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Business Plan 101: Critical Risks and Problems

When starting a business, it is understood that there are risks and problems associated with development. The business plan should contain some assumptions about these factors. If your investors discover some unstated negative factors associated with your company or its product, then this can cause some serious questions about the credibility of your company and question the monetary investment. If you are up front about identifying and discussing the risks that the company is undertaking, then this demonstrates the experience and skill of the management team and increase the credibility that you have with your investors.  It is never a good idea to try to hide any information that you have in terms of risks and problems.

Identifying the problems and risks that must be dealt with during the development and growth of the company is expected in the business plan. These risks may include any risk related to the industry, risk related to the company, and risk related to its employees. The company should also take into consideration the market appeal of the company, the timing of the product or development, and how the financing of the initial operations is going to occur. Some things that you may want to discuss in your plan includes: how cutting costs can affect you, any unfavorable industry trends, sales projections that do not meet the target, costs exceeding estimates, and other potential risks and problems.  The list should be tailored to your company and product. It is a good idea to include an idea of how you will react to these problems so your investors see that you have a plan.

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This free Notion document contains the best 100+ resources you need for building a successful startup, divided in 4 categories: Fundraising, People, Product, and Growth.

This free eBook goes over the 10 slides every startup pitch deck has to include, based on what we learned from analyzing 500+ pitch decks, including those from Airbnb, Uber and Spotify.

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12 Types of Business Risks and How to Manage Them

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Everything you need to raise funding for your startup, including 3,500+ investors, 7 tools, 18 templates and 3 learning resources.

Information about the countries, cities, stages, and industries they invest in, as well as their contact details.

List of 250 startup investors in the AI and Machine Learning industries, along with their Twitter, LinkedIn, and email addresses.

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90% of startups fail .

Thanks to the explosion of the digital economy, business founders have plenty of opportunities that they can tap into to build a winning business.

Unfortunately, there is a myriad of challenges your new business has to navigate through. These risks are inevitable, and they are a part of life in the business world.

However, without the right plan, strategy, and instruments, your business might be drowned by these challenges.

Therefore, we have created this guide to show you how can your business utilize risk management to succeed in 2022.

There are many types of startup and business risks that entrepreneurs can expect to encounter in 2022. Most of these threats are prevalent in the infancy stages of a business.

To know what you’ll be up against, here is a breakdown of the 12 most common threats.

12 Business Risks to Plan For

1) economic risks.

Failure to acquire adequate funding for your business can damage the chances of your business succeeding.

Before a new business starts making profits, it needs to be kept afloat with money. Bills will pile up, suppliers will need payments, and your employees will be expecting their salaries.

To avoid running into financial problems sooner or later, you need to acquire enough funds to shore up your business until it can support itself.

On the side, world and business country's economic situation can change either positively or negatively, leading to a boom in purchases and opportunities or to a reduction in sales and growth.

If your business is up and running, a great way to limit the effect of negative economic changes is to maintain steady cash flow and operate under the lean business method.

Here's an article from a founder explaining how he set up a lean budget on his $400k/year online business.

2) Market Risks

Misjudging market demand is one of the primary reasons businesses fail .

To avoid falling into this trap, conduct detailed research to understand whether you will find a ready market for what you want to sell at the price you have set.

Ensure your business has a unique selling point, and make sure what you offer brings value to the buyers.

To know whether your product will suit the market, do a survey, or get opinions from friends and potential customers.

Building a Minimum Viable Product of that business idea you've had is the recommendations made by most entrepreneurs.

This site, for example, was built in just 3 weeks and launched into the market to see if there was any interest in the type of content we offered.

The site was ugly, had little content and lacked many features. Yet, +7,700 users visited it within the first week, which made us realize we should keep working on this.

90% of startups fail. Learn how to not to with our weekly guides and stories. Join 40,000+ founders.

3) Competitive Risks

Competition is a major business killer that you should be wary of.

Before you even start planning, ask yourself whether you are venturing into an oversaturated market.

Are there gaps in the market that you can exploit and make good money?

If you have an idea that can give you an edge, register it. This will prevent others from copying your product, re-innovating it, and locking you out of what you started.

Competitive risks are also those actions made by competitors that prevent a business from earning more revenue or having higher margins.

4) Execution Risks

Having an idea, a business plan, and an eager market isn’t enough to make your startup successful.

Most new companies put a lot of effort into the initial preparation and forget that the execution phase is equally important.

First, test whether you can develop your products within budget and on time. Also, check whether your product will function as intended and whether it’s possible to distribute it without taking losses.

5) Strategic Risks

Business strategies can lead to the growth or decline of a company.

Every strategy involves some risk, as time & resources are generally involved to put them into practice.

Strategic risk in the chance that an implemented strategy, therefore, results in losses.

If, for example, the Marketing Department of a company implements a content marketing strategy and a lot of months, time & money later the business doesn't see any ROI, this becomes a strategic risk.

6) Compliance Risks

Compliance risks are those losses and penalties that a business suffers for not complying with countries' and states' regulations & laws.

There are some industries that are highly-regulated so the compliance risks of businesses within them are super high.

For example, in May 2018, the EU Commission implemented the General Data Protection Regulation (GDPR), a law in privacy and data protection in the EU, which affected millions of websites.

Those websites that weren't adapted to comply with this new rule, were fined.

7) Operational Risks

Operational risks arise when the day-to-day running of a company fail to perform.

When processes fail or are insufficient, businesses lose customers and revenue and their reputation gets ruined.

One example can be customer service processes. Customers are becoming every day less willing to wait for support (not to mention, receive bad quality one).

If a business customer service team fails or delays to solve customer's issues, these might find their solution in the business competitors.

8) Reputational Risks

Reputational risks arise when a business acts in an immoral and discourteous way.

This led to customer complaints and distrust towards the business, which means for the company a big loss of sales and revenue.

With the rise of social networks, reputational risks have become one of the main concerns for businesses.

Virality is super easy among Twitter so a simple unhappy customer can lead to a huge bad press movement for the company.

A recent example is the Away issue with their toxic work environment, as a former employee reported in The Verge .

The issue brought lots of critics within social networks which eventually led the CEO, Steph Korey, to step aside from the startup ( she seems to be back, anyway 🤷‍♂️! ).

9) Country Risks

When a business invests in a new country, there is a high probability it won't work.

A product that is successful in one market won't necessarily be in another one, especially when people within them are so different in cultures, climates, tastes backgrounds, etc.

Country risk is the existing failure probability businesses investing in new countries have to deal with.

Changes in exchange rates, unstable economic situations and moving politics are three factors that make these country risks be even more delicate.

10) Quality Risks

When a business develops a product or service that fails to meet customers' needs and quality expectations, the chance these customers will ever buy again is low.

In this way, the business loses future sales and revenue. Not to mention that some customers will ask for refunds, increasing business costs, as well as publicly criticize the company's products, leading to bad reputation (and a viral cycle that means even less $$ for the business).

11) Human Risk

Hiring has its benefits but also its risks.

Employees themselves involve a huge risk for a business, as they become to represent the company through how they work, mistakes committed, the public says and interactions with customers & suppliers,

A way to deal with human risk is to train employees and keep a motivated workforce. Yet, the risk will continue to exist.

12) Technology Risk

Security attacks, power outrage, discontinued hardware, and software, among other technology issues, are the events that form part of the technology risk.

These issues can lead to a loss of money, time and data, which has many connections with the previously mentioned risks.

Back-ups, antivirus, control processes, and data breach plans are some of the ways to deal with this risk.

How Businesses Can Use Risk Management To Grow Business

To mitigate any future threats, you need to prepare a comprehensive risk management plan.

This plan should detail the strategy you will use to deal with the specific challenges your business will encounter. Here’s what to do.

1) Identify Risks

Every business encounters a different set of challenges.

Before mapping the risks, analyze your business and note down its key components such as critical resources, important services or products, and top talent.

2) Record Risks

Once risks have been identified, you need to assess and document the threats that can affect each component.

Identify any warning signs or triggers of that recorded risk, also.

3) Anticipate

The best way to beat a threat is to detect and prepare for it in advance.

Once you know your business can be affected by a certain scenario, develop steps that you will take to stop the risk or to blunt its effects.

4) Prioritize Risks

Not all types of business risk have the same effect. Some can bring your startup to its knees, while others will only cause minimal effects.

To keep your business alive, start by putting in place measures that protect the vital functions from the most severe and most probable risks.

5) Have a Backup Plan

For every risk scenario, have at least two plans for countering the threat before it arrives.

The strategy you put in place should be in line with the current technology and trends.

Ensure your communicate these measures with all your team members.

6) Assign Responsibilities

When communicating measures with the team, assign responsibilities for each member in case any of the recorded risks affect the business.

These members should also be responsible for controlling the risks every certain time and maintaining records about them.

What is a Business Risk?

The term "business risk" refers to the exposure businesses have to factors that can prevent them from achieving their set financial goals.

