assumption sheet business plan

Financial Assumptions and Your Business Plan

Written by Dave Lavinsky

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

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What are Financial Assumptions?

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

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

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

Why are Financial Assumptions Important?

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

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

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

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

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

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Financial assumptions vs projections.

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

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

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

Key Assumptions By Financial Statement

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

Income Statement

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

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

Balance Sheet

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

Cash Flow Statement

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

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

Notes to Financial Statements

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

What are the Assumptions Needed in Preparing a Financial Model?

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

For EACH key product or service you offer:

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

For EACH subscription/membership you offer:

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

Cost Assumptions

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

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

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

Properly Preparing Your Financial Assumptions

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

Part 1 – Current Financials

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

Part 2 – Financial Assumptions

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

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

Part 3 – Projected Cash Flow Statement and Balance Sheet

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

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

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

Part 4 – Future Financials

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

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

Part 5 – Calculations

Calculate all critical financial numbers like:

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

Part 6 – Sensitivity Analysis

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

Calculate both EBITDA margins and EPS ranges at each level.

Part 7 – Section Highlights

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

Part 8 – Financial Summary

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

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

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!

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

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

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

Other Resources for Writing Your Business Plan

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

Plan Projections

ideas to numbers .. simple financial projections

Home > Business Plan > Business Plan Assumptions

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.

Free Assumption Templates: Project, Business and Financial

By Kate Eby | May 25, 2022

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We’ve collected free, downloadable assumption templates for project, business, and financial management needs. They can help you identify and track project constraints and assumptions during strategy development and project planning.

Included on this page, you will find a project assumptions and constraints template , an assumptions log template , an assumptions mapping template , and more.

Project Assumptions and Constraints Template

Download Project Assumptions and Constraints Template Microsoft Excel | Microsoft Word

This assumptions and constraints template enables you to enter and track all objectives, assumptions, and constraints for your project. Each section comes pre-filled with explanatory text to help you correctly identify deliverables, tasks, scope, assumptions, constraints, and estimated time for project completion. The template is completely customizable and includes an approvals section for documenting signatures from key stakeholders.

For more project planning templates and resources, see this extensive collection of project scope management tools .

Financial Assumption Template

Download Financial Assumption Template Microsoft Excel | Microsoft Word

Use this financial assumption template to organize and visualize your financial projections on a yearly or monthly basis. Customize the items in the Particulars column to reflect your anticipated income sources and costs, and enter projected expenses and revenue for each month or year. This template includes a column that factors in financial assumptions, such as depreciation, financing costs, and income tax, so that your final financial projection is as accurate as possible.

For more financial planning resources, see this collection of business financial plan templates for more free, downloadable forms.

Assumption Log Template

Download Assumption Log Template Microsoft Excel | Microsoft Word

Record and track project assumptions through the entire lifecycle of your project with this assumption log template. Enter all assumptions into the log, and record the date, validation task assignments, and comments. By doing so, you can keep tabs on all aspects of your project as it develops.

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

Sales Assumption Template

Download Sales Assumption Template Microsoft Excel | Smartsheet

Use this sales assumption template to track sales projections and assumptions while planning your monthly sales goals. The template includes 12 columns for recording monthly projections, as well as customizable rows where you can record projections for different product categories. The template also allows you to compare year-over-year performance against projections, which will help improve the accuracy of financial planning over time.

Assumptions Mapping Template

Download Assumptions Mapping Template Microsoft Word | Microsoft PowerPoint

An assumptions mapping template enables you to visualize, categorize, and communicate your assumptions clearly. The template divides assumptions into three, color-coded categories: desirable, feasible, and viable. On the second page, you will find a graph that enables you to plot assumptions based on their relative importance and certainty. Map each color-coded assumption onto the graph to create a dynamic visualization of your project assumptions.

For more resources and guidance on the project initiation process, see this comprehensive guide to project initiation .

