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Financial Assumptions and Your Business Plan

Written by Dave Lavinsky

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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.

How to Finish Your Business Plan in 1 Day!

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With Growthink’s Ultimate Business Plan Template you can finish your plan in just 8 hours or less!

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

Click here to see how Growthink’s professional business plan consulting services can create your business plan for you.

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Since 1999, Growthink has developed business plans for thousands of companies who have gone on to achieve tremendous success.

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

Other Resources for Writing Your Business Plan

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

Other Helpful Business Plan Articles & Templates

Download a Free Business Plan Template

Plan Projections

ideas to numbers .. simple financial projections

Home > Business Plan > Business Plan Assumptions

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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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What Are the Key Assumptions of a Business Plan?

by Mariel Loveland

Published on 28 May 2019

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

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

Key Assumptions Definition

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

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

Key Assumption 1: Finances

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

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

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

Key Assumptions 2: Consumer Base

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

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

Key Assumptions 3: Need

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

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

Key Assumptions 4: Resources

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

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

Key Assumptions 5: Profitability

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

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Questioning Key Assumptions in Your Business Plan

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

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

assumptions made in a business plan

Is There a Need for Your Product or Service?

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

The Balance / Getty Images

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

Key Takeaways

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

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

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

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

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

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

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

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

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

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

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

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

Opportunities

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

What is a SWOT analysis?

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

What percent of businesses fail within the first year?

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

Small Business Association. " Frequently Asked Questions ."

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

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

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

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

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

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

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

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

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

The rationale for preparing a set of strategic assumptions

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

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

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

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

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

Preparing a set of strategic assumptions

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

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

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

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

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

An example: The importance of a single strategic assumption

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

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

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

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

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

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

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

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

Other examples of powerful strategic assumptions

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

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

Publicizing strategic Assumptions: The tipping point

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

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

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

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

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

assumptions made in a business plan

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.

assumptions

Sample List of Assumptions

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

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Strategic planning: managing assumptions, risks and impediments

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While no one likes the idea of having one foot on the brake while doing strategic planning, there are very good reasons to take the time required to be cautious. We are speaking to the undeniable link between the business assumptions we make and the risks we introduce to the organization during strategic planning. In fact, the assumptions we base strategies upon can mushroom into grave risks and show-stopper impediments down the line – appearing out of nowhere when the business attempts to execute to a seemingly well-laid plan. Twelve to eighteen months into strategy implementation is too late to go back and ask, “What were we assuming…?” Given that time will always be of the essence, what kind of strategic assumption vetting and risk management is warranted? How much is enough?

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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Business Assumptions: Understanding Key Predictions in Entrepreneurship

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Business Assumptions Definition

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

Types of Business Assumptions

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

Revenue Assumptions

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

Market Size Assumptions

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

Operational Expense Assumptions

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

The Role of Business Assumptions in Financial Planning

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

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

Forecasting

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

Strategic Planning

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

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

The Impact of Business Assumptions on Risk Assessment

Business assumptions and risk assessment.

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

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

The Pitfall of Over-Optimism

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

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

The Danger of Over-Pessimism

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

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

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

Criticality of Validating Business Assumptions

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

Methods for Validating Business Assumptions

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

Market Research

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

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

Example of Markdown for Market Research

Hypothesis Testing

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

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

Example of Markdown for Hypothesis Testing

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

Business Assumptions in Startup Ecosystems

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

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

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

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

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

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

Link Between Business Assumptions and Sustainable Business Models

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

The Role of Business Assumptions in Creating Sustainable Business Models

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

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

Business Assumptions Impact on Long-term Viability

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

The Influence on Corporate Social Responsibility

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

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

Guidelines for Making Reasonable Business Assumptions

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

Adopt a Conservative Approach

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

Consider Current Market Trends

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

Regular Review and Update of Assumptions

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

Sound Underlying Logic

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

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

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What Are the Financial Assumptions on a Business Plan?

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How to Obtain Short-Term Financing for a Business

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

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  • 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

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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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How Financial Assumptions Can Make Or Break Your Business Plan

assumptions made in a 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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Financial Plan Assumptions

assumptions made in a business plan

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on July 11, 2023

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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.

Revenue Assumptions

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.

Investment Assumptions

Tax Assumptions

Corporate tax rates.

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

Tax Credits and Incentives

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

Tax Planning Strategies

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

Economic and Industry Assumptions

Macroeconomic factors.

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

Interest Rates

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

Unemployment Rates

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

Macroeconomic Factors in Economic and Industry Assumptions

Industry Trends and Competition

Market size and growth.