This exposure can come from a variety of situations, but they can be classified into two:

• Internal factors: The risk comes from sources within the company, and they tend to be related to human, technological, physical or operational factors, among others.
• External factors: The risk comes from regulations/changes affecting the whole country/economy.

Any of these factors led to the business being unable to return investors and stakeholders the adequate amounts.

What Is Risk Management?

Risk management is a practice where an entrepreneur looks for potential risks that their business may face, analyzes them, and takes action to counter them.

The steps you take can eliminate the threat, control it, or limit the effects.

A risk is any scenario that harms your business. Risks can emanate from a wide variety of sources such as financial problems, management errors, lawsuits, data loss, cyber-attacks, natural calamities, and theft.

The risk landscape changes constantly, therefore you need to know the latest threats.

By setting up a risk management plan, your business can save money and time, which in some cases can be the determinant to keep your startup in business.

Not to mention, on the side, that risk management plans tend to make managers feel more confident to carry out business decisions, especially the risky ones, which can put their startups in a huge competitive advantage.

Wrapping Up

Becoming your own boss is one of the most rewarding things you can do.

However, launching a business is not a walk in the park; risks and challenges lurk around every corner.

If you are planning to establish a new business come 2022, make sure you secure its future by creating a broad risk management plan.

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6 Critical Risks in a Business Plan

Business plan risks analysis, problem, challenging factors and mitigation strategies.

What is a major example of critical risk in a business plan? Every business is prone to facing certain business risks, which might appear very critical in the real world.

As a business person, you must be able to spend sufficient time in drafting your business plan so that it is capable of addressing the critical risks and assumptions that your business might face.

You should be able to envision and determine, in your business plan, critical risks in a restaurant business plan that might pose a threat to the overall success of your business. When you do not pay enough attention to these risks, it could cause your readers – most important of which are potential investors and bankers – to negatively evaluate your business plan.

Below are some critical business risks and contingencies in a business plan that you must ensure to properly handle before they pose a threat to the success of your business.

Conducting Business Plan Risk Assessment – Business Plan Risk Factors

• Risk of Overestimated Figures

The number one critical business risk that might land your business into problem by getting too much negative attention has to do with figures that have been overestimated. We are talking about high sales profit that seem too optimistic; salaries that appear to be too high or outrageous for a business of its age; and profitability.  These three, if you overestimate the figures, will inadvertently pose as a serious business risk.

For salaries, it will be wise for you to go for the minimum as a startup business, together with any additional incomes that come in the form of profits.

For sales and profits, it will be wise of you to always give figures that appear to be more likely, not figures that seem to match your optimism. Your business’ profitability largely depends on your ability to meet sales projections, and your ability to be able to operate in the confines of your costs. • Risk of Indecisive Conversion Rates

Conversion rate (also hit rate) has to do with the percentage of people, out of the total number of people you approached, that purchased or patronized your product or services. Conversion rate could be best tested through test marketing or pre-selling.

When you test market, it simply means you offer the sales of your product within a particular limited area, for a particular period of time. Usually, you would offer incentives to buyers to encourage them help you outline your actual target customers for your business.

When you pre-sell, you are making introduction of your products or services to prospective customers, and even accepting orders for deliveries.

Your goal is to accurately know the conversion rate such that a reader may be able to take your projected market size, apply the conversion rate, and be able to deduce what the total sales estimate might be. • Risk of Ignored Competition

Here is another critical business risk that many entrepreneurs fail to curtail. As an entrepreneur, you are the master and captain of your game. You are to take charge and seize your market. How do you do that? You are to know every competitor in the industry of your business. Yes, it is an obligation you can never overlook.

Many entrepreneurs feel they know their competitors very well, when in actually reality, they have no real clue as to who their major competitors are. You must ensure you have adequate knowledge of your immediate competitors, as well as substitutes and potential or latent competitors.

If you want to prove your long-term vision for your business, you must always keep abreast with the latest development regarding your competitors. You should even envision businesses that, in later years, might stand as competitors.

• Financial Risk

Most businesses today fold up as a result of financial difficulties. Lack of adequate financial resources is a very critical business risk that might make a business to close.

In most cases, the business runs out of enough money; many customers are taking too long to pay up; unforeseen expenses and too much miscellaneous; accidents and costly financial mistakes could pose a very critical business risk to the business, and even lead to the eventual folding up if the business does not have enough money saved for rainy days to handle such problems.

In your business plan, you should demonstrate that you have adequate financial strength to operate your business until break-even and even after that. Provide the amount of needed investments and loans you will obtain to start and even run the business successfully – even if you are sure your sales volume will generate as much needed money to run the business.

• Risk of Inadequate Payback

When drafting your business plan, it is pertinent to always think about what the readers of your business plan will be expecting. For most people, it is how you intend to pay back the loan or investment you obtained, or the line of credit you hope to obtain from external sources such as banks.

For bankers, they would analyze the business plan critically to understand how exactly you have made plans to settle up the loans or line of credit you want to obtain from the bank. Your cash flows and your collateral issues are highly significant.

In the case of investors, the growth rates and profit margins of the business are highly critical because these are the factors that will actually determine how much they would earn.

For very vital employees, analyzing the business plan helps them have a good grasp of the business’ operation; this in turn would help them envision their future with the business. • Strategic Risk

Another critical business risk factor to your business plan is the strategic risk. Sometimes, your best well-laid business plan might very quickly, actually look so obsolete.

The strategic risk is the business risk that your business strategy might actually become too rigid and no longer efficient in shooting your business to its desired level; your business then starts struggling in order to achieve its business goals.

This business risk could be as a result of a very powerful new competitor in the industry; technological advancement; a shift in the demand of customers; or even a rise in the cost of raw materials or other market changes.

You should take out time to write your business plan such that whenever you face a strategic risk, you should be able to easily tweak your business strategy and adapt, and be able to come up with a viable solution.

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Business Plan Risk Analysis - What You Need to Know

The business plan risk analysis is a crucial and often overlooked part of a robust business plan. In the ever-changing world of business knowing potential pitfalls and how to mitigate them could be the difference between success and failure.  A well-crafted business plan acts as a guiding star for every venture, be it a startup finding its footing or a multinational corporation planning an expansion. However, amidst financial forecasts, marketing strategies, and operational logistics, the element of risk analysis frequently gets relegated to the back burner. In this blog, we will dissect the anatomy of the risk analysis section, show you exactly why it is important and provide you with guidelines and tips. We will also delve into real-life case studies to bring to life your learning your learning.

Table of Contents

• Risk Analysis - What is it?
• Types of Risks
• Components of Risk Analysis
• Real-Life Case Studies
• Tips & Best Practices
• Final Thoughts

Business Plan Risk Analysis - What Exactly Is It?

Risk analysis is like the radar system of a ship, scanning the unseen waters ahead for potential obstacles. It can forecast possible challenges that may occur in the business landscape and plan for their eventuality. Ignoring this can be equivalent to sailing blind into a storm. The business plan risk analysis section is a strategic tool used in business planning to identify and assess potential threats that could negatively impact the organisation's operations or assets. Taking the time to properly think about the risks your business faces or may face in the future will enable you to identify strategies to mitigate these issues.

Types of Business Risks

There are various types of risks that a business may face, which can be categorised into some broader groups:

• Operational Risks: These risks involve loss due to inadequate or failed internal processes, people, or systems. Examples could include equipment failure, theft, or employee misconduct.
• Financial Risks: These risks are associated with the financial structure of the company, transactions the company makes, and the company's ability to meet its financial obligations. For instance, currency fluctuations, increase in costs, or a decline in cash flow.
• Market Risks: These risks are external to the company and involve changes in the market. For example, new competitors entering the market changes in customer preferences, or regulatory changes.
• Strategic Risks: These risks relate to the strategic decisions made by the management team. Examples include the entry into a new market, the launch of a new product, or mergers and acquisitions.
• Compliance Risks: These risks occur when a company must comply with laws and regulations to stay in operation. They could involve changes in laws and regulations or non-compliance with existing ones.

The business risk analysis section is not a crystal ball predicting the future with absolute certainty, but it provides a foresighted approach that enables businesses to navigate a world full of uncertainties with informed confidence. In the next section, we will dissect the integral components of risk analysis in a business plan.

Components of a Risk Analysis Section

Risk analysis, while a critical component of a business plan, is not a one-size-fits-all approach. Each business has unique risks tied to its operations, industry, market, and even geographical location. A thorough risk analysis process, however, typically involves four main steps:

• Identification of Potential Risks: The first step in risk analysis is to identify potential risks that your business may face. This process should be exhaustive, including risks from various categories mentioned in the section above. You might use brainstorming sessions, expert consultations, industry research, or tools like a SWOT analysis to help identify these risks.
• Risk Assessment: Once you've identified potential risks, the next step is to assess them. This involves evaluating the likelihood of each risk occurring and the potential impact it could have on your business. Some risks might be unlikely but would have a significant impact if they did occur, while others might be likely but with a minor impact. Tools like a risk matrix can be helpful here to visualise and prioritise your risks.
• Risk Mitigation Strategies: After assessing the risks, you need to develop strategies to manage them. This could involve preventing the risk, reducing the impact or likelihood of the risk, transferring the risk, or accepting the risk and developing a contingency plan. Your strategies will be highly dependent on the nature of the risk and your business's ability to absorb or mitigate it.
• Monitoring and Review: Risk analysis is not a one-time task, but an ongoing process. The business landscape is dynamic, and new risks can emerge while old ones can change or even disappear. Regular monitoring and review of your risks and the effectiveness of your mitigation strategies is crucial. This should be an integral part of your business planning process.