Stay on Top of Project Constraints and Assumptions with Smartsheet

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Business Planning

Business Plan Financial Projections

Written by Dave Lavinsky

Financial projections are forecasted analyses of your business’ future that include income statements, balance sheets and cash flow statements. We have found them to be an crucial part of your business plan for the following reasons:

They can help prove or disprove the viability of your business idea. For example, if your initial projections show your company will never make a sizable profit, your venture might not be feasible. Or, in such a case, you might figure out ways to raise prices, enter new markets, or streamline operations to make it profitable.
Financial projections give investors and lenders an idea of how well your business is likely to do in the future. They can give lenders the confidence that you’ll be able to comfortably repay their loan with interest. And for equity investors, your projections can give them faith that you’ll earn them a solid return on investment. In both cases, your projections can help you secure the funding you need to launch or grow your business.
Financial projections help you track your progress over time and ensure your business is on track to meet its goals. For example, if your financial projections show you should generate $500,000 in sales during the year, but you are not on track to accomplish that, you’ll know you need to take corrective action to achieve your goal.

Below you’ll learn more about the key components of financial projections and how to complete and include them in your business plan.

What Are Business Plan Financial Projections?

Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:

1. Income Statement Projection

The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

There are a few key items you will need to include in your projection:

Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.

Sample Income Statement

2. cash flow statement & projection.

The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.

There are a few key items you will need to include in your cash flow projection:

The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.

Sample Cash Flow Statements

3. balance sheet projection.

The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.

A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.

It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.

Sample Balance Sheet

How to create financial projections.

Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.

Cost Assumptions

When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.

It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.

Capital Expenditures, Funding, Tax, and Balance Sheet Items

You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.

Capital Expenditures

When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.

When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.

When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.

Balance Sheet Items

When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.

Financial Projection Scenarios

Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.

Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.

Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.

Conduct a Ratio Analysis

A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.

There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:

Gross margin ratio
Operating margin ratio
Return on assets (ROA)
Return on equity (ROE)

To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.

Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.

Be Realistic

When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.

Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.

Sales Forecast

One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.

Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.

Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.

Create Multi-Year Financial Projections

When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.

It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.

Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.

Business Plan Financial Projections FAQs

What is a business plan financial projection.

A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.

What are annual income statements?

The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.

What are the necessary financial statements?

The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.

How do I create financial projections?

You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.

Planning, Startups, Stories

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

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

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

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

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

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

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

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

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

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

Sample List of Assumptions

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

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How Financial Assumptions Can Make Or Break Your Business Plan

May 9, 2022

Adam Hoeksema

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

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

Financial Assumptions

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

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

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

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

The Role of Financial Assumptions in Forecasting

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

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

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

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

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

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

The Importance of Accuracy in Financial Assumptions

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

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

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

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

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

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

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

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

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

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

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

Key Financial Assumptions Examples

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Find Your Industry Specific Projections Template to Help Create Assumptions:

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

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

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

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

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

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

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

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

Outsourcing

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

Demonstration

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

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

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

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

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

About the Author

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

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List Business Plan Assumptions

Identify and list business plan assumptions. You will get real business benefits from the assumptions list in your business plan. Planning is about managing change, and in today’s world, change happens very fast. Assumptions solve the dilemma about managing consistency over time, without banging your head against a brick wall.

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

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

You will use your business plan assumptions often

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

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

An Assumptions Example

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

Financial Plan Assumptions

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.

Cost Assumptions

Fixed and variable costs.

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

Cost of Goods Sold (COGS)

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

Operating Expenses

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

Inflation Rate

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

Investment Assumptions

Capital expenditures.

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

Working Capital Requirements

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

Financing Sources and Costs

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

Tax Assumptions

Corporate tax rates.

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

Tax Credits and Incentives

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

Tax Planning Strategies

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

Economic and Industry Assumptions

Macroeconomic factors.

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

Interest Rates

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

Unemployment Rates

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

Macroeconomic Factors in Economic and Industry Assumptions

Industry Trends and Competition

Market size and growth.