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

Technological Advancements

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

Regulatory Changes

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

Competitive Landscape

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

Sensitivity Analysis and Scenario Planning

Identifying key variables and uncertainties.

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

Developing Scenarios and Assumptions

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

Analyzing the Impact on Financial Performance

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

Risk Mitigation and Contingency Planning

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

Regular Review and Update of Assumptions

Importance of ongoing monitoring.

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

Frequency of Assumption Updates

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

Incorporating New Information and Data

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

Adjusting Financial Plans as Needed

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

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

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

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

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

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

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

Financial Plan Assumptions FAQs

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

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

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

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

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

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

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

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

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

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

About the Author

True Tamplin, BSc, CEPF®

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

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

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

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How to Bridge the Gap Between Aspirations and Reality in Business Bringing a vision to life requires a good dose of self-honesty and a multi-year plan for incremental progress.

By Simin Cai, Ph.D. • Feb 23, 2024

Key Takeaways

  • Having a dream or vision is essential for motivation, but it's crucial to harmonize your ambitions with reality by creating a step-by-step roadmap with achievable milestones.
  • It's important to pivot when necessary and adjust your aspirations based on evolving realities.
  • Harmonizing aspirations with reality leads to happiness, because it builds trust that we can make our dreams come true.

Opinions expressed by Entrepreneur contributors are their own.

There's an old joke: What's the difference between medicine and poison? Answer: The dose. The same might be said of the difference between a business vision and wishful thinking — they exist along a spectrum. It all comes back to the gap between the two. Having a dream can inspire action and keep our sense of motivation alive. But if the gap between vision and reality is too vast to be understood or executed, we can grow frustrated in pursuit of that same dream, leading to a profound sense of defeat.

The answer is harmonizing our ambitions with what is genuinely achievable, while being careful not to undersell ourselves and what we are capable of — in other words, dream big but plan accordingly. Then, create a step-by-step road map for the big dream and break it off into achievable milestones connecting the steps.

Related: The Best Entrepreneurs Are Dreamers Who Can Match Their Vision With Reality

Investing strategy into hope

"Hope is not a strategy." This quote has many fathers , including the football coach Vince Lombardi and the film producer James Cameron. It was used by one CEO surveyed by McKinsey to describe the need to have tough strategic conversations along the road to achieving the dream. Backing the vision with strategic thinking puts hope in its rightful place.

According to positive psychology, hopefulness is a life-sustaining human strength . It allows us to think in a goal-oriented way and lay out the pathway to achieve those goals. "Good" hope , not fantastical thinking or a pollyannaish defense against a harsh world, also fosters our agency ——the belief that we can make the necessary changes to bring our aspirations into form.

Happiness exists along a continuum, and the smaller the gap, the happier you will be and the more likely you will find investors to share your vision. But, when faced with a lack of available resources, don't lose hope. Getting honest about the distance between aspiration and reality will help new leaders craft a strategy to bridge the gap. Then, it's a matter of finding ways to forge ahead through incremental progress.

Related: How Small Incremental Steps Can Help You Achieve Your Largest Goals

Set achievable milestones

It's well known that the majority of startups fail, suggesting too many budding entrepreneurs don't properly assess the gap and end up falling off the cliff. However, data from 2024 shows that while just 10% of startups go under in year one, this figure blows out to 70% in years two to five . Breaking up a business vision into achievable milestones is crucial to keeping it manageable, but without the solid fundamentals of financing, research, and targeting the right market , success may be short-lived.

The first year of a multi-year strategy builds confidence, but it's crucial to keep momentum in the years that follow. The gap refers to not just the overarching vision but the smaller gaps between each year. Sometimes, sacrifices have to be made, such as leaders not even paying themselves as much as their staff until the business moves into sustainable profitability . If even an annual goal is a bridge too far, the same principle applies to setting quarterly milestones. This will build momentum.

When our aspirations are harmonized with our reality, every step towards those goals fuels happiness because we are engaged and purposeful. But there's a catch: Our sense of fulfillment may not come so much from meeting our goals, as exceeding our own expectations. So, leave room for overachieving when breaking down big aspirations. Then, remember to celebrate your wins. It not only stimulates dopamine but strengthens relationships and helps us redouble our efforts for the next challenge.

Related: 6 Habits That Turn Dreams Into Reality

Pivot when facing obstacles

Some challenges to a five-year business plan just cannot be foreseen, especially when macroeconomic conditions change unpredictably. So when reality shifts, we must adjust our aspirations. If things are just taking longer than anticipated, then build it into the plan. In this sense, harmony does not have a fixed center of gravity and is dynamic by nature , so we must always be adapting to keep our goals and capacities within touching distance.