Through these four steps, you can create a risk analysis section in your business plan that not only identifies and assesses potential threats but also outlines clear strategies to manage and mitigate these risks. This will demonstrate to stakeholders that your business is prepared and resilient, able to handle whatever challenges come its way.

Business Plan Risk Analysis - Real-Life Examples

To fully grasp the importance of risk analysis, it can be beneficial to examine some real-life scenarios. The following are two contrasting case studies - one demonstrating a successful risk analysis and another highlighting the repercussions when risk analysis fails.

Case Study 1: Google's Strategic Risk Mitigation

Consider Google's entry into the mobile operating system market with Android. Google identified a strategic risk : the growth of mobile internet use might outpace traditional desktop use, and if they didn't have a presence in the mobile market, they risked losing out on search traffic. They also recognised the risk of being too dependent on another company's (Apple's) platform for mobile traffic. Google mitigated this risk by developing and distributing its mobile operating system, Android. They offered it as an open-source platform, which encouraged adoption by various smartphone manufacturers and quickly expanded their mobile presence. This risk mitigation strategy helped Google maintain its dominance in the search market as internet usage shifted towards mobile.

Case Study 2: The Fallout of Lehman Brothers

On the flip side, Lehman Brothers, a global financial services firm, failed to adequately analyse and manage its risks, leading to its downfall during the 2008 financial crisis. The company had significant exposure to subprime mortgages and had failed to recognise the potential risk these risky loans posed. When the housing market collapsed, the value of these subprime mortgages plummeted, leading to significant financial losses. The company's failure to conduct a robust risk analysis and develop appropriate risk mitigation strategies eventually led to its bankruptcy. The takeaway from these case studies is clear - effective risk analysis can serve as an essential tool to navigate through uncertainty and secure a competitive advantage, while failure to analyse and mitigate potential risks can have dire consequences. As we move forward, we'll share some valuable tips and best practices to ensure your risk analysis is comprehensive and effective.

Business Plan Risk Analysis Tips and Best Practices

While the concept of risk analysis can seem overwhelming, following these tips and best practices can streamline the process and ensure that your risk management plan is both comprehensive and effective.

• Be Thorough: When identifying potential risks, aim to be as thorough as possible. It’s crucial not to ignore risk because it seems minor or unlikely; even small risks can have significant impacts if not managed properly.
• Involve the Right People: Diverse perspectives can help identify potential risks that might otherwise be overlooked. Include people from different departments or areas of expertise in your risk identification and assessment process. They will bring different perspectives and insights, leading to a more comprehensive risk analysis.
• Keep it Dynamic: The business environment is continually changing, and so are the risks. Hence, risk analysis should be an ongoing process, not a one-time event. Regularly review and update your risk analysis to account for new risks and changes in previously identified risks.
• Be Proactive, Not Reactive: Use your risk analysis to develop mitigation strategies in advance, rather than reacting to crises as they occur. Proactive risk management can help prevent crises, reduce their impact, and ensure that you're prepared when they do occur.
• Quantify When Possible: Wherever possible, use statistical analysis and financial projections to evaluate the potential impact of a risk. While not all risks can be quantified, putting numbers to the potential costs can provide a clearer picture of the risk and help prioritise your mitigation efforts.

Implementing these tips and best practices will strengthen your risk analysis, providing a more accurate picture of the potential risks and more effective strategies to manage them. Remember, the goal of risk analysis isn't to eliminate all risks—that's impossible—but to understand them better so you can manage them effectively and build a more resilient business.

In the ever-changing landscape of business, where uncertainty is a constant companion, the risk analysis section of a business plan serves as a guiding compass, illuminating potential threats and charting a course toward success. Throughout this blog, we have explored the critical role of risk analysis and the key components involved in its implementation. We learned that risk analysis is not just about identifying risks but also about assessing their potential impact and likelihood. It involves developing proactive strategies to manage and mitigate those risks, thereby safeguarding the business against potential pitfalls. In conclusion, a well-crafted business plan risk analysis section is not just a formality but a strategic asset that empowers your business to thrive in an unpredictable world. As you finalise your business plan, keep in mind that risk analysis is not a one-time task but an ongoing practice. Revisit and update your risk analysis regularly to stay ahead of changing business conditions. By embracing risk with a thoughtful and proactive approach, you will position your business for growth, resilience, and success in an increasingly dynamic and competitive landscape. Want more help with your business plan? Check out our Learning Zone for more in-depth guides on each specific section of your plan.

How to Highlight Risks in Your Business Plan

Tallat Mahmood

5 min. read

Updated October 25, 2023

One of the areas constantly dismissed by business owners in their business plan is an articulation of the risks in the business.

This either suggests you don’t believe there to be any risks in your business (not true), or are intentionally avoiding disclosing them.

Either way, it is not the best start to have with a potential funding partner. In fact, by dismissing the risks in your business, you actually make the job of a lender or investor that much more difficult.

Why a funder needs to understand your business’s risks:

Funding businesses is all about risk and reward.

Whether it’s a lender or an investor, their key concern will be trying to balance the risks inherent in your business, versus the likelihood of a reward, typically increasing business value. An imbalance occurs when entrepreneurs talk extensively about the opportunities inherent in their business, but ignore the risks.

The fact is, all funders understand that risks exist in every business. This is just a fact of running a business. There are risks that exist with your products, customers, suppliers, and your team. From a funder’s perspective, it is important to understand the nature and size of risks that exist.

• There are two main reasons why funders want to understand business risks:

Firstly, they want to understand whether or not the key risks in your business are so fundamental to the investment proposition that it would prevent them from funding you.

Some businesses are not at  the right stage to receive external funding  and placate funder concerns. These businesses are best off dealing with key risk factors prior to seeking funding.

The second reason why lenders and investors want to understand the risk in your business is so that they can structure a funding package that works best overall, despite the risk.

In my experience, this is an opportunity that many business owners are wasting, as they are not giving funders an opportunity to structure deals suitable for them.

Here’s an example:

Assume your business is  seeking equity funding,  but has a key management role that needs to be filled. This could be a key business risk for a funder.

Highlighting this risk shows that you are aware of the appointment need, and are putting plans in place to help with this key recruit. An investor may reasonably decide to proceed with funding, but the funding will be released in stages. Some will be released immediately and the remainder will be after the key position has been filled.

The benefit of highlighting your risks is that it demonstrates to investors that you understand the danger the risks pose to your company, and are aware that it needs to be dealt with. This allows for a frank discussion to take place, which is more difficult to do if you don’t acknowledge this as a problem in the first place.

Ultimately, the starting point for most funders is that they  want  to invest in you, and  want  to validate their initial interest in you.

Highlighting your business risks will allow the funder to get to the nub of the problem, and give them a better idea of how they may structure their investment in order to make it work for both parties. If they are unsure of the risks or cannot get clear explanations from the team, it is unlikely they will be forthcoming when it comes to finding ways to make a potential deal work.

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• The right way to address business risks:

The main reason many business owners don’t talk about business risks with potential funders is because they don’t want to highlight the weaknesses in their business.

This is a fair concern to have. However, there is a right way to address business risk with funders, without turning lenders and investors off.

The solution is to focus on how you  mitigate the risks.  

In other words, what are the steps you are taking in your business as a direct reaction to the risks that you have identified? This is very powerful in easing funder fears, and in positioning you as someone who has a handle on their business.

For example, if a business risk you had identified was a high level of customer concentration, then a suitable mitigation plan would be to market your products or services targeting new clients, as opposed to focusing all efforts on one client.

Having net profit margins that are lower than average for your market would raise eyebrows and be considered a risk. In this instance, you could demonstrate to funders the steps you are putting in place over a period of time to help increase those margins to at least market norms for your niche.

The process of highlighting risks—and, more importantly, outlining key mitigating actions—not only demonstrates honesty, but also a leadership quality in solving the problems in your business. Lenders and investors want to see both traits.

• The impact on your credibility:

Any lender or investor  backs the leadership team  of a business first, and the business itself second.

This is because they realize that it is you, the management team, who will ultimately deliver value and grow the business for the benefit for all. As such, it is imperative that they have the right impression about you.

The consequence of highlighting business risks in your business plan with mitigations is that it provides funders a real insight into you as a business leader. It demonstrates that not only do you have an understanding of their need to understand risk in your business, but you also appreciate that minimizing that risk is your job.

This will have a massive impact on your credibility as a business owner and management team. This impact is more acute when compared to the hundreds of businesses they will meet that omit discussing the risks in their business.