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

Technological Advancements

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

Regulatory Changes

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

Competitive Landscape

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

Sensitivity Analysis and Scenario Planning

Identifying key variables and uncertainties.

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

Developing Scenarios and Assumptions

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

Analyzing the Impact on Financial Performance

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

Risk Mitigation and Contingency Planning

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

Regular Review and Update of Assumptions

Importance of ongoing monitoring.

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

Frequency of Assumption Updates

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

Incorporating New Information and Data

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

Adjusting Financial Plans as Needed

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

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

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

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

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

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

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

Financial Plan Assumptions FAQs

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

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

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

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

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

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

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

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

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

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

About the Author

True Tamplin, BSc, CEPF®

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

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

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

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Business Assumptions: Understanding Key Predictions in Entrepreneurship

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

Business Assumptions Definition

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

Types of Business Assumptions

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

Revenue Assumptions

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

Market Size Assumptions

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

Operational Expense Assumptions

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

The Role of Business Assumptions in Financial Planning

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

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

Forecasting

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

Strategic Planning

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

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

The Impact of Business Assumptions on Risk Assessment

Business assumptions and risk assessment.

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

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

The Pitfall of Over-Optimism

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

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

The Danger of Over-Pessimism

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

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

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

Criticality of Validating Business Assumptions

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

Methods for Validating Business Assumptions

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

Market Research

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

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

Example of Markdown for Market Research

Hypothesis Testing

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

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

Example of Markdown for Hypothesis Testing

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

Business Assumptions in Startup Ecosystems

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

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

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

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

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

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

Link Between Business Assumptions and Sustainable Business Models

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

The Role of Business Assumptions in Creating Sustainable Business Models

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

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

Business Assumptions Impact on Long-term Viability

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

The Influence on Corporate Social Responsibility

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

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

Guidelines for Making Reasonable Business Assumptions

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

Adopt a Conservative Approach

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

Consider Current Market Trends

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

Regular Review and Update of Assumptions

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

Sound Underlying Logic

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

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

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Understanding the Role of Business Plan Assumptions in Success

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

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

Grasping Frequent Usage of Business Plan Assumptions

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

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

Illustration of Assumptions Usage

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

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

Delving into Financial Assumptions in Business Plan

Value of financial assumptions in plan development.

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

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

Contrasting Financial Assumptions with Projections

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

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

Examining Key Assumptions for Various Financial Statement

Income statement assumptions.

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

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

Balance Sheet Assumptions

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

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

Cash Flow Statement Assumptions

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

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

Notes on Assumptions for Financial Statements

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

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

Identifying Assumptions Crucial in Developing a Financial Model

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

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

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

Steps to Prepare Your Business Financial Assumptions

Examining current financials.

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

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

Establishing Financial Assumptions

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

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

Projecting Cash Flow Statement and Balance Sheet

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

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

Visualizing Future Financials

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

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

Conducting Calculations for Assumptions

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

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

Performing Sensitivity Analysis

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

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

Highlighting Section Offers

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

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

Summarizing Financial Aspects

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

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

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

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What Are Key Assumptions of a Business Plan?

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

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

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

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

What are key assumptions?

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

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

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

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

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

Why are key assumptions important in a business plan?

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

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

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

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

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

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

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

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

Examples of key assumptions in a business plan

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

Here are some examples.

Target market assumptions

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

Competitive landscape assumptions

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

Revenue stream assumptions

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

Financial projections

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

Considerations for making key assumptions in a business plan

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

Here are some key considerations.

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

Conservatism

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

Flexibility

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

Tips for reviewing and updating key assumptions in a business plan

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

Here are some tips for reviewing and updating key assumptions.

Regularly review and assess the accuracy of your assumptions

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

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

Be open to revising your assumptions

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

Communicate updates to your team

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

Use your updated assumptions to inform your decision-making

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

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

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

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

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

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

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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?

