships with multiple suppliers to ensure a diversified supply chain.
Appropriate facilities and workspace will be provided to accommodate project activities and team members.	Conduct a thorough assessment of facility requirements and ensure early coordination with the appropriate departments or individuals responsible for facility management.
External support services, such as IT support or specialized expertise, will be accessible as needed throughout the project lifecycle.	Clearly define service level agreements (SLAs) with external service providers to establish expectations regarding response times and availability.
The required machinery and equipment will be in good working condition and available for use throughout the project.	Implement a proactive maintenance schedule for machinery and equipment to minimize breakdowns and ensure optimal performance.

Also called or financial assumptions, these refer to the estimated or projected costs associated with executing a project. They involve making assumptions about the financial resources required to complete various project activities, deliverables, and milestones.

The cost of labor will remain within the allocated budget for the project.	Regularly monitor labor costs throughout the project.
Material costs will not exceed the estimated amounts and will remain stable throughout the project.	Establish relationships with reliable suppliers and regularly review pricing agreements.
External services or subcontractor costs will align with the estimated budgeted amounts.	Clearly define expectations and deliverables in contracts or agreements with external service providers or subcontractors.
Overhead costs, such as utilities and administrative expenses, will remain consistent and within budgeted projections.	Continuously monitor and track overhead costs.
Travel and accommodation expenses for project-related activities will remain within the projected budget.	Implement travel policies and guidelines to ensure cost-conscious decisions when planning project-related travel.
Inflation or currency fluctuations will not significantly impact the overall project costs.	Conduct thorough market research and economic analysis to anticipate and forecast potential inflation or currency fluctuations.

These relate to the boundaries, extent, and requirements of the project scope. Scope assumptions encompass the specific deliverables, functionalities, and features that are included or excluded from the project.

The project scope will remain unchanged throughout the project lifecycle.	Implement a formal scope change management process that requires thorough evaluation and documentation of proposed scope changes.
The identified deliverables are comprehensive, and they align with the project's objectives.	Conduct a detailed requirements-gathering process at the beginning of the project to ensure comprehensive understanding of stakeholder needs and expectations.
The project will not require additional features, functionalities, or scope expansions beyond the initial scope definition.	Develop a robust change control process to assess and manage scope-change requests.
The project team has a clear understanding of the scope and requirements, and no major misunderstandings or misinterpretations will arise.	Conduct comprehensive project kickoff and requirement clarification sessions with the project team to ensure a shared understanding of the scope and requirements.
The scope of work will not be impacted by external factors, such as changes in regulations or market conditions.	Conduct thorough environmental and risk assessments to identify potential external factors that may impact the project scope.
All key stakeholders have provided their inputs and requirements, and there will be no significant changes or additions to the stakeholder expectations during the project.	Establish a robust stakeholder engagement and communication plan.

Also called , these refer to the assumptions made about the external environmental factors that might impact the project's success or outcomes. These assumptions consider the broader social, economic, political, and natural factors that can influence the project environment.

The regulatory environment will remain consistent and will not undergo significant changes that could impact the project's compliance requirements.	Establish regular communication channels with regulatory authorities or industry associations to stay updated on potential regulatory changes.
Political stability will be maintained, and there will be no major changes in government policies or leadership that could disrupt project operations or introduce new risks.	Monitor the political landscape, and stay informed about any potential political risks or changes.
Social factors, such as public opinion or cultural norms, will remain relatively stable and will not significantly impact the project's acceptance or support within the community or stakeholder groups.	Conduct comprehensive stakeholder analysis and engage with relevant stakeholders throughout the project.
Environmental sustainability requirements will be upheld, and the project will comply with relevant environmental regulations and standards.	Develop and implement an environmental management plan that includes measures for monitoring and mitigating environmental impacts.
Natural disasters, extreme weather events, or climate conditions will not occur or have a significant impact on project operations, timelines, or the availability of resources.	Conduct a thorough risk assessment to identify potential natural disaster risks and extreme weather patterns in the project's location.
Technological advancements and innovations relevant to the project's industry or domain will not significantly disrupt or render obsolete the project's proposed solutions or methodologies.	Stay updated with industry trends and emerging technologies through regular market research and participation in relevant conferences or forums.