The fact is, funders have seen enough businesses and business plans in all sectors to instinctively know what risks to expect. It’s just more telling if they hear it from you first.

• What does this mean for you going forward?

Funders rely on you to deliver on your inherent promise to add value to your business for all stakeholders. The weight of this promise becomes much stronger if they can believe in the character of the team, and that comes from your credibility.

A business plan that discusses business risks and mitigations is a much more complete plan, and will increase your chances of securing funding.

Not only that, but highlighting the risks your business faces also has a long-term impact on your character and credibility as a business leader.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Tallat Mahmood is founder of The Smart Business Plan Academy, his flagship online course on building powerful business plans for small and medium-sized businesses to help them grow and raise capital. Tallat has worked for over 10 years as a small and medium-sized business advisor and investor, and in this period has helped dozens of businesses raise hundreds of millions of dollars for growth. He has also worked as an investor and sat on boards of companies.

Table of Contents

• Why a funder needs to understand your business’s risks:

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Strategic planning: managing assumptions, risks and impediments

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

Assumptions Introduce Risk

At a minimum, the planning process must involve an evaluation of the impacts that the strategy will have on the business to determine if it will actually help accomplish the outcomes intended. That is the absolute minimum requirement.

The strategic planing process is the one key point to get in front of idle supposition and truly manage assumptions, risks and impediments. When strategy is well developed, there will be an actual plan for implementation associated with the strategy. A holistic plan defines goals that support the strategy and addresses the operational tactics that will accomplish the goals. No business possesses a crystal ball to know exactly what will happen in the economy, financial markets or competitors next bold moves. That means that business assumptions are a necessary evil.

Given that we must rely upon certain assumptions to put strategic plans together and that risk will always be present (as will natural impediments to execution of strategy), the following sections will explore each of these factors at the planning level…beginning with a definition of terms and ending with approaches to better manage process.

What is an assumption in strategic planning?

The dictionary defines an assumption as follows: “ something taken for granted; a supposition ”.

Assumptions form the basis of strategies, and those underlying assumptions must all be fully vetted. Testing strategic assumptions requires allowing those involved with planning to back away from the “givens” and challenge them to ensure the team is not assuming the rosiest of scenarios on which to base strategy.

Considering that the synonyms for the word “assumption” includes words like “hypothesis”, “conjecture”, “guess”, “postulate” and “theory” the concept takes on a more weighty meaning in the  strategic planning process. Yes, assumptions are beliefs we take for granted, but they can be no better than guesses in many cases.

Assumptions are not always justifiable. Defending an assumption may be difficult, as facts are not always available to support the belief. That does not mean that they are incorrect, but it does underscore the challenge assumptions present in planning. In fact, assumptions are particularly difficult to even identify because they are usually unconscious beliefs.

An assumption about assumptions:

One can safely assume that if an assumption is sound, the inferences and conclusions associated with the assumption will also be sound. Unfortunately, the reverse is also safe to assume.

What is a risk in strategic planning?

As a noun, risk means something that may cause injury or harm or the chance of loss or the perils to the subject matter. As a transitive verb, risk means to “expose to hazard or danger” or “to incur the risk or danger of”.

In strategic planning, the definitions applying to both the noun and the transitive verb usage are relevant. A risk might be an event or condition that might occur in the future. Likewise, we may risk financial losses if we bet on an assumption that is incorrect.

An unmitigated risk can become an impediment, so risks must be evaluated in terms of the likelihood they will occur and the impact they will have if they do occur. If the impact/likelihood of a risk is high “enough”, we should identify a mitigation path – as an unmitigated risk can become an impediment later on.

All risk can never be removed from a strategic plan, therefore business planning teams must approach risk management from a Cost / Benefit perspective. Business risk mitigation in planning can cost speed, but if risks are addressed early the organization can avoid future impediments.

What is an impediment in strategic planning?

An impediment is something that makes movement or progress difficult. It differs from being a risk in that risks are future-based and an impediment is something that is occurring now.

During the strategic planning process, impediments might be grouped into macro or micro categories. Macro impediments might include: poor culture, business process inefficiencies, lack of job descriptions, no performance metrics and many other general types of issues. Micro impediments might include: core competency gaps, having people in the wrong roles, lack of sufficient tools to support business functions and technology / infrastructure issues.

Knowing business impediments and factoring them into the planning process adds realism to the strategy being developed and the operational tactics needed to implement it.

How should risks, assumptions and impediments be identified?

Identification of assumptions.

Strategic planning is a team sport, so working in teams is a great way to approach the identification of assumptions. In small groups, conduct a “round robin” to identify the assumptions within each strategic theme of the plan. Review the assumptions compiled by each team and discuss. This same approach can be used to identify impediments and risks.

The following are questions that assist to identify assumptions:

• Is there anything being taken for granted?
• Are there beliefs that we are ignoring that we shouldn’t?
• What beliefs are leading us to this conclusion?
• What is… (this project, strategy, explanation) assuming?
• Why are we assuming…?

Identification of Risks

Risks are about events that, when triggered, cause problems. Hence, risk identification can start with the source of problems, or with the problem itself. Remember, risk sources may be internal or external to the organization. Examples of risk sources are: external stakeholders, employees, finance, political and even weather.

Risks are related to the identified threats from SWOT analysis, so that is another valuable reference during the identification process. For example: the threat of losing money, the threat of a major planned product launch being delayed or the threat of a labor strike disrupting critical manufacturing operations. The threats may exist with various entities, most importantly with shareholders, customers and legislative bodies such as the government.

When either source or problem is known, the events that a source may trigger or the events that can lead to a problem can be investigated. For example: banks withdrawing funding support for expansion; confidential information may be stolen by employees; weather delaying construction projects, etc.

Additionally, other methods of risk identification may be applied, dependent upon culture, industry practice and compliance. For instance, objectives-based risk identification can focus on any potential threats to achieving strategic objectives. Any event that may endanger achieving an objective partly or completely can be identified as risk. Scenario-based risk identification – In scenario analysis different scenarios are created. The scenarios may be the alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle. Any event that triggers an undesired scenario alternative is identified as risk. As a final example, a taxonomy-based risk identification can be utilized, where the taxonomy is a breakdown of possible risk sources. Based on the taxonomy and knowledge of best practices, a questionnaire can be compiled and the answers to the questions used to reveal risks.

How should risks, assumptions and impediments be dealt with?

Dealing with identified assumptions essentially becomes a task of translating the assumption to a risk. Once all risks have been identified, they must then be assessed as to their potential severity of impact (generally a negative impact, such as damage or loss) and to the probability of occurrence.

The assessment of risk is critical to make the best educated decisions in order to mitigate known risks properly. Once risks have been identified and assessed, the strategies to manage them typically include transferring the risk to another party, avoiding the risk, reducing the negative effect or probability of the risk, or even accepting some or all of the potential or actual consequences of a particular risk.

Taking the time and caution to identify, asses and deal with the risks and other factors will always be a worthy investment, even when time is of the essence. The vetting of these factors will pay off in smooth implementation of the strategic plan down the line. Your plan can proceed, free of the potholes and other roadblocks that, with a little planning, might well have derailed the best-laid plans.

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Category: Business Growth & Strategy

Tags:   risk management , Strategic Planning

Since 2006, Joe Evans has been President & CEO of Method Frameworks, one of the world's leading strategy and operational planning management consultancies. The firm provides services for a diverse field of clients, ranging …

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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.

Download our Ultimate Business Plan Template here

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!

Don’t you wish there was a faster, easier way to finish your business plan and financial projections?

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

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

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

OR, Let Us Develop Your Plan For You

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

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Ivey Business Journal

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

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

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

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

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

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

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

The rationale for preparing a set of strategic assumptions

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

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

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

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

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

Preparing a set of strategic assumptions

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

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

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

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

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

An example: The importance of a single strategic assumption

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

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

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

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

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

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

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

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

Other examples of powerful strategic assumptions

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

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

Publicizing strategic Assumptions: The tipping point

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

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

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

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

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Project Management

How to make and manage accurate project assumptions [complete guide with 30+ examples].

March 18, 2024

We make assumptions or suppositions in our everyday lives—for instance, you assume your car will work in the morning and get you to work on time. Or, your phone won’t stop functioning while you’re trying to locate an address using Google Maps.

Now imagine making these assumptions as a project manager—there’s suddenly a lot more at stake. With the goal to deliver a project on time, you have plenty of assumptions, like availability of resources or timely approval of the requested budget , to navigate as you make a project plan. 

As you can assume, managing project assumptions is tricky. You cannot rely on guesswork as poor assumptions can derail project delivery, especially if you don’t have backup plans and are unprepared to handle associated risks.