Pro Forma Financial Statements (with Templates and Examples)

Bryce Warnes

Reviewed by

Janet Berry-Johnson, CPA

April 21, 2022

This article is Tax Professional approved

Pro forma definition

According to Merriam-Webster , “pro forma” means:

Made or carried out in a perfunctory manner or as a formality
Based on financial assumptions or projections

I am the text that will be copied.

Pro forma is actually a Latin term meaning “for form” (or today we might say “for the sake of form, as a matter of form”).

When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios. They’re a way for you to test out situations you think may happen in the future to help you make business decisions.

There are three major pro forma statements:

Pro forma income statements
Pro forma balance sheets
Pro forma cash flow statements

Pro forma statements look like regular statements, except they’re based on what ifs, not real financial results. As in, “What if my business got a $50,000 loan next year?” Your pro forma statements for that scenario would show what your income, account balances, and cash flow would look like with a $50,000 loan.

Since pro forma statements deal with potential outcomes, they’re not considered GAAP compliant . This is because GAAP compliant reports must be based on historical information.

Pro forma statements don’t need to meet the strictest accounting standards , but must be clearly marked as “pro forma” and can’t be used for things like filing taxes. Using pro forma statements that aren’t marked as such to misrepresent your business to investors, the IRS, or financial institutions can be penalized by the Securities and Exchange Commission).

However, pro forma statements are still extremely useful. They can help you make a business plan, create a financial forecast, and even get funding from potential investors or lenders.

Different but related: you can send clients pro forma invoices to let them know how much their order would be if they placed it today.

Why create pro forma statements?

Creating pro forma statements for future scenarios can help you:

Get financed, by showing lenders or investors how you would use their money to sustainably grow your business.
Plan for the future, by considering best, worst, and most likely case scenarios in detail.
Anticipate changes that may affect your business as it grows, such as entering a new tax bracket.

For these purposes, pro forma statements are typically created as a part of a financial forecast in financial accounting. Big corporations who have in-house accountants use pro forma statements for financial modeling and forecasting different scenarios.

Pro forma statements vs. budgets

It may be tempting to think of a pro forma statement as the same as a business budget . After all, you create both in anticipation of the future. And both help you plan how you’ll use your money. But budgets and pro forma statements are two distinct financial tools.

Think of it this way: A pro forma statement is a prediction, and a budget is a plan. Your budget may be based on the financial information of your pro forma statements—after all, it makes sense to make plans based on your predictions.

For example: Your income this year is $37,000. According to your pro forma annual income statement, your financial projections show it will be $44,000 next year. So, when you create next year’s budget, you can include that extra $7,000—maybe spending $4,000 over the course of the year to pay down the principal on a loan , while adding $3,000 to savings.

Types of pro forma statement

There are four main types of pro forma statements. While they all fall into the same categories—income statement, balance sheet, and cash flow statement—they differ based on the purpose of the financial forecast.

1. Full-year pro forma projection

This type of pro forma projection takes into account all of your financials for the fiscal year up until the present time, then adds projected outcomes for the remainder of the year. That can help you show investors or partners what business finances could look like by the end of the fiscal year.

2. Financing or investment pro forma projection

You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing. In that case, you can use a financing pro forma projection to make your case. It takes into account an injection of cash from an outside source—plus any interest payments you may need to make—and shows how it will affect your business’s financial position.

3. Historical with acquisition pro forma projection

This type of pro forma projection looks at the past financial statements of your business, plus the past financial statements of a business you want to buy . Then it merges them to show what your financials would have looked like if you made a business combination (or merger) earlier. You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now.

4. Risk analysis pro forma projection

Looking at both best case and worst case scenarios helps you make financial decisions based on challenges you may face in the future. For instance, what happens if your main vendor raises their prices like they did last year? Or how will that proposed transaction of buying new equipment impact you long term? Risk analysis lets you take the future for a test ride, and try out different outcomes.

Pro forma templates

To create a pro forma statement, you can use the same template you’d use for a normal financial statement. You may want to use Bench’s free templates:

Income statement
Balance sheet
Cash flow statement

How to create pro forma statements

The sample pro forma statements below may look different from the statements you create, depending on what your template looks like. But generally, these are the steps you need to take to create them—and the info your pro forma statements should include.