Agility is championed as a business virtue for this reason. Changing circumstances may mean a vision is going to take longer to realize. It may mean a detour is required. Or in the worst-case scenario, the original goal may just not be possible. Even then, not all is lost. One of the lessons of the pandemic for small businesses was to pivot into an existing strength , rather than leaping blindly into a new offering altogether.

But a word to the wise: Do not confuse a strategy with an objective — and be wary of idealism. Strategy is how we bridge the gap, but objectives are the signposts along the way. Mistaking one for the other can result in misaligned priorities and improper allocation of resources. Remember, happiness is a state of being — and if we cling so tightly to an aspiration that we forget our reality, we risk pushing it away.

Entrepreneur Leadership Network® Contributor

President & CEO of Go!Foton

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

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Tax Time Guide 2024: What to know before completing a tax return

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IR-2024-45, Feb. 21, 2024

WASHINGTON — During the busiest time of the tax filing season, the Internal Revenue Service kicked off its 2024 Tax Time Guide series to help remind taxpayers of key items they’ll need to file a 2023 tax return.

As part of its four-part, weekly Tax Time Guide series, the IRS continues to provide new and updated resources to help taxpayers file an accurate tax return. Taxpayers can count on IRS.gov for updated resources and tools along with a special free help page available around the clock. Taxpayers are also encouraged to read Publication 17, Your Federal Income Tax (For Individuals) for additional guidance.

Essentials to filing an accurate tax return

The deadline this tax season for filing Form 1040, U.S. Individual Income Tax Return , or 1040-SR, U.S. Tax Return for Seniors , is April 15, 2024. However, those who live in Maine or Massachusetts will have until April 17, 2024, to file due to official holidays observed in those states.

Taxpayers are advised to wait until they receive all their proper tax documents before filing their tax returns. Filing without all the necessary documents could lead to mistakes and potential delays.

It’s important for taxpayers to carefully review their documents for any inaccuracies or missing information. If any issues are found, taxpayers should contact the payer immediately to request a correction or confirm that the payer has their current mailing or email address on file.

Creating an IRS Online Account can provide taxpayers with secure access to information about their federal tax account, including payment history, tax records and other important information.

Having organized tax records can make the process of preparing a complete and accurate tax return easier and may also help taxpayers identify any overlooked deductions or credits .

Taxpayers who have an Individual Taxpayer Identification Number or ITIN may need to renew it if it has expired and is required for a U.S. federal tax return. If an expiring or expired ITIN is not renewed, the IRS can still accept the tax return, but it may result in processing delays or delays in credits owed.

Changes to credits and deductions for tax year 2023

Standard deduction amount increased. For 2023, the standard deduction amount has been increased for all filers. The amounts are:

  • Single or married filing separately — $13,850.
  • Head of household — $20,800.
  • Married filing jointly or qualifying surviving spouse — $27,700.

Additional child tax credit amount increased. The maximum additional child tax credit amount has increased to $1,600 for each qualifying child.

Child tax credit enhancements. Many changes to the Child tax credit (CTC) that had been implemented by the American Rescue Plan Act of 2021 have expired.

However, the IRS continues to closely monitor legislation being considered by Congress affecting the Child Tax Credit. The IRS reminds taxpayers eligible for the Child Tax Credit that they should not wait to file their 2023 tax return this filing season. If Congress changes the CTC guidelines, the IRS will automatically make adjustments for those who have already filed so no additional action will be needed by those eligible taxpayers.

Under current law, for tax year 2023, the following currently apply:

  • The enhanced credit allowed for qualifying children under age 6 and children under age 18 has expired. For 2023, the initial amount of the CTC is $2,000 for each qualifying child. The credit amount begins to phase out where AGI income exceeds $200,000 ($400,000 in the case of a joint return). The amount of the CTC that can be claimed as a refundable credit is limited as it was in 2020 except that the maximum ACTC amount for each qualifying child increased to $1,500.
  • The increased age allowance for a qualifying child has expired. A child must be under age 17 at the end of 2023 to be a qualifying child.

Changes to the Earned Income Tax Credit (EITC). The enhancements for taxpayers without a qualifying child implemented by the American Rescue Plan Act of 2021 will not apply for tax year 2023. To claim the EITC without a qualifying child in 2023, taxpayers must be at least age 25 but under age 65 at the end of 2023. If a taxpayer is married filing a joint return, one spouse must be at least age 25 but under age 65 at the end of 2023.

Taxpayers may find more information on Child tax credits in the Instructions for Schedule 8812 (Form 1040) .