Also called , these relate to the project schedule, duration, and sequencing of activities. They involve assumptions about task dependencies, milestones, critical path, and any factors that might impact the project timeline.

The project schedule and milestones will be achievable within the allocated timeframes.	Conduct a thorough project planning phase, including accurate task estimation and allocation of appropriate resources.
Task dependencies will be accurately identified, and there will be no significant delays in predecessor activities.	Conduct a comprehensive dependency analysis during project planning to identify and document task dependencies accurately.
The project team will have sufficient time to complete all project activities and deliverables as planned.	Regularly assess the workload and progress of the project team.
The time required for review and approval processes will be reasonable and not cause substantial delays.	Define clear review and approval processes, and establish realistic timelines for each review stage.
The availability of resources, such as human resources or equipment, will align with the project schedule and will not cause significant time constraints.	Conduct resource planning early in the project to identify and allocate resources based on project requirements and timelines.
The planned task sequencing and dependencies will be accurately identified, and there will be no significant changes or delays in the sequence of tasks.	Regularly review and validate the planned task sequencing against actual progress and changing project requirements.

These are related to the expected level of quality for the project deliverables. They involve assumptions about the required standards, processes, and criteria for ensuring that the project outputs meet the desired level of quality.

The project deliverables will meet or exceed the specified quality standards.	Develop a comprehensive quality management plan that clearly outlines the quality standards and criteria for project deliverables.
The project team will follow established quality assurance processes and procedures throughout the project lifecycle.	Provide adequate training and resources to the project team on quality assurance processes and procedures.
The required testing and validation activities will be conducted thoroughly to ensure the quality of project deliverables.	Develop a comprehensive testing and validation plan that includes clear test objectives, test cases, and acceptance criteria.
The project outcomes will be accepted and approved by stakeholders without significant rework or revisions.	Conduct frequent stakeholder engagements and progress reviews to ensure ongoing alignment between project outcomes and stakeholder expectations.
The project will adhere to industry best practices and recognized quality frameworks.	Conduct comprehensive research and stay updated on industry best practices and quality frameworks relevant to the project.
The project team will prioritize and actively address any identified quality issues or defects during the project execution.	Implement a robust issue tracking and resolution process to capture and address quality issues or defects promptly.

These relate to the expectations, interests, and behaviors of project stakeholders. They consider assumptions about stakeholder support, involvement, and any potential impacts or risks associated with stakeholder management.

Key stakeholders will actively participate and provide timely input and feedback throughout the project.	Develop a stakeholder engagement plan that outlines clear communication channels and expectations for stakeholder involvement.
Stakeholders' expectations and requirements are accurately captured and well defined at the beginning of the project.	Conduct comprehensive stakeholder analysis and requirements gathering exercises early in the project.
Stakeholders will support the project's objectives and actively contribute to its success.	Establish open and transparent communication channels to foster stakeholder buy-in and support.
Stakeholders' availability for meetings, reviews, and approvals will align with the project schedule.	Plan and schedule stakeholder engagements well in advance, considering their availability and constraints.
Stakeholders' priorities and preferences will remain relatively stable throughout the project.	Conduct ongoing stakeholder communication and regular check-ins to stay informed about any changes in priorities or preferences.
Stakeholders will have a shared understanding and alignment regarding the project's scope, goals, and outcomes.	Develop and communicate a comprehensive project charter or vision statement that clearly outlines the project's scope, goals, and desired outcomes.

The Most Common Project Assumptions

The most common project assumptions typically involve factors such as employee productivity, skill levels of team members, adherence to timelines, availability of resources, and anticipated costs. While often considered basic, these assumptions can significantly impact a project.