In this article, we’ll discuss how to identify and manage project assumptions to estimate project management outcomes more accurately. We’ll learn about:

• Types of project assumptions with examples
• The relationship between project assumptions, dependencies, and risks
• Tips and strategies for managing project assumptions

Why every project assumption can be a potential risk, and how to cope with the uncertainty

1. operations-related project assumptions, 2. environmental project assumptions, 3. time-based project assumptions, 4. resource-related project assumptions, 5. financial project assumptions, 6. project scope assumptions, how are project assumptions, dependencies, and risks connected, assumptions vs. project risks, assumptions vs. project constraints, 1. leverage quality task and project management tools, 2. keep an assumptions log, 3. constantly monitor your assumptions, uncertainty, poor communication flows, lack of willingness to change and adapt.

Understanding Project Assumptions

Project assumptions are factors, events, and circumstances project managers and their teams assume to be true —even though there’s no empirical evidence to back them up.

All project managers rely on certain assumptions during the entire project lifecycle . From the project planning process to development and delivery , the right set of assumptions helps them visualize project success and prevent roadblocks like:

• Blocked schedules and holdups
• Delayed supplies
• Budget shortage
• Unhealthy team dynamics

Despite the no-evidence aspect, most project assumptions are based on data trends and past experience or are an educated guess. They seem like common sense—until they don’t and become a project risk. 🥲

Assumptions are called so because they’re rooted in unknowns and uncertainties.

So, there’s always a nexus between assumptions and risks. Multiple things can go wrong, invalidate your assumptions, and rock your project management boat. That’s why you need to have a game plan that will help you account for the potential risks you may encounter if your assumptions go haywire.

Successful project managers typically cope with these uncertainties by:

• Identifying project assumptions and documenting next steps in case one or more are proven wrong
• Relying on extensive research and expert consultations to note tricky assumptions
• Observing the more volatile assumptions (like price fluctuations) at regular intervals

Pro tip: When identifying key assumptions, it’s always wise for the project manager to note down the risk potential side side by side. A quick way to do this is through the ClickUp Risk Assessment Whiteboard Template —it comes with a color-coded map to help you track the likelihood and severity of all project risks.

Risks related to unreliable project assumptions often end up in the top-right corner of the map and require constant monitoring.

6 Common Types of Project Assumptions

We can divide project assumptions into different categories depending on what they focus on. While the categorization is up to you, here are the six most common types with examples :

Every project manager knows about the inherent risks within daily operations , like scope creep, equipment breakdowns, team conflicts, or miscommunication with project stakeholders.

Here are broad-scope operations-related project assumption statements you can consider:

• No unexpected circumstances will cause extra costs, delays, or workforce issues
• There will be no internal or external communication and collaboration problems
• The software we use for product development and project management won’t experience lags or bugs that could affect the project duration
• The team won’t run out of the necessary resources to complete the tasks
• We won’t come across issues in ordering and obtaining materials and supplies necessary
• Team members will remain healthy and productive to deliver their duties 

Many implicit assumptions here can be potential liabilities and lead to delays and even project failure, so it’s important to be prudent with your estimates. For example, instead of assuming 100% team availability, it’s wiser to estimate 80% availability to account for sick leaves and vacations.

Environmental project assumptions, also called location assumptions, focus on environmental factors you have no control over. Let’s observe a few examples of project assumptions related to environmental scenarios below:

• There will be no unexpected geopolitical events that could affect the project’s success
• Natural disasters, if any, won’t impact the availability of supplies necessary
• Regulatory compliances will remain the same
• The operations won’t pose short- or long-term environmental risks
• The factory won’t be flooded during heavy rains
• The market demand for the product will remain stable in the foreseeable future

Tip: Use the ClickUp Contingency Plan Template to devise alternative solutions for environmental assumptions gone wrong.

Time-based or scheduling project assumptions focus on the project duration , aiming to predict how long each activity and task will last. You use them to create a realistic project timeline to stick to. ⌛

A few examples of common project assumptions in this space:

• The team is competent enough to complete tasks according to the project schedule
• The planned project dependencies won’t change and disrupt the project timeline
• Project stakeholders will be available for timely meetings and consultations
• There will be no delays in feedback and approval processes
• The team’s day-to-day workflow complements the deadline
• There will be no delays due to the unavailability of resources or understaffing

These assumptions are concerned with the availability and management of all the resources necessary for delivering projects, from materials and technology to human capital.

Check out a few examples of resource assumptions:

• Our supplier will deliver the materials on time for a smooth production cycle
• The factory equipment will be regularly inspected and serviced to avoid sudden malfunctions
• The project manager has allocated enough team members to the project
• The ins and outs of the budget are accounted for
• Team members won’t take extra days off or quit until the project is completed
• The in-use project management platform won’t experience downtime

Map out these assumptions during the project planning process—you may need approval from key stakeholders in certain areas (like budgeting).

Some teams like to log financial assumptions separately to have more detailed project cost estimations —the idea is to set aside money for each project phase, task, or milestone.

Here are a few examples of budget assumptions:

• The cost of labor won’t increase in the next three months
• Procurement costs will remain within the planned limits
• The cost of renting the equipment won’t go up by more than 10%
• Insurance costs will be no higher than 0.5% of the total project costs.
• The cost estimates are prepared to accommodate a 5% standard deviation in inflation rates

A project scope describes the delivery goals, requirements, and tasks you need to complete for an established end result—additional demands mean your original project plan is rendered useless. Essentially, your entire project scope is an assumption.

Here are some project assumption examples in terms of scope:

• The original project schedule won’t change
• There will be no last-minute requirements incorporated within the scope
• All project team members understand the scope and their role in the bigger picture
• The project charter defines the scope and deliverables in clear terms
• Key stakeholders agree on the project charter
• No external factors will affect the scope

Bonus: Use the ClickUp Project Scope Template or the ClickUp Project Charter Template to organize all scope-related data, including project dependencies, schedules, and timelines. Both templates are collaborative, allowing team members to contribute and make real-time changes to the scope for enhanced transparency.

We know that project assumptions, dependencies, and risks dictate the course of a project and help manage the workflows efficiently—but how do these concepts affect each other? Let’s find out.

Both assumptions and project dependencies can lead to risks but in different ways . As we discussed before, every assumption has a risk potential since there’s always a chance it’s invalid. In most cases, assumptions apply to the entirety of projects. For example, you assume that your project team members will reach milestones without delay—but the likelihood that they won’t is a risk.

Dependencies , on the other hand, denote the risk related to two or more interconnected activities. Let’s say for a project to move to the launch phase , it first requires final approval from the key stakeholders, which project managers assume to get on time.

In this case, the approval task is a “dependency” as its delay can postpone the entire project launch timeline—so that’s a pretty heavy risk.

Project Assumptions, Risks, and Constraints: A Comparison

Project assumptions, risks, and constraints are overlapping concepts, so let’s shed some light here. 🔦

Let’s focus on risks and constraints individually for the sake of comparison.

Both assumptions and risks are noted before a project starts. The difference here is that you want your assumptions to hold true for all-around project success. However, it’s the opposite for project risks —they will jeopardize your project if they materialize, so you need a risk management plan to reduce the likelihood of each documented risk.

Project constraints are pre-existing limitations you need to account for when making project assumptions. Unlike assumptions that may or may not be true, constraints are certain. According to the Project Management Institute , there are six types of project constraints:

You identify assumptions and constraints early on during the initiation phase . Every project assumption helps you plan and lead the direction forward, while project constraints are like boundaries that keep you moving in the right lane.

3 Best Strategies for Managing Project Assumptions

Here are three expert-approved tips and strategies to help you manage project assumptions throughout the project lifecycle. 🌻

If you want to manage assumptions like a pro, you need to use a tool that can help you visualize workflows to spot risks, have a bird’s-eye view of your project budget and human resources, and make adjustments on the fly.

If finding all these options in a single tool sounds impossible, it’s only because you haven’t seen what ClickUp can do!

ClickUp is one of the best-rated project management tools on the market because it has options that help you zoom in on micro project details, as well as keep an eye on the bigger picture. 😍

Start your project the right way with the ClickUp Project Management suite

Everything you need to identify project assumptions and manage them is available within the ClickUp Project Management feature bundle.

Let’s start with ClickUp Docs —this knowledge management option can help you create, edit, share, and store all project-related documentation, from a project plan and charter to standard operating procedures (SOPs) . This is also an excellent option if you need to document assumptions, risks, and their deviations in one place.

You’ll find ClickUp Brain , a powerful AI writing assistant, within ClickUp Docs. With it, you can brainstorm, write text, or summarize your text to save time and boost productivity.

ClickUp Brain has a convenient feature named AI Tools —it lets you use 100+ research-based prompts for a variety of tasks across cross-functional teams. For instance, if you choose the Project team option, you’ll see customizable prompts like Create scope document and Create a project risk management plan , which will help you carve out your project’s assumptions.

Furthermore, if you want you and your stakeholders to have clarity over project assumptions and deadlines, use ClickUp views . You get 15+ options to observe projects from different perspectives , identify stable or false assumptions, and locate dependencies and risks proactively.

Use the List view to organize workflows or the Board view to sort tasks based on the level of completion. Take advantage of advanced views like the Workload view to manage your team’s workload or the Gantt chart view to track project constraints and dependencies on an adjustable, drag-and-drop-enabled timeline.  

