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All business plans rely on certain assumptions about the future. Your sales projections depend on assumptions about market size and customer demand. Your cost structure assumes future prices for raw materials, labor, manufacturing, etc. Every part of your plan, from headcount growth to capital expenditures, is based on assumptions you make about the conditions your company will face.
While assumptions are necessary in business planning, the problem comes when those assumptions are unrealistic, inaccurate, or overly optimistic. Building your plan on flawed assumptions sets you up for failure down the road. When reality doesn’t match your assumptions, you miss your targets and have to course-correct, which is tremendously disruptive to company momentum.
How can you ensure your assumptions are realistic? Here are some tips for developing, testing, and adapting your planning assumptions so they mirror reality as closely as possible. With more accurate assumptions, you’ll set appropriate targets and be prepared to adjust when conditions change.
Before diving into how to create strong assumptions, it’s important to understand some key mistakes that often undermine assumption quality:
Being Too Optimistic: It’s easy to see the future through rose-colored glasses, assuming everything will work in your favor. You might overestimate market size or customer demand based on what you hope will happen rather than what’s truly realistic. But optimism doesn’t change market realities. Basing targets on overly optimistic assumptions leaves you prone to overinvest and underdeliver.
Focusing Too Narrowly: Sometimes assumptions consider external factors but fail to account for internal dynamics. For example, you might assume you can double production volume based on demand forecasts, but overlook capabilities and constraints on sourcing, facilities, systems, etc. Internal realities must align with outside forces for your plan to work.
Failing to Pressure Test: Many assumptions go untested because people feel confident in their judgments and forecasts. But you should pressure test even your most trusted assumptions through market research, benchmarks, sensitivity analysis, etc. This validation keeps bias at bay and spots flawed assumptions before they derail your plan.
Not Adapting: Reality never precisely matches assumptions. Markets and trends fluctuate day-to-day, new challenges emerge, risks materialize. When forces shift, assumptions and plans should shift too. Rigidly clinging to outdated assumptions causes financial modeling and targets to diverge further from actuals.
Limited Foresight: Some assumptions carefully consider current conditions and near-term projections, but overlook major shifts on the horizon. This includes things like emerging competitors, demographic/generational shifts, regulatory changes, supply/demand cycle swings, etc. Failing to account for bigger disruptions makes assumptions obsolete.
By understanding these common pitfalls, you can proactively avoid them as you craft your assumptions.
How can you ensure your assumptions are sound? Here are some tips for developing realistic and reasonable planning assumptions:
Gather Hard Data: Don’t rely on intuition or hopefulness. Research historical data, growth rates, market projections, existing pipeline, cost trajectories, etc. Facts and figures ground your assumptions in reality. Seek data that directly informs each assumption.
Pressure Test Assumptions: For every assumption, ask “what if I’m wrong?” Challenge the logic with alternatives like “best case” and “worst case.” Gauge how results would differ if the assumption is off by 20%, either positively or negatively. The more validated under different scenarios, the more reliable the assumption.
Benchmark Similar Companies: If you lack enough internal data history, look to benchmarks. For sales assumptions, analyze growth rates for comparable companies. For cost assumptions, learn from industry price trajectories. Find patterns from those further ahead to shape your forward-looking assumptions.
Involve a Wide Range of Perspectives: Don’t let assumptions be set in a vacuum. Draw insights from people across roles who see different aspects of the business and market. Sales, marketing, finance, operations and other leaders will spot potential flaws or identify better data to inform assumptions.
Map Interdependencies: Question how performance in one area affects others. For example, does your sales volume assumption align with your manufacturing capacity assumption? Understanding cross-impacts leads to more cohesive and achievable plans overall.
Account for Uncertainties: Use conservative figures when outcomes are less predictable. Or conduct scenario planning with multiple versions—optimistic, moderate, pessimistic—to ensure downside risks are built into plans. Hedging against uncertainties prevents unpleasant surprises.
Pressure Test Early On: Don’t invest significant time building models and targets before testing key assumptions. Poke holes in the logic early, while you still have time to gather better data or adjust direction before setting the course.