Here are some of the most common project assumptions:

The project team members have the required skills and expertise to perform their assigned roles effectively.
The project stakeholders have a clear and consistent understanding of the project goals and objectives.
The project will be completed within the allocated budget.
The project will be delivered within the specified timeline or deadline.
The project requirements and scope are well defined and will not significantly change during the project.
The project team will have access to necessary resources, such as equipment, technology, and materials, throughout the project duration.
The project team members will collaborate and communicate effectively throughout the project.
Risks and uncertainties associated with the project have been adequately identified and addressed.
The project assumptions and constraints are accurately identified and considered during project planning.
Regulatory and compliance requirements related to the project will remain stable and consistent.

High-Level Project Assumptions

High-level project assumptions are broad, overarching assumptions that shape the foundation of a project. They typically encompass strategic, organizational, or industry-level factors that significantly influence the project's success. Teams should include these assumptions in the project charter.

In addition to listing high-level assumptions in the charter, consider adding them to the project scope document , along with the constraints and deliverables.

The following are are some key initial assumptions that can result in project failure if proven untrue:


The project aligns with the organization's strategic goals and objectives.
Adequate financial resources will be allocated to support the project.
Stakeholders are committed and supportive of the project.
The project is based on accurate and reliable market research or customer insights.
The project operates within the legal and regulatory framework.
The necessary technology infrastructure and systems are in place to support the project.
Competent and capable project leadership is in place.

"Often in projects, the team is focused on tactics, but they have to weave those into the strategy," Ffrench explains.

Assumptions in a Project Charter

When creating a project charter, it is common to include certain assumptions that form the basis of the project's planning and execution. Limit your list to those assumptions that present the greatest threat to project success.

Here is a sample software development project summary with five examples of high-level assumptions to include on the project charter:


The project aims to develop and implement a new customer relationship management (CRM) software solution for a company. The CRM system will streamline customer data management, enhance sales and marketing activities, and improve customer service. The project team will be responsible for designing, developing, and deploying the CRM system across all relevant departments within a timeframe of six months.

The chosen technology platform for the CRM system is compatible with existing IT infrastructure and can be seamlessly integrated into the company's environment.
End users within the organization will embrace the new CRM system and actively participate in user acceptance testing and training activities.
The allocated budget for the project is sufficient to cover development costs, licensing fees, and any required infrastructure upgrades.
The existing customer data can be accurately migrated from the current system to the new CRM solution without significant data loss or integrity issues.
Third-party vendors or external service providers required for the project, such as hosting services or integration partners, will deliver their services and meet agreed-upon timelines.

Assumptions in Project Plans

Project plan assumptions cover more detailed elements of the project than those found in the charter, including assumptions of lesser impact. These assumptions encompass resources, milestones, timelines, budget, and activities, including individual tasks and nuances of team communication.

Here are some examples of project assumptions a team might include in a project plan, but not the project charter, for a human resources project:

The "Modern Market" Website Redesign Project is aimed at revamping our e-commerce website to improve user experience, navigation, and aesthetics, as well as integrate enhanced analytics tools for better customer tracking and personalization. The project will be carried out over a six-month period by our in-house web design team, in collaboration with the marketing and IT departments.

Regularly scheduled maintenance windows will remain constant, allowing for planned downtimes for site updates.
The major internet browsers (e.g., Chrome, Safari, Firefox) will not release significant updates during the project timeline that could affect website display or functionality.
The third-party plugins planned for integration into the website for analytics purposes will remain stable and supported throughout the project duration.

Mistakes to Avoid When Making Project Assumptions

Avoid making assumptions without documenting and communicating them clearly as part of project planning. Another common mistake is not regularly reviewing and updating assumptions. As projects evolve, some assumptions might no longer hold true, and new ones might emerge.