New Clean Vehicle Credit. The credit for new qualified plug-in electric drive motor vehicles has changed. This credit is now known as the Clean Vehicle Credit. The maximum amount of the credit and some of the requirements to claim the credit have changed. The credit is reported on Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit , and on Form 1040, Schedule 3.

More information on these and other credit and deduction changes for tax year 2023 may be found in the Publication 17, Your Federal Income Tax (For Individuals) , taxpayer guide.

1099-K reporting requirements have not changed for tax year 2023

Following feedback from taxpayers, tax professionals and payment processors, and to reduce taxpayer confusion, the IRS recently released Notice 2023-74 announcing a delay of the new $600 reporting threshold for tax year 2023 on Form 1099-K, Payment Card and Third-Party Network Transactions . The previous reporting thresholds will remain in place for 2023.

The IRS has published a fact sheet with further information to assist taxpayers concerning changes to 1099-K reporting requirements for tax year 2023.

Form 1099-K reporting requirements

Taxpayers who take direct payment by credit, debit or gift cards for selling goods or providing services by customers or clients should get a Form 1099-K from their payment processor or payment settlement entity no matter how many payments they got or how much they were for.

If they used a payment app or online marketplace and received over $20,000 from over 200 transactions,

the payment app or online marketplace is required to send a Form 1099-K. However, they can send a Form 1099-K with lower amounts. Whether or not the taxpayer receives a Form 1099-K, they must still report any income on their tax return.

What’s taxable? It’s the profit from these activities that’s taxable income. The Form 1099-K shows the gross or total amount of payments received. Taxpayers can use it and other records to figure out the actual taxes they owe on any profits. Remember that all income, no matter the amount, is taxable unless the tax law says it isn’t – even if taxpayers don’t get a Form 1099-K.

What’s not taxable? Taxpayers shouldn’t receive a Form 1099-K for personal payments, including money received as a gift and for repayment of shared expenses. That money isn’t taxable. To prevent getting an inaccurate Form 1099-K, note those payments as “personal,” if possible.

Good recordkeeping is key. Be sure to keep good records because it helps when it’s time to file a tax return. It’s a good idea to keep business and personal transactions separate to make it easier to figure out what a taxpayer owes.

For details on what to do if a taxpayer gets a Form 1099-K in error or the information on their form is incorrect, visit IRS.gov/1099k  or find frequently asked questions at Form 1099-K FAQs .

Direct File pilot program provides a new option this year for some

The IRS launched the Direct File pilot program during the 2024 tax season. The pilot will give eligible taxpayers an option to prepare and electronically file their 2023 tax returns, for free, directly with the IRS.

The Direct File pilot program will be offered to eligible taxpayers in 12 pilot states who have relatively simple tax returns reporting only certain types of income and claiming limited credits and deductions. The 12 states currently participating in the Direct File pilot program are Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington state and Wyoming. Taxpayers can check their eligibility at directfile.irs.gov .

The Direct File pilot is currently in the internal testing phase and will be more widely available in mid-March. Taxpayers can get the latest news about the pilot at Direct File pilot news and sign up to be notified when Direct File is open to new users.

Finally, for comprehensive information on all these and other changes for tax year 2023, taxpayers and tax professionals are encouraged to read the Publication 17, Your Federal Income Tax (For Individuals) , taxpayer guide, as well as visit other topics of taxpayer interest on IRS.gov.

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How Tarek El Moussa turns outdated properties into luxury homes

  • Tarek El Moussa spoke to BI about flipping luxury homes.
  • Focusing on the details, like cabinet material and flooring, is crucial in elevating high-end homes.
  • Creating a custom feel with unique elements in kitchens and bathrooms is essential, too.

Insider Today

Tarek El Moussa is peeling back the curtain on luxury homes.

The HGTV star started his flipping career updating modest family homes in California with his ex-wife, Christina Hall, on their series "Flip or Flop."

But today, his business has grown, and he has moved on to flipping million-dollar homes with his company, Tarek Buys Houses, and his wife, Heather Rae El Moussa, as he documents for their series "The Flipping El Moussas."

Much of the process of flipping a home is the same, no matter what kind of house it is. However, in an interview with Business Insider about his new book, " Flip Your Life ," El Moussa said there are a few key differences in updating a luxury home.

The details make the difference

According to El Moussa, "details and texture" are the key to elevating high-end homes.

"To make houses stand out, you can't just have drywall everywhere," he said. "You gotta have wallpaper, you gotta have molding, you have to have paneling."

He added that going the extra mile with ceilings is important, pointing to wood paneling and other luxury materials to create a cohesive feel.