Need to discuss risks with teams faster? Use the Chat view to communicate with your team without leaving ClickUp, minimizing the need for long meetings and context switching .

Think of an assumptions log as a project manager’s diary —this is where you’ll record every assumption you make from the project planning phase to project execution .

Having all project assumptions in one place will help you keep track of them, monitor their validity, and make changes when necessary.

Use ClickUp templates to maintain assumption logs diligently

ClickUp offers 1,000+ templates for various purposes, including maintaining assumption logs. These templates come with premade sections and serve as a shortcut for quality documentation.

If you want to manage project assumptions, we recommend checking out ClickUp risk assessment and project assessment templates .

For example, the ClickUp Assumption Grid Decision Matrix Template is perfect for organizing project assumption logs based on risk and uncertainty factors.

You can use the template’s Custom Fields to specify your assumptions, add attributes to each, and explain its impact on your decision-making criteria. Its real-time updates feature can keep your stakeholders informed of all the changes you make.

Once you’re done with assumptions, use the ClickUp Project Planner Template to break down your project, organize tasks and resources, and track progress to ensure your assumptions are correct. 

Documenting assumptions isn’t enough. As your project progresses, some of your assumptions will be proven right, while a few may stand invalid. This means your project plan may change, and you need to think on your feet to tweak team workflows.

That’s why you need to constantly track your project assumptions list as a project manager and keep an eye out for unexpected events. This will help you spot the smallest changes and adjust your course accordingly.

Using ClickUp to monitor and manage assumptions

ClickUp offers a range of solutions to identify project assumptions that turn out to be untrue. For instance, you can set up ClickUp Automations to send you an alert for changes in critical assumptions and constraints.

Let’s say your assumption is that a certain task demands 50 hours—you can configure a simple automation to send you a notification if the time tracked on the task exceeds 50 hours.

Additionally, visualize project metrics and conduct assumption analysis with ClickUp Dashboards . Choose from 50+ cards to customize your Dashboard and present the specific numerical or visual data you’re interested in. Visualizing assumptions from previous projects can help you plan for future projects and minimize deviations.

Overcoming Project Assumption Challenges

Coordinating project assumptions is no easy feat—there are a number of challenges that could slow you down and affect your project’s success.

Here are some common challenges and ways to overcome them:

This is the number one issue of keeping project assumptions—you can’t tell if they’ll come true or not. Unfortunately, there’s no way to beat uncertainty , which is inherent to every project assumption.

However, you can manage uncertainties better by communicating their impact with your teams and stakeholders, documenting every decision made and action taken, and carefully monitoring the project’s timeline.

A lack of communication among team members can lead to misunderstandings and project delays . To overcome this, you need to ensure your staff isn’t afraid to speak up and voice their concerns, especially when it comes to aspects like resource management and delivery time. If you’re working remotely, use tools like ClickUp that allow real-time and transparent communication without the need for tense and overly formal meetings.

Bonus: Use ClickUp Whiteboards to brainstorm resource management with cross-functional teams in real time. These digital canvases let you draw, write text, add and connect shapes, and create tasks in a more relaxed setting that promotes easy communication.

Both project managers and stakeholders need to be flexible and willing to make changes on the go to accommodate new assumptions . A lack of willingness to do so on either side can affect project outcomes.

When managing assumptions in project management, ensure everyone involved understands the consequences of not adapting to changes. Hold regular meetings with stakeholders, keep them updated, and explain the reasoning behind every action and decision.

Manage Project Assumptions with ClickUp

Coordinating project assumptions is one of the pillars of successful project management . Without assumptions, you can’t estimate project outcomes or determine goals realistically.

As a free project management tool , ClickUp offers everything you need to keep a project assumptions log, collaborate with teams and stakeholders, and identify dependencies, constraints, and risks in a friction-free manner.

Sign up for ClickUp today and see how the solution helps you fly from assumptions to success. 🦋

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How to Test Your Assumptions

When you’re developing a strategy for a new business, testing assumptions in a logical order gives you the best chance to make course corrections early — and not waste time and money.

• Leadership Skills
• Developing Strategy
• Financial Management & Risk

For a new business to succeed, many assumptions have to prove true. Testing assumptions in a logical order gives the team the best chance of making course corrections early — and not wasting time and money. In this essay, I outline a method for (1) identifying the assumptions or unknowns and (2) resolving these assumptions on the basis of three parameters: severity, probability, and cost of resolution.

Between stints in academia, I spent more than 20 years in marketing, engineering, and general management in both startups and public companies. Most pertinent to this essay, I served as vice president of engineering for Align Technology Inc. from December 2000 to July 2004. It was at Align — now a 6,800-employee company based in San Jose, California — where I learned firsthand the importance of testing assumptions. Since leaving Align, I have worked with more than 100 startup teams and developed a systematic approach for testing assumptions. Below, I’ll explain my method, illustrating how testing assumptions helped Rent the Runway Inc., a 505-employee company based in New York City, become a fast-growing success. I’ll also explain how my method might have helped Align — prosperous though it has now become — bleed less cash during its early days.

The enthusiasm surrounding the “lean startup methodology” and its many offshoots has created a mindset that entrepreneurs should just launch, failing early and often — iterating , to use startup parlance. But failure alone does not teach. If there are an infinite number of bad ideas, eliminating one gets us no closer to a good idea. Rather, the businessperson contemplating a new venture must begin by evaluating factors that have to be true for the venture to succeed. He or she also must model these factors in a way that allows for reasonable testing. For example, the assumption that people will buy a product for the asking price is a big one; it would take a full launch to completely validate this. Therefore, the entrepreneur must split big assumptions into discrete, manageable assumptions that can be tested at a level of detail allowing for efficient learning.

Identifying the assumptions is the first step. The second is determining a sequence for testing them. Each step should resolve a critical unknown. And each resolution should spur the entrepreneur to continue, change direction (in other words, “pivot”), or, in the worst case, abandon the enterprise.

About the Author

Jon Fjeld is a professor of the practice of strategy and philosophy, and the executive director of the Center for Entrepreneurship and Innovation at Duke University’s Fuqua School of Business, in Durham, North Carolina.

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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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What Are the Key Assumptions of a Business Plan?

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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.

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Business Information Guide

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Introduction

I. the company, concept, and product(s) or service(s), ii. the industry analysis, iii. market research & analysis, iv. economics of the business, v. the marketing plan, vi. design & development plan, vii. operations plan, viii. management team, ix. overall schedule, x. critical risks, problems and assumptions, xi. financial plan, xii. proposed company offering.

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The recommendations and resources on this page complement the Whitman School of Management's Nuts and Bolts of Great Business Plans , which was written by Department of Entrepreneurship and Emerging Enterprises . The sections on this page correspond to the Nuts and Bolts of Great Business Plan sections.

Nearly every part of your business plan will require some type of research. Since gathering and analyzing the amount of information and data this assignment requires can be time consuming, be sure to plan your time accordingly. These recommendations and resources are just starting points. Be prepared to gather information and data from many different sources as you research and put together your business plan.

The following video tutorials were developed to provide a refresher on general research and business research strategies. The four business research video tutorials, in particular, were developed by Business, Management and Entrepreneurship Librarian Stephanie JH McReynolds to support EEE 457 students in the development of Capstone business plans.

• Video Tutorials for General and Business Research General Research Video Tutorials Include: "Research Starting Points," "Searching with Summon," "Finding Journal Articles." Business Research Video Tutorials Include: "Industry Research Part 1: Identifying Industry Codes," "Industry Research Part 2: Discovering Industry Research Reports and Data," "Company Research," "Market Research Resources."

First outline the nature of the entity you plan to create and where you are in that process, then capture the essence of your business concept and explain that concept, then detail the products and services you anticipate selling, and then talk about your entry approach and your vision for growth over the next five years.

As you draft your idea, use the resources on the Article and News page of the Business Information Guide to explore trends and relevant company, industry, and product news and analysis. Refer to the resources on the Company Research page of the Business Information Guide to become familiar with other companies offering similar products or services.

The "industry" refers to the larger landscape, as in the "computer hardware wholesale trade industry" or the "card and gift industry" or the "architectural services industry." The focus here is on what is happening in the industry and on the relative attractiveness of the industry as a whole.

Refer to the Industry Research page of the Business Information Guide for recommendations and guidance.

This section should convince the reader or investor that you truly know your customers. It should convince the reader that your product or service a) solves a customer need that customers want solved; b) will have a substantial market in a growing industry; and c) can achieve sales in the face of competition. For example, the predicted sales levels directly influence such factors as the size of the manufacturing operation, the marketing plan, and the amount of debt and equity capital you will require. Yet most entrepreneurs seem to have great difficulty preparing and presenting market research and analyses that show that their ventures' sales estimates are sound and attainable. Consult industry publications, articles in trade magazines and trade associations to understand how the industry defines, identifies and segments its customers. Then apply yourself creatively by integrating the information in a unique way.

Explore resources on the Business Information Guide for Market Research , Data & Demographics , and Articles and News .