Here are some best practices to follow that will help you avoid common mistakes when documenting project assumptions:

Document and Regularly Review Assumptions: Create a list of assumptions, and check it twice or more. Don't file it and forget; keep it dynamic and updated.
Identify Dependencies: Dependencies can reveal hidden assumptions. It's essential to map out and understand these relationships.
Verify Assumptions: Avoid accepting assumptions as reality without verifying them. "You have to define your assumptions, take your view out a bit wider than you might normally, and then bring it back with some addendums," explains Barry. "Add them to the project plan and schedule reviews. It's not as cool as some of the other tasks in project management, but it's really important to check."
Take Responsibility for Gaps: If you see something, do something. If you identify gaps or potential problems in the plan, take responsibility addressing these issues rather than leaving them for others to handle.
Seek Collaborative Input: Collaboration is key in project planning. "You need someone to bounce ideas off," says Ffrench. Talk to other leaders and experienced colleagues, and involve those who are doing the work in the planning process.
Avoid Overreliance on Highest-Paid Opinions: Be aware of the HIPPO effect , where the highest-paid person's opinion might carry undue weight. This can lead to missed opportunities if others are hesitant to voice differing ideas.
Update Your Approach: Don't cling to practices or methods that are no longer relevant or effective. Cultivate a team culture that is open to change and adaptation. "We also put so much passion into building the plane while flying it,” says Barry. “Even if it's irrelevant, we keep it. You need a culture where teams can accept challenges and changes."
Continuously Verify Assumptions: Don't limit the verification of assumptions to the business case or strategic planning phase. Continue identifying and tracking relevant assumptions throughout the project's lifespan.
Treat Assumptions as Potential Risks: Assumptions represent risk. Ensure each one is understood in terms of its potential impact on your project's success.
Document Assumptions Clearly: It is crucial to document your assumptions clearly and specifically. Ambiguity can lead to misunderstanding and misinterpretation, potentially jeopardizing the project.
Consider External Factors: Don't limit your assumptions to internal project matters. External factors such as market conditions, regulations, or technological advancements can significantly impact your project.

Project Assumptions Starter Kit

Download the Project Assumptions Starter Kit

Use this starter kit to surface and record your project assumptions quickly. The kit contains all the documents you need, including a 2x2 assumptions matrix and a printable assumptions log template. All these templates are free and fully editable to suit your organization's needs. Download them individually or as a complete starter kit.

In this kit, you'll find the following:

A 2x2 assumptions matrix for Excel to help you collect and prioritize assumptions according to potential impact and likelihood.
A RAID template for Excel to record and assess your project assumptions alongside project risks, issues, and dependencies.
A project assumptions log template for Excel to log and track assumptions through the project lifecycle.
A project assumptions gathering announcement email template for Microsoft Word to notify team members of an assumptions brainstorming and discussion meeting.
A project assumptions bash announcement email template for Microsoft Word with space to include a virtual meeting link.

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Financial Plan Assumptions

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on July 11, 2023

Are You Retirement Ready?

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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What Are Financial Assumptions in a Business Plan?

Financial assumptions are an integral part of any business plan .

They provide a foundation for the financial projections and help investors and stakeholders understand the underlying assumptions behind the numbers.

Financial assumptions can cover a wide range of topics, including revenue growth, cost of goods sold, expenses, and capital expenditures.

In this blog post, we’ll explore what financial assumptions are, how they are used in a business plan, and how to create realistic financial assumptions for your business.

What are Financial Assumptions in a Business Plan?

Financial assumptions are estimates or predictions about future financial performance. They are used to forecast a company’s revenue, expenses, and profits over a certain period. Financial assumptions are based on historical data, market trends, and the company’s own goals and strategies.

In a business plan, financial assumptions are used to create financial projections, which are detailed estimates of a company’s future financial performance.

Financial projections can include a profit and loss statement, a balance sheet, and a cash flow statement. These projections are based on the financial assumptions made in the business plan, and they help investors and stakeholders understand the expected financial performance of the company.