Keep Iterating: Even after validating assumptions, continue questioning them throughout plan creation and execution. The more iterations, the more accurate your view of the future. Build in formal refresh checkpoints to keep assumptions from stagnating.
Thoughtful development of assumptions is critical, but you also need to validate them through research, analysis and engagement. Here are proven techniques for pressure testing your assumptions:
– Market Research: Tap insights from existing and prospective customers, third-party data sources, interviews with industry experts, competitive intelligence and more. This gauges external response to your offerings, sizes the opportunity and provides benchmarks.
– Surveys: Convert assumptions into questions you can ask directly via customer surveys, employee surveys, vendor surveys etc. Ask point blank if key groups agree with sales volume projections, cost increase expectations, hiring plans and other assumptions.
– Advisory Boards: Assemble a formal board of external advisors and let them scrutinize your full business plan, including assumptions. They will identify unrealistic or unsupported assertions.
– Focus Groups: Hear reactions to your business plan direction through in-depth focus group discussions. Listen for when participants challenge assumptions—that’s where external perceptions diverge from your internal views.
– Sensitivity Analysis: Test best, worst and probable scenarios in your financial modeling. See how negative (or positive) impacts on key assumptions affect growth, profitability, financing needs and other outcomes.
– Peer Review: Before finalizing your plan, have peers in finance, operations and other areas review assumptions that relate to their domains. Respect their expertise and make adjustments where they see inconsistencies.
– Executive Signoff: Finally, have your leadership team formally approve the plan assumptions. Aligning on targets requires clear understanding and commitment to the underlying assumptions.
You know your assumptions are sound if they hold up to rigorous validation from a diverse set of sources. Be prepared to make changes where gaps become apparent between assumptions and reality.
Even with rigorous validation up front, realities will diverge from assumptions over time. Markets fluctuate, new challenges emerge, risks materialize. Build flexibility into implementation to pivot when required.
Here are some tips for adapting to reality shifts:
– Revisit Assumptions Quarterly: Set calendar reminders to formally review status of your plan assumptions on a recurring basis. Key questions: Is this still accurate? What new data can inform this? What changes are needed?
– Watch for Divergence: Monitor leading indicators specific to each assumption—sales inquiry volume, raw material prices, hiring pacing, web traffic, burn rate, etc. When they start misaligning with your plan, re-evaluate assumptions.
– Conduct Mid-Year Replanning: Don’t wait for the annual plan refresh. Do a formal replanning exercise mid-year to address emerging realities. Revise assumptions and realign resources and budgets to the updated forecast.
– Empower Local Insights: Don’t let new realities bubble up slowly from the bottom. Empower sales, R&D, country managers and frontline teams to flag when their view differs from plan assumptions.
– Listen to Customers: Sales, account management and customer advisory panels will provide an early warning if demand is falling short of projections. Let this trigger a reassessment of assumptions.
– Update Models Frequently: Don’t let models and dashboards become stale. Refresh underlying assumptions and financials often to ensure leadership has a current view.
– Test New Offerings: Pilot products, services, pricing models and other new offerings to prove (or disprove) assumptions in a contained environment before betting big. Let real-world signals shape rollout.
With constant sensitivity to changes in market conditions, new data and leading indicators, you can pivot quickly when realities contradict core assumptions in your plan. Think of assumptions as living documents to be refined continually.
Accurate planning assumptions separate successful strategy execution from frustration and missed goals. Leaders too often underestimate the damage of building plans, investments and organizational capabilities on a flawed foundation.
Be diligent upfront in developing a realistic set of planning assumptions, pressure testing them through research and analysis. Keep listening and stay ready to update assumptions and adapt plans when realities shift. With a dynamic view, you can create plans and make decisions based on the clearest possible view of the future.
In summary, ensuring realism and accuracy in business plan assumptions is crucial for setting achievable targets and being prepared for inevitable shifts in market conditions. Avoid common pitfalls like optimism bias, narrow focus and limited foresight when developing assumptions. Take a rigorous approach leveraging data, research, cross-functional input and other validation techniques. Continually revisit assumptions and adapt plans accordingly as realities evolve. With sound assumptions as your foundation, your business plan will reflect achievable potentials rather than fantasy, fueling growth and success.