The economics of the business is the section addressing the basic logic of how profits are earned in your business as well as the sales level required to breakeven. Two companies in the same industry might make profit in very different ways. Will this be a high margin, low volume business with low fixed costs? Will it be a low margin, high volume business where the cost structure is predominantly variable? The story begins by identifying your sources of revenue and how much margin you make on each of them.

Explore  Company Research resources on the Business Information Guide to find revenue and expenses of similar companies. Find industry ratios (such as profit/loss ratio by sales class) in Industry Research resources, such as Bizminer.

The Marketing Plan describes how your projected sales will actually be attained. How will you make sales actually happen? A great idea is meaningless if you cannot find customers. Thus, this section builds on the Market Section, where you defined your market and outlined your targeted segments and their buyer behavior. The marketing plan needs to provide detail on the overall marketing strategy that will exploit the opportunity and your competitive advantages. Include a discussion of sales and service policies, pricing, distribution, promotion and advertising strategies, and sales projections. The marketing plan needs to describe what is to be done, how it will be done, when it will be done, and who will do it.

Explore resources on the Business Information Guide for Market Research , Data & Demographics , and Articles and News . Find books on marketing strategy via Summon and the Classic Catalog .

Articles and News Search Tips:

Pay close attention to the words and terms in this section from The Nuts and Bolts of Great Business Plans. These words can be useful search terms. For example, sales and service policies, pricing, distribution, promotion, advertising strategies, and sales projections. As you review your search results, pay particular attention to the words and phrases in the keywords and subject terms of the article records, as these can yield additional search terms.

A basic search for marketing and strategy and (your product or concept term) can also yield relevant results. The databases will also suggest additional terms to use in your search, such as market research AND strategy, advertising agencies, advertising campaigns, marketing management, market research, marketing agreements for you to explore.

This is a very important section for those teams developing a non-existent product, doing research and development, having technical obstacles to overcome, or seeking patent or copyright protection. However, if you are in a business where research and development is not a major issue (e.g., retailing, many consumer services), then you can leave this section out and just address and technologies you plan to employ in the OPERATIONS section.

The nature and extent of any design and development work, and the time and money required before the product or service is marketable, need to be considered in detail. (Note that design and development costs are often underestimated.) Design and development might be the engineering work necessary to convert a laboratory prototype to a finished product; the design of special tooling; the work of an industrial designer to make a product more attractive and saleable; or the identification and organization of employees, equipment, and special techniques, such as the equipment, new computer software, and skills required for computerized credit checking, to implement a service business.

Refer to the Patents & Intellectual Property guide for resources and research tips.

The operations section outlines how you will run your business and deliver value to your customers. Operations is defined as the processes that deliver your products/services to a customer or user and can include the production process for delivering your service to a given customer, manufacturing process if you are a manufacturer, transportation, logistics, travel, printing, consulting, and after-sales service. It also includes such factors as plant location, the type of facilities needed, space requirements, internal processes, capital equipment requirements, and labor force (both full- and part-time) requirements.

Explore resources on the Business Information Guide for Market Research , Data & Demographics , and Articles and News . For the geographic subsection, the mapping features of some Company Research databases (such as Data Axle Reference Solutions) and the mapping feature, or geographic limiters, available in certain Market Research resources (such as SimplyAnalytics) may be especially useful. To help identify suppliers, explore Thomasnet.com .

This section of the business plan includes a description of the functions that will need to be filled, a description of the key management personnel and their primary duties, an outline of the organizational structure for the venture, a description of the board of directors and key advisors, a description of the ownership position of any other investors, and so forth. You need to present indications of commitment, such as the willingness of team members to initially accept modest salaries, and of the existence of the proper balance of technical, managerial, and business skills and experience in doing what is proposed.

Find articles on building your management team and board of directors with databases on the Articles and News page of the Business Information Guide. Explore the Career Research Guide for relevant information, such as salary research resources.

A graphical schedule that shows the timing and interrelationship of the major events necessary to launch the venture and realize its objectives is an essential part of a business plan. The underlying cash conversion and operating cycle of the business will provide key inputs for the schedule. In addition to being a planning aid by showing deadlines critical to a venture's success, a well-presented schedule can be extremely valuable in convincing potential investors that the management team is able to plan for venture growth in a way that recognizes obstacles and minimizes investor risk. Since the time necessary to do things tends to be underestimated in most business plans, it is important to demonstrate that you have correctly estimated these amounts in determining the schedule.

• Gantt Charts as Planning Tools Part of Project Management Tools tutorial from Boston University.
• How to Use a PERT Chart for Project Planning Project planning overview from the Motley Fool.

The development of a business has risks and problems, and the business plan invariably contains some implicit assumptions about these issues. You need to include a description of the risks and the consequences of adverse outcomes relating to your industry, your company and its personnel, your product's market appeal, and the timing and financing of your startup. Be sure to discuss assumptions concerning sales projections, customer orders, and so forth. If the venture has anything that could be considered a fatal flaw, discuss why you do not see it as a problem or how you intend to overcome it. The discovery of any unstated negative factors by potential investors can undermine the credibility of the venture and endanger its financing. Be aware that most investors will read the section describing the management team first and then this section.

To inform this section, explore resources on the Business Information Guide for  Market Research ,  Data & Demographics , Company Research ,  Industry Research ,and  Articles and News .

This section lays out a picture of the financial performance of the firm as it is started, stabilizes and grows. The financial plan is basic to the evaluation of an investment opportunity and needs to represent your best estimates of financial requirements. The purpose of the financial plan is to indicate the venture’s potential and to present a timetable for financial viability. It also can serve as an operating plan for financial management using financial benchmarks. In preparing the financial plan, look creatively at the venture and think about bootstrapping techniques, especially in the early days.

Explore  Company Research  resources (such as PrivCo, which includes venture capital financial data, and Mergent Online, which includes 10-K reports) on the Business Information Guide to find revenue and expenses of similar companies. Find industry ratios (such as profit/loss ratio by sales class) in  Industry Research  resources, such as Bizminer.

• Beginners' Guide to Financial Statements Guide to financial statements from the SEC.
• Business Startup Financing Startup financing guidance from BizFilings, part of Wolters Kluwer.
• Financial Statement Analysis: The Basics for Non-Accountants Guide to financial statement analysis from Harvard Business School.
• Preparing Financial Business Statements Guide to preparing financial statements from BizFilings, part of Wolters Kluwer.

The purpose of this section of the plan is to indicate the amount of any money that is being sought, the nature and amount of the securities offered to the investor, a brief description of the uses that will be made of the capital revised, and a summary of how the investor is expected to achieve its targeted rate of return. It is important to realize the terms for financing your company that you propose here are only the first step in the negotiation process with those interested in investing, and it is very possible that your financing will involve different kinds of securities than originally proposed.

Discover relevant articles with the resources on the  Article and News  page of the   Business Information Guide.

• A Beginner’s Guide to Startup Valuation Overview of startup valuation
• Business Calculators Business Calculators recommended by the Motley Fool.
• How Much Is Your Slice of That Unicorn Really Worth? Stanford Business article on how to determine startup shares value. Includes link to free online calculator to help estimate the worth of startup shares.
• How to Value Private Companies Overview from Investopedia on how private companies are valued.
• “Valuing the Business” Chapter from eBook Creating Services and Products Overview of business valuation methods for entrepreneurs.
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• Last Updated: Mar 20, 2024 9:53 AM
• URL: https://researchguides.library.syr.edu/business
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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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Project Assumptions: 30 Examples and How to Manage Them

Editorial Team

What is a Project Assumption

Project assumption is the events or conditions most likely to occur when a project life-cycle takes place. It is also deemed as an element in the planning phase of a project that is assumed to be considered true, actual, or certain despite the lack of evidence or proof, according to the Project Management Body of Knowledge (PMBOK) 6th Edition. Assumptions are usually made based on the hypotheses established from past experiences and knowledge. They bring a degree of risk to the project because they might or might not be correct or realized. When the project assumptions turn out to be incorrect, they might also become restrictions or constraints, resulting in major project delays and may cause project limitations. The project assumptions that the project managers commonly make are as follows:

• Resource Assumptions
• Cost Assumptions
• Schedule-Based Assumptions
• Quality/Specification Assumptions
• Technology Assumptions
• Location/Environment Assumptions

Examples of Projects’ Resource Assumptions

• All the materials and equipment needed will be obtained and available to be used when conducting the project. However, there might be a lack of materials and scarcity in the equipment needed for the project life-cycle. This can be a hindrance in the project management and implementation to take place efficiently because not everything needed is available.
• The people involved in the project might not be in their best condition or health throughout the project life-cycle because sickness and fatigue might result in a lack of efficiency when carrying out the project. This may violate the assumption that everyone involved will be doing their work efficiently throughout the project .
• All the resources allocated are sufficient for the project life-cycle. However, the project could still be at risk if the contributions from resources are insufficient. This may compromise the timeline, scope, and end goal of the project as the resources allocated do not meet the assumptions made during the project planning .
• All of the people that are involved at the beginning of the project will remain and stay in the project until the project is completed. However, it is crucial to take note that there may be workers that may withdraw from the project throughout the project life-cycle.
• All the resources (equipment, tools, or materials) will be in good condition to be used throughout the project life-cycle. However, there might be issues where the resources malfunction or damage as the project progresses .
• Members of the project team would have access to the tools they need to execute their respective tasks on schedule, including advanced equipment and software, and electricity during working time. However, the tools may not be enough for everyone to access.