Creating a pro forma income statement

There are five steps to creating a pro forma income statement:

Set a goal for sales in the period you’re looking at. Let’s say you want to increase your income by $18,000 over the course of one year.
Set a production schedule that will let you reach your goal, and map it out over the time period you’re covering. In this case, you’ll want to earn an additional $1,500 income every month, for 12 months.
Plan how you’ll match your production schedule. You could do this by growing your number of sales a fixed amount every month, or gradually increasing the amount of sales you make per month. It’s up to you—trust your experience as a business owner.
It’s time for the “loss” part of “ Profit and Loss .” Calculate the cost of goods sold for each month in your projection. Then, deduct it from your sales. Deduct any other operating expenses you have, as well.
Prepare your pro forma income statement using data you’ve compiled in the prior four steps.

One note: your pro forma statements will be much more accurate if your bookkeeping is up to date. That way, when you project future periods, you’re basing it off the reality of your business today.

How Bench can help

To predict the future, you first need to understand the past. With Bench, you get a crystal clear image of your financial history so you can focus on planning your future. We’re America’s largest bookkeeping service helping thousands of business owners better understand the financial health of their operations so they can keep focused on growth and planning. When it comes time to create a pro forma statement, you have reliable numbers and reports to get started. We may not be a crystal ball, but we’re the next best thing. Learn more .

Example pro forma income statement:

Rosalia’s Reliable Recordings

Creating a pro forma cash flow statement

You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement. That means taking info from the income statement, then using the cash flow statement format to plot out where your money is going, and what you’ll have on hand at any one time. This pro forma statement can be part of a larger cash flow forecast used for decision making.

Your projected cash flow can give you a few different insights. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. You’ll have to make plans to borrow money and pay it off.

On the other hand, if net cash flow is positive, you can plan on having enough extra cash on hand to pay off loans, or save for a big investment.

Example pro forma cash flow statement

Mickie’s Murakami Museum

Creating a pro forma balance sheet

By drawing on info from the income statement and the cash flow statement, you can create pro forma balance sheets. However, you’ll also need previous balance sheets to make this useful—so you can see how your business got from “Balance A” to “Balance B.”

The balance sheet will project changes in your business accounts over time. So you can plan where to move money, when.

Example pro forma balance sheet

Daily Dumpling Deliveries

Once you’ve created your pro forma income statements, and cast your eyes forward to the future of your business, you can start planning how you’ll spend your money. It’s time to create a small business budget .

Cash Flow Statement: Explanation and Example

Master cash flow statements, master your business’s cash flow.

How to Pay Off Your Business Debt, Fast

Buried in small business debt? Follow this plan to dig yourself out.

What is Deferred Revenue and Why is it a Liability?

How do you record revenue when you get paid upfront? Deferred revenue.

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What Are the Key Assumptions of a Business Plan?

Small Business
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How to Write a Business Plan for a Food Truck Business

Challenges of corporate planning, how to price your products & programs to increase your income.

How to Counter the Argument From a Potential Investor That Most Small Businesses Fail
6 Types of Business Plans

Entrepreneurs often make two basic assumptions about a new business: that they have a product consumers will want and that the business owner can make and sell the product profitably. An investor or partner will want to see that you’ve done you’re homework and can support more key assumptions than those two, with research and data.

Product or Service Need

One of the first and most important assumptions to address in a business plan is that there is a demonstrated need for your product or service in the marketplace. You can do this with a competition analysis, showing that others are making this product or offering this service and selling it profitably. If you believe you have a new idea no one has tried yet, demonstrate that there’s a need or desire for the benefit you offer, which can include showing how other companies currently address this consumer need, but not as well as your new idea will.

Sufficient Customer Base

Another key assumption is that enough consumers want your product or service that you can generate adequate sales to make a profit for the long run. You will need to demonstrate that there are many more people in your target market than you need, because all of them won’t buy, and many will buy from competitors.