How Financial Assumptions Impact a Business Plan

Financial assumptions play a crucial role in a business plan, as they help to shape the overall financial strategy of the company.

By providing a foundation for financial projections, financial assumptions help to inform key decisions such as how much to invest in marketing and sales efforts, how much to allocate towards research and development, and how much to set aside for operating expenses.

It’s important to note that financial assumptions are just that - assumptions. They are based on the best information available at the time the business plan is written, but they are not guarantees of future performance.

To create realistic financial assumptions, it’s important to consider a range of factors, including market trends, industry benchmarks, and the company’s own goals and capabilities.

If the financial assumptions in a business plan turn out to be too optimistic or unrealistic, it can harm the overall financial performance of the company.

On the other hand, if the financial assumptions are too conservative, the company may miss out on potential opportunities for growth and expansion.

It’s important to strike a balance and create financial assumptions that are both realistic and ambitious.

Creating Realistic Financial Assumptions

As mentioned, it’s important to create realistic financial assumptions in a business plan. This can help to ensure that the financial projections are accurate and achievable, and it can also help to build credibility with investors and stakeholders.

There are a few key factors to consider when creating financial assumptions for a business plan.

Market trends

It’s important to consider the current state of the market and how it is likely to evolve in the future. This includes factors such as economic conditions, consumer demand, and competition.

Industry benchmarks

It can be helpful to compare your financial assumptions to industry benchmarks to see how they compare. This can give you a sense of whether your assumptions are realistic in the context of your industry.

Company goals and capabilities

Your financial assumptions should be aligned with the goals and capabilities of your company. It’s important to consider the resources and expertise that you have at your disposal, as well as any potential constraints or challenges that you may face.

By considering these factors and creating financial assumptions that are grounded in reality, you can help to ensure that your business plan is realistic and achievable.

Revising Financial Assumptions

As a business grows and evolves, it’s important to periodically review and revise the financial assumptions in the business plan. This can help to ensure that the financial projections remain accurate and relevant.

There are a few key signs that it may be time to revise your financial assumptions.

Changes in the market

If there have been significant changes in the market since the business plan was written, it may be necessary to revise the financial assumptions. This could include changes in economic conditions, consumer demand, or competition.

Changes within the company

If there have been significant changes within the company, such as new products or services, changes in leadership, or shifts in strategy, it may be necessary to revise the financial assumptions.

Differences between actual and projected performance

If there is a significant gap between the actual financial performance of the company and the projected performance based on the financial assumptions in the business plan, it may be necessary to revise the assumptions.

By regularly reviewing and revising the financial assumptions in your business plan, you can help to ensure that the financial projections remain accurate and relevant and that your company is well-positioned for future growth and success.

Just like marketing assumptions , financial assumptions are an essential part of any business plan.

By creating realistic financial assumptions that are grounded in market trends, industry benchmarks, and the company’s own goals and capabilities, and by regularly reviewing and revising these assumptions as needed, you can help to ensure that your business plan is realistic and achievable.

