Dr Jeff Cornwall

A frustrating part of business planning is the uncertainly underlying so much of what goes into a new venture plan. Estimating revenues and expenses requires us to estimate, approximate and sometimes even guess at many key aspects of our forecasts.
Although good research can go a long way to improving our accuracy, at some point we still need to make assumptions about fundamental forces that shape our revenue and expense forecasts.
A common mistake that many entrepreneurs make is to quickly treat all of these assumptions as fact. Whether it be psychological denial of the risks we are about to face or simply our unbridled optimism, we seem to quickly forget how agonizing the process of making these assumptions was when we formulated our plans.
However, this is a dangerous course. In fact, we should embrace our assumptions as they can prove to be one of the most powerful management tools we have as we start and grow our new ventures.
During the planning process the entrepreneur should make a list of assumptions. Every time an assumptions is made about revenues or expenses, it should be added to the list. Once we have a draft of a complete plan, go through all of the assumptions to determine which are fundamentally important to the success of the venture. Which of these assumptions are likely to be ones that will keep us awake at night worrying about what the future will actually hold?
Take the most important handful, certainly no more than five assumptions, and use these to develop a couple of scenarios for the plan. I recommend that you treat the initial plan you have developed as your best case scenario. Even though you have assumed it is what is likely to happen, experience shows us that most of the time we have been too rosy in our forecasts.
Take the key assumptions that you have isolated and develop an alternative set of financial statements that reflect a poorer outcome occurs for all of them. This then should become your most likely scenario that you share with outsiders.
Then assume the absolute worst case for each of these assumptions — no matter how dire it looks — and develop a third set of financials. This is your worst case. Most of the time it predicts failure. Get comfortable with the fact that this may occur. Failure is a possible outcome in almost everything we do in life, and in a new business we need to understand what this failure will look like. We will be better prepared to launch the business if we understand what is really at stake.
The power of our assumptions does not stop with the plan, however. Our key assumptions become among our most important management tools. Develop ways to measure the variables behind these assumptions and commit to measuring them on a regular basis, be it weekly or monthly. Make sure that you continue to measure and review them over time as the business grows. These measures may include pricing assumptions, order size, frequency of orders, labor costs, worker productivity, market share, or any of a long list of common assumptions we have to make in planning. Make sure you create processes for you or your staff to measure them and use them in your decision making and future planning.
With this data you will have the means to catch problems as they are occurring and you are hopefully able to take action to adjust your plans as those problems are unfolding.
The alternative is to wait until the problems show up on your income statement. But, by then it may be too late. Income statements give us a view of our history. We need to be able to see how these assumptions are taking place in real time.