There is no specific formula businesses use to calculate this number, but your excess potential customer base should be more than just a percentage of your sales need. For example, if you need 100 people to buy from you each day, don’t plan on surviving in an area with 120 or 130 potential customers. Plan on needing an exponential number, which might be five to 10 times the number of customers you need.

Research to Demonstrate Profitability

Every entrepreneur assumes he will be profitable, but that assumption must be borne out by market research, budgeting and sales projections. Profitability does not depend only on sales – it centers around your cost to make and sell your product.

Once you have calculated your manufacturing and overhead costs, review the various price levels at which you might sell your product to determine if you can pay off your start-up costs, then start making a profit. You can choose a pricing strategy that generates high sales volumes by selling at a low price or by trying to maximize profit margins with a higher price.

Management Expertise and Experience

A product doesn’t make itself, and a company doesn’t run itself. One of the key assumptions of a business plan is that the principals can run a business profitably. The creator of a widget might make the best widget the marketplace has ever seen, but that doesn’t mean she knows how to organize a company, handle accounting, create marketing strategies, develop budgets, handle legal issues, prepare taxes and perform the many tasks required to operate a business. A business plan should demonstrate that the principals not only know how to make a product or deliver a service, but also will be able to manage all aspects of the business.

Adequate Funding and Capitalization

Even when a business starts making a profit from operations, it might still take months or years to pay off the initial start-up costs. Many small businesses fail because the owner believes he can fund the operations on sales. Sales volumes that will be more than adequate for making a profit in year two or three might not even be close to helping you meet your debt service obligations your first year. Demonstrate in a business plan that you have sufficient capitalization to run the business until break-even and afterward, or provide the amount of investment or loan you’ll need to start the business.

Small Business Administration: Essential Elements of a Good Business Plan for Growing Companies
FindLaw: Contents of a Written Business Plan

Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such Smart-Healthy-Living.net, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.

How to design an effective business plan, pre-launch marketing checklist, what is the role of a business plan in getting venture capital funding, do all businesses need a production plan, main steps in business planning, how to open a pumpkin farm, what factors make the difference between a good business plan & an excellent one, how to sell business ideas, essentials for business success, most popular.

1 How to Design an Effective Business Plan
2 Pre-Launch Marketing Checklist
3 What Is the Role of a Business Plan in Getting Venture Capital Funding?
4 Do All Businesses Need a Production Plan?

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Financial Assumptions and Your Business Plan

What are Financial Assumptions?

Why are Financial Assumptions Important?

Finish Your Business Plan Today!

Key Assumptions By Financial Statement

Income Statement

Balance Sheet

Cash Flow Statement

Notes to Financial Statements

What are the Assumptions Needed in Preparing a Financial Model?

Properly Preparing Your Financial Assumptions

Part 1 – Current Financials

Part 2 – Financial Assumptions

Part 3 – Projected Cash Flow Statement and Balance Sheet

Part 4 – Future Financials

Part 5 – Calculations

Part 6 – Sensitivity Analysis

Part 7 – Section Highlights

Part 8 – Financial Summary

How to Finish Your Business Plan in 1 Day!

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Other Resources for Writing Your Business Plan

Other Helpful Business Plan Articles & Templates

Plan Projections

Business Plan Assumptions

Business Plan Assumptions List

About the Author

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Business Plan Financial Projections

What Are Business Plan Financial Projections?

1. Income Statement Projection

Sample Income Statement

Sample Cash Flow Statements

Sample Balance Sheet

Cost Assumptions

Capital Expenditures, Funding, Tax, and Balance Sheet Items

Capital Expenditures

Balance Sheet Items

Financial Projection Scenarios

Conduct a Ratio Analysis

Be Realistic

Sales Forecast

Create Multi-Year Financial Projections

Business Plan Financial Projections FAQs

What are annual income statements?

What are the necessary financial statements?

How do I create financial projections?

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Financial Plan Assumptions

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