Key Business Plan Assumptions: Types and How to Make Them

Remember Kodak? They practically invented the first portable camera as we know it. But then they completely missed the digital photography revolution and, well, faded to black.

This means even big companies with a long history of success can fail, no matter how the economy is doing.

So, how do business leaders stay ahead of the game and keep making money?

And what if their business is already in trouble?

In both cases, the key is to make major assumptions in a business plan from early on.

Wait, what assumptions? Let’s learn that in this article.

Why do assumptions matter in a business plan?

Assumptions are an essential part of a business plan because they help explain how you came up with certain numbers and ideas.

Here’s why they matter:

Providing a framework for your plan

Every business plan includes estimates—like how much money you’ll make or how fast you'll grow. Assumptions explain the reasoning behind those numbers.

For example, if you assume a certain percentage of people in your target market will become customers, that assumption helps shape your sales and financial projections.

Helping manage uncertainty

The future is uncertain, especially when starting a business. Assumptions are like educated guesses that let you plan despite that uncertainty. By being clear about these assumptions, it becomes easier to adjust if things don’t go as expected.

Identifying potential risks

Assumptions highlight what could go wrong. If one of your key assumptions is incorrect—like expecting a certain number of customers each month—it might throw off your entire plan. Identifying these assumptions helps you prepare for possible challenges and adjust when needed.

Building credibility with stakeholders

Investors and partners want to know that your projections are well thought out. Clearly stated assumptions give them confidence that your plan is based on more than just wishful thinking. They show that you’ve considered various factors before arriving at your figures.

Offering flexibility

As the market or your business changes, assumptions can be revisited and updated. This flexibility allows you to pivot your strategies and keep your business plan aligned with current realities.

Types of major assumptions in a business plan

In a business plan, various types of assumptions are made across different areas for strategic planning. These assumptions are essentially predictions about factors that will affect the business's success.

Here are the main types of business assumptions:

1. Marketing assumptions

Market assumptions zero in on the specific markets where your business operates. They're important for understanding your competitive landscape and how much your products or services can grow.

Some of the key market assumptions include:

• Market size: An important factor in business forecasting. It involves estimating the total number of potential customers for your products or services – the total addressable market (TAM).

• Market share: This is about projecting the percentage of that market you aim to capture.

• Competitive dynamics: These are well-informed predictions about what your rivals will do and how the market will change overall.

• Customer behavior: This is about understanding what your customers prefer, how they buy things, and how loyal they are to brands like yours.

2. Financial assumptions

Financial assumptions guide your business plan, covering forecasts on costs, revenue, return on investment, and expenses. They provide a glimpse into your business's future performance, helping readers assess the accuracy of your projections. This is especially important when you’re predicting your cash flow.

These assumptions must align with your financial planning and be realistic. Avoid making wild claims, as this makes your whole plan seem less believable, even the parts that might actually be accurate.

It's always better to be a bit cautious when making financial forecasts. This approach builds trust in your plan and prevents discrepancies that could cause people to reject it altogether.

Some of the key financial assumptions include:

For each product or service:

• Sales: How many do you expect to sell each month?
• Expected annual growth rate: How much will your sales increase each month (in percentage)?

For each subscription or membership:

• Price: What's the cost (monthly, quarterly, or annually)?
• Members: How many do you have now, or expect to have soon?

Consider your costs:

• Your salary: What do you make each month, and what raise do you expect each year?
• Team salaries: What do you pay your team each month, and what raises can they expect?
• Marketing: What's your starting monthly marketing budget, and how much will it grow each year?
• Miscellaneous purchases: How much money do you need in the first year for equipment or office space?
• Funding: How much money do you need now?
• Loan repayment: How long will it take to pay back any loans?

Income statement assumptions:

Income statement assumptions are basically your best guesses about your income and expenses.

Think of it as predicting:

• How much you'll earn from sales
• What it'll cost to make your product
• Your daily business costs
• How much your equipment will wear down over time.

When forecasting future expenses, start by looking at what you've spent in the past. Then, adjust those numbers based on where you can improve or save money.

Balance sheet

Your balance sheet assumptions are like a snapshot of what you own, what you owe, and what's left over.

Make sure you include everything that affects your balance sheet, especially all the money coming in and going out. A common mistake is forgetting to track all your cash flow, so be extra careful with that!

Cash flow statement

Cash flow assumptions are like your predictions about when money will actually change hands, even though it might already be on your books. It's important to include these in your financial statement so you can see the big picture of your cash flow year by year.

Think of the cumulative cash flow assumption as a roadmap for your investors. It shows them how you plan to spend the money they give you, and it helps you keep your spending in check over time.

You should also add notes to your financial statements. It acts as a helpful guide for anyone reading them. Here, you should clearly outline the thought process behind certain decisions, like how you valued your long-term assets or how you accounted for potential risks. It's important to go beyond simply listing these items. Take the time to provide a concise explanation for each one.

3. Operational assumptions

Operational assumptions are basically informed estimates about the day-to-day running of your business. This includes things like:

• How efficiently you'll work
• How you'll handle supplies
• What your customers will want

These assumptions are important for strategic planning and running things smoothly.