El Moussa told BI that kitchens are also essential to solidifying a home's luxury feel .

For instance, he and his team incorporate custom cabinetry and islands made of marble slabs to take their kitchens to another level.

Likewise, it's becoming more common for luxury homes to have two kitchens so people don't have to entertain in the same space where they cook and clean.

Don't forget the floor plan

El Moussa also said that open-concept floor plans remain a must-have for luxury homes, though other experts told BI they're becoming less appealing to some homeowners because the lack of defined areas can be difficult for day-to-day living.

But luxury owners still love the trend, which can lead to a lot of work during the flipping process, El Moussa said.

"The big thing is really opening up floor plans," he said, as luxury owners want the wow factor an open space creates. "A lot of times when we're going into these houses, they were developed or built years ago, and in order to modernize them, we might have to move a bathroom or move a wall or expand the master suite."

But he said it's worth it to create the one-of-a-kind feel high-end buyers are looking for.

"It's all about the details and making a home feel custom through custom closet doors, custom wooden doors, custom cabinets, and high-end shower tiles," El Moussa said.

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Watch: 25 ways you can revamp your home

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  1. Financial Assumptions & Your Business Plan [Updated 2024]

    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.

  2. 14 Types of Business Assumption

    Business assumptions are things that you assume to be true for the purposes of developing a strategy, making decisions and planning. They are commonly documented in business plans and business cases as a disclosure of uncertainty and risk.

  3. Business Plan Assumptions

    Business Plan Assumptions List Inflation rates and foreign exchange rates - effect on sale and purchases - effect on assets and liabilities Sales and marketing - level and timing of sales demand - exporting considerations - pricing strategy, high or low - trade and early payment discounts - advertising and promotion costs - warranty costs

  4. What Are the Key Assumptions of a Business Plan?

    Business plan assumptions examples range from financing, consumer base and profitability to management and resources. Key Assumption 1: Finances One of the business plan assumptions examples is finances. Do you have the funding to run your company until it becomes profitable?

  5. Establishing Reasonable Planning Assumptions

    Making assumptions regarding your business for planning purposes. As you work your way through the planning process, you will be called on to take your best guess regarding the key operational issues facing your business. You'll have to make estimates regarding productivity, capacity, cash flow, costs, and many other interrelated factors.

  6. Questioning Key Assumptions in Your Business Plan

    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.

  7. STRATEGIC ASSUMPTIONS: THE ESSENTIAL (AND ...

    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.

  8. What Are the Key Assumptions of a Business Plan?

    Writing up a business plan involves making a few assumptions -- including that there's a sufficient customer base for the product. An investor or partner will want to see that you've done...

  9. What are the Most Common Types of Business Assumptions

    Here are some of the common types of business assumptions: Financial Even after making profits, it often takes months or even years to pay off the initial investments.

  10. The Value of Business Plan Assumptions

    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.

  11. How to Make Accurate Financial Assumptions For Your Business

    1. Decide Which Financial Assumptions to Make The first thing you'll need to do is create a list of all the financial assumptions you're going to make.

  12. Startup Financial Assumptions

    The cost assumptions based on customer acquisition are some of the most important financial assumptions we'll make in our business plan and typically represents one of the largest startup expenses. Note that in these examples we use "visitor" to mean anyone coming to buy from us, whether it's to our website or to our storefront.

  13. Strategic planning: managing assumptions, risks and impediments

    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.

  14. What Are Key Assumptions of a Business Plan?

    Key assumptions are the underlying beliefs and assumptions that shape the way a business operates and makes decisions. They can be related to various aspects of the business, including its target market, competitive landscape, revenue streams, and financial projections.

  15. Business Assumptions: Understanding Key Predictions in Entrepreneurship

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

  16. What Are Business Assumptions?

    In business, assumptions are ideas or beliefs that are taken for granted before taking any action. For businesses to plan, develop and implement strategies, as well as make decisions, assumptions can be made. These conjectures, also known as disclosures of uncertainty (or risk), are usually standardized.

  17. 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 ...

  18. What Are Financial Assumptions in a Business Plan?

    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.

  19. How Financial Assumptions Can Make Or Break Your Business Plan

    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.

  20. Financial assumptions

    Your financial plan is the main component of your business plan. Mike Figiluolo explains that the first step in building that financial plan is documenting your assumption. ... I had to make ...

  21. 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.

  22. 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.

  23. How to Bridge the Gap Between Aspirations and Reality in Business

    Business, like life, is a balancing act of the known and the unknown. We cannot control everything, but we can be careful and deliberate in how we frame our aspirations and set goals toward their ...

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