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COMMENTS

What Are Key Assumptions of 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 ...
How to present key assumptions in your business plan?
The key assumptions subsection is the second subsection of the financial plan section. It follows the sources and uses, and precedes your sales forecast. The goal of this subsection is to give readers on overview of how you built your forecast. So that they can understand both the methodology and the key drivers used to model your revenues ...
What Are the Key Assumptions of a Business Plan?
One of the key assumptions of a business plan is that the principals can run a business profitably. The creator of a widget might make the best widget the marketplace has ever seen, but that doesn ...
14 Types of Business Assumption
Summary: Business Assumptions. Type. Business Plans. Definition (1) Things that you assume to be true for the purposes of developing a strategy, making decisions and planning. Definition (2) The process of managing uncertainty by choosing reasonable assumptions as a basis for strategy, decision making and planning. Related Concepts.
Financial Assumptions and Your Business Plan
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.
Questioning Key Assumptions in Your Business Plan
Questioning Key Assumptions in Your Business Plan. Asking the hard questions now will save you time and money in the future. The Balance is part of the Dotdash Meredith publishing family. Asking tough questions about capital, leadership structure, and market research when writing your business plan will help ensure a successful venture.
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 ...
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 ...
List Business Plan Assumptions
You will use your business plan assumptions often. 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 ...
12 Key Elements of a Business Plan (Top Components Explained)
Here are some of the components of an effective business plan. 1. Executive Summary. One of the key elements of a business plan is the executive summary. Write the executive summary as part of the concluding topics in the business plan. Creating an executive summary with all the facts and information available is easier.
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 ...
How to make assumptions for the financial projections of your business plan
Note: Every common assumption you find above are designed to help you prepare better financial projections for your business plan. Take what you like, ignore what you do not.
How to Write the Perfect Business Plan: A Comprehensive Guide
Determine how you can best reach potential customers. Evaluate your competition. Your marketing plan must set you apart from your competition, and you can't stand out unless you know your ...
What Are the Financial Assumptions on a Business Plan?
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 ...
What are the Most Common Types of Business Assumptions
The assumption that key talent will be available is a dangerous one. ... "A business plan should lay bare that the founders while excelling in product making or service delivery, have planned for ...
Your Initial Business Plan is a Huge List of Assumptions
Time to Make a List. As the title of this article states, your starting business plan is mostly a huge list of assumptions. You want to list out as many of those assumptions as you can identify. And if you only end up with 8 or 10 on your list, you've got a long way to go. Think more like 20, 30, 40. In fact, the more innovative or disruptive ...
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 ...
How Financial Assumptions Can Make Or Break Your Business Plan
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 ...
Project Assumptions & Examples
The In-Depth Guide to Project Assumptions with Examples. Try Smartsheet for Free. Project assumptions provide a foundation for decision-making, risk management, and project planning. In this guide, we provide expert insight on project assumptions, and you can download helpful templates to effectively gather and manage assumptions.
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 ...
What Are Financial Assumptions in a Business Plan?
Financial assumptions are an integral part of any business plan. They provide a foundation for the financial projections and help investors and stakeholders understand the underlying assumptions behind the numbers. Financial assumptions can cover a wide range of topics, including revenue growth, cost of goods sold, expenses, and capital ...
How to identify your key assumptions in business in 2024?
Three major steps in Business Assumptions. 1. Identify the assumptions. An assumption acts as Supporting proof in any business. Identifying the number of assumptions decreases the uncertainty in ...

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

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Other Resources for Writing Your Business Plan

Other Helpful Business Plan Articles & Templates

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?

Planning, Startups, Stories

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The quickest way to turn a business idea into a business plan

Ivey Business Journal

The rationale for preparing a set of strategic assumptions

Preparing a set of strategic assumptions

An example: The importance of a single strategic assumption

Other examples of powerful strategic assumptions

Publicizing strategic Assumptions: The tipping point

Lean Business Planning

List Business Plan Assumptions

You will use your business plan assumptions often

An Assumptions Example

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12 Key Elements of a Business Plan (Top Components Explained)

Why Are Business Plans Important?

1. Proves Your Business Viability

2. Guides You Throughout the Business Cycle

3. Helps You Make Better Business Decisions

4. Eliminates Big Mistakes

5. Secures Financing and Attracts Top Talents

Key Elements of Business Plan

1. Executive Summary

Components of an Executive Summary

2. Business Description

Components of a Business Description

3. Market Analysis

Market Analysis Factors

Components of the Market Analysis Section

4. Marketing Plan

5. Sales Strategy

6. Competitive Analysis

7. Management and Organization

8. Products and Services

9. Operating Plan

10. Financial Projections and Assumptions

11. Request For Funding

12. Exhibits and Appendices

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How to Write the Perfect Business Plan: A Comprehensive Guide

Executive Summary

Management Team

Key Concepts

Competitive Advantage

Tying It All Together