Some of the key operational assumptions include:

• Production capacity: This is the estimate of the production you think you can make or deliver within a set time.
• Cost of goods sold (COGS): What you expect it will cost to make your product or service. For example, a coffee shop might assume coffee beans will stay at the same price, letting them keep their prices low.
• Operating expenses: This is the projected ongoing costs of running your business. For instance, a small business might expect their rent to stay the same next year, so they can invest in other things.
• Supply chain reliability: This is your belief in how dependable your suppliers are.

4. Sales and marketing assumptions

Sales and marketing assumptions help you guess how you'll reach customers and turn them into buyers. They're super important for making good sales, marketing strategies, and setting goals you can actually reach.

Here are some examples:

• Lead conversion rate: We figure 10 out of every 100 interested people will become paying customers within 3 months.
• Customer churn: We expect to lose about 5% of our customers every few months, so we need to keep getting new ones.
• Website visitors: We think our website will get 15% more visitors each month because of our online marketing.
• Brand recognition: We want 20% more people in our target market to know our brand after our new campaign.

5. Competitor assumptions

Competitor assumptions are guesses about what your competitors are doing and how it might affect your business. These help you understand your place in the market.

Common competitor assumptions:

• Market share and growth: Guessing how much market share competitors have and if it will change. For example, assuming a competitor won’t grow much, leaving room for you.
• Pricing strategy: Predicting how competitors price their products and if they’ll change. You might assume they won’t lower prices, letting you compete on other things.
• Product offering: Assuming competitors will keep their current products without new innovations soon.
• Marketing and sales: Guessing competitors will keep using traditional marketing, allowing you to try different approaches.
• Customer loyalty: Assuming competitors have weak customer loyalty, giving you a chance to offer better service and gain their customers.

How to make accurate assumptions for your plan?

To make accurate well-rounded assumptions, you need a deep understanding of your operations, your market, your competitors, and your customers. This will help you make informed predictions about the future and set realistic goals.

Let's break down the key steps to creating accurate assumptions for your business. Remember, every business is unique, so the exact process will vary depending on your company's stage, industry, and other factors.

But the following steps offer a solid foundation to guide you:

1. Decide which assumption to make

The first step is to identify the key assumptions you'll need to make. This includes considering your operations, market, competitors, and customers.

There are many assumptions you can make. However, focus on the ones most specific to your business model, your stakeholders' needs, and your strategic goals.

2. Choose your level of detail

It's easy to get lost in the weeds when you know your business so well. But your assumptions should be clear for everyone, not just you. And they need to be easy to change as things evolve.

Too much detail or complexity can make your business plan clunky and hard to use. Instead, aim for a balance.

For example, when you're just starting out with a few customers, you might predict sales growth based on how much each customer usually spends. But as your business grows and you have good numbers of customers, this becomes difficult to keep track of.

So, even if it seems more accurate at first, it might be better to use simpler, broader assumptions, like overall sales growth. These are much easier to update as your business changes.

3. Check your current performance

Next, analyze your current and past financial performance to support each assumption.

For example, if you're estimating monthly revenue growth, review your year-to-date (YTD) performance to establish a baseline before making future assumptions. Even with limited financial data, use what you have.

4. Collect industry data

It's also important to consider industry projections and trends for your niche in the upcoming periods.

Your business doesn’t operate alone, so be aware of broader trends that could affect your outlook, not just your internal actions.

This might include analyzing competitors and their market share. This helps you understand your business's position and what might influence your short-term performance.

5. Be realistic

It might sound simple, but it's important to mention. While it's great to be hopeful about your business, don't make big claims you can't really support with good reasons.

If you set unrealistic expectations, you’ll likely hurt your progress and lose trust when the actual results don’t match up.

For example, if you’ve been seeing 3% sales growth each month for the past six months, it makes sense to expect something similar. But assuming it’ll jump to 10% without any real proof isn’t a good idea, even if it sounds better to investors in the short term.

Now that we understand how to make accurate assumptions, let's explore the….

Common mistakes to avoid when making key business assumptions

Getting your business assumptions wrong can result in hurting sales, profits, and even your company's reputation.

Here are some common mistakes to avoid when making key business assumptions:

• Overly optimistic: Don't just focus on the best-case scenario. Factor in possible risks to avoid overestimating your success.
• Ignoring data: Don't base assumptions on gut feelings. Use real data to make informed predictions.
• Inflexibility: Things change! Make sure your assumptions can adapt as your business and the market evolve.
• Overcomplicating: Too much detail can slow you down. Keep things simple enough to manage easily.
• Underestimating costs: Things might cost more than you think. Factor in potential increases so you're prepared.
• Forgetting to review: Business conditions change, so revisit your assumptions regularly to make sure they're still relevant.
• Relying on one metric: Don't just look at one number, like sales. Consider other things like customer satisfaction and how your competitors are doing.

Conclusion

In conclusion, assumptions play a vital role in small businesses. They help shape your strategies, plans, and decisions, giving you a way to predict future events or conditions. Although they can present challenges, managing your assumptions well can make them more accurate, effective, and less risky.

As a small business owner, knowing how to handle your assumptions can be crucial to your success. So, make thoughtful assumptions, manage them carefully, and let them guide you toward your business goals.

To make your plans even better, think about getting help from experts who specialize in business plans and growth strategies, such as a business plan consultancy. They can give you valuable advice and support to help you succeed and sustainably grow your business.