How to Manage Projects’ Resource Assumptions

• Conduct assumption analysis for the risk management planning to come up with a backup plan if the actual plan does not work, such as the ways to manage the lacking of materials that are deemed necessary for the project, thus reducing the risk that may affect the efficiency of the project.
• Collaborating with the Human Resource department caters to the well-being of the workers involved in the project in ensuring that their condition and performance are at their best.
• Project assumptions should be recorded in a separate project assumption log or in any structured document for tracking and managing the insufficiency or issues related to the project resources (equipment, materials, tools, and people).
• Collaborate with the Human Resource department in monitoring and supervising the staff members and workers involved in the project by keeping track of their performance and creating a contract beforehand where they are not allowed to leave the project before it is completed unless provided with strong justifications.
• Always monitor all of the resources and keep track of the condition of the resources to ensure that the resources are in the best condition since it may affect the performance quality of the task in the project .
• Problems or suggestions should be communicated and directed to the project manager as soon as possible so that action can be taken and issues can be avoided.

Examples of Projects’ Cost Assumptions

• The cost spent for the purchase and maintenance of the resources will stay within the planned budget by the project manager. However, if the resources depreciate or malfunction, the budget may exceed the actual cost assumptions since it requires repairing the resources.
• Salary costs for those working on the project will be within the expected assumption. However, in some cases, when the deadline is nearing, the salary costs will alter since it requires the workers to work overtime.
• Wages of any subcontractors and indirect costs such as space rental, utilities, and office supplies will stay within the expected budget. However, the cost may change as time passes, depending on the economy.
• The total cost of daily operations will remain unchanged. However, in certain cases, the cost may vary as time passes, depending on the economy.
• The project’s material, equipment, and resources costs will remain constant when purchasing. However, the market price might be exceeded or reduced since the market price is often not fixed.
• The total budget of the project will not exceed and can cover back the capital used.

How to Manage Projects’ Cost Assumptions

• Always monitor and check the condition of the resources (equipment, materials, or tools) and ensure that all staff members and workers use the equipment according to the user manual and do not violate it.
• Create accurate cost projections where these are critically important in the budgeting phase of a project.
• Design the short-term and long-term budgets to aid the formation of contracts where this may usually keep the overall project cost to be within the budgeted cost, thus preventing the project from being over the actual budget.
• Other stakeholders must verify broader project assumptions, such as the budget and the project cost.
• Always keep track of every purchase of resources or materials and study the market price to study the most profitable time to purchase the goods.
• Determine precisely where and when the shift may occur so that it is easier to assess the effect on the project’s progress and in making necessary adjustments.

Examples of Projects’ Schedule-Based Assumptions

• All the equipment or materials are available when it is needed according to the schedule planned. However, there might be a situation where the materials are insufficient for the project when needed.
• The project’s finances are within the budget for the specific time as scheduled by the project manager. However, it is crucial to take note that the condition of the equipment and the country’s economy might alter the expected budget.
• All the staff members and workers can complete their respective tasks within the schedule planned efficiently.
• The supplier will deliver consumables on time. However, there might be cases where the delivery process was delayed, and the consumables did not arrive as scheduled.
• All relevant stakeholders will come to the next meeting as scheduled. However, there might be instances where stakeholders are unavailable to attend.
• The expected project’s timeline can be met, and the project will complete within the expected time .

How to Manage Projects’ Schedule-Based Assumptions?

• Create the Assumption Analysis to identify the potential risks if the project life-cycle did not meet the expected schedule to avoid minimal loss or waste that can affect the project negatively.
• Have alternative options in dealing with uncertainty and risks if the project life-cycle does not meet the expected schedule or budget that has been planned within the project timeline.
• Always monitor and analyze the project’s timeline to keep track of the progress of the tasks performed by the staff members and workers.
• Deliver the project following the scheduled timeline and try to minimize the effect if the timeline cannot be met by having a backup plan.
• Use project management tools to visualize and map out the project’s timeline to identify dependencies and draw out the constraints and assumptions of the project.
• Have a contingency plan to cover any resource constraints that might cause the project’s timeline to be pushed back.  

Examples of Projects’ Quality/Specification Assumptions

• The quality of all equipment or materials is in good working condition throughout the project life-cycle. However, for some materials or equipment, the quality of the goods may depreciate, thus affecting their’ working condition.
• The scope and specifications of the project will not change when the project takes place. However, when conducting the project, there might be cases where the scope and specifications need to be altered to cater to the requirements and needs of the project.
• All the goods supplied by the suppliers are in the best condition and of the preferable quality.
• All the staff members and workers possess good qualities of the required skills in the project . However, the work quality of the workers may resonate differently as they possess differences in skills, training, and experiences.

How to Manage Projects’ Quality/Specification Assumptions

• Document and monitor the project assumptions in the Project Assumption Log to maintain and monitor the quality of the resources.
• Draw out the project’s assumption analysis to plan, predict, and monitor the scope, specifications, and changes that might occur when conducting the project.
• Maintain good communication and keep track of the suppliers when purchasing the resources.
• Collaborate with the Human Resource department to provide training for the workers involved in the project to ensure that their performance can be improved and polished.

Examples of Projects’ Technology Assumptions

• The process of software development of the project will be able to meet the need of the stakeholders and customers.
• The IT support for the project will be able to cater to technical difficulties such as system errors, network congestion, connection problem, and technical errors.
• The data have been automatically updated in the data inventory, and all information in the data inventory is synchronized.
• All the physical devices such as laptops, computers, mobile phones, printers, and more are in good condition to be used for the project.
• The system of the project is compatible, functions properly, and is stable for the project to take place smoothly.

How to Manage Projects’ Technology Assumptions

• Always refer to the Software Development Life Cycle (SDLC) when designing the software project and critically analyze the need analysis to identify the needs and comments from the customer.
• IT Managers should monitor and supervise the support provided by all IT support staff members.
• Data Centre Managers should monitor and supervise the data in the inventory where all the data related to the project must be ensured to be updated automatically and are synchronized.
• The Project Manager should check the condition of all of the physical devices to ensure that everything is in the best condition to be used.
• System Administration should monitor and supervise the compatibility, security, functionality, and stability of the system in the project.

Examples of Projects’ Location/Environments Assumptions

• There are minimal network congestion and strong internet connection in the location where the project is conducted. However, connection disruptions sometimes occur due to other conditions that may be related to the environment or surroundings of the project.
• The project location is fixed throughout the life cycle and will not change as the project progresses. However, there might be conditions where there may be a need for the project members to work outstation when necessary.
• During the rainy season, the project can still progress as usual, and the project will not be affected by the changes in weather.

How to Manage Projects’ Location/Environments Assumptions

• The Project Manager should monitor the network and internet connection in the project settings and devise at least one contingency plan to cater to the technical difficulties in the project’s location.
• Develop the project plan accordingly and check beforehand if there exists the need to move the project’s location as it progresses.
• Identify and manage as many assumptions to increase the probability that the project will be completed successfully , on time, and within the estimated budget despite the weather changes.
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Discussing Key Resources and Risk Exposure in Your Farm Business Plan

• Margaret Lippsmeyer, Michael Langemeier , and Michael Boehlje
• Center for Commercial Agriculture
• Purdue University

Introduction

Developing a business plan for your farm helps align day-to-day operations with overarching business goals.  In this article, we explore the importance of assessing current business resources and exposure to risk while creating a business plan.  We provide discussion on risks to your business’s key resources, a framework to evaluate the strength of your farm’s resource base, and an outline of how to craft an effective business plan.  These topics link back to our previous articles on integrated risk management (Lippsmeyer, Langemeier, and Boehlje, 2024a) and key resources (Lippsmeyer, Langemeier, and Boehlje, 2024b) where we discussed how macroeconomic factors and other external shocks can influence timing and effectiveness of investments in key business resources.

Assessing Resources

Availability and strength of key resources—including financial, physical, human, organizational, and information technology—should shape your business objectives and determine an effective business plan.  Business objectives and business plans should focus on strengthening your farm’s key resource base.  This resource base acts as a foundation for potential farm expansion, or ability to withstand shocks or stresses in the business environment.  Evaluating key resources is a critical initial step in business planning, ensuring you have accurate benchmarks for your business’s resources.  These benchmarks help to identify which key resources to leverage and which need to be strengthened.

In the next sections we discuss different types of key resources and major risks associated with each.  In addition to this discussion, Figure 1 poses a series of questions which can be used to assess the strength of your farm’s key resources.  These questions are intended to pinpoint potential shortcomings in a farm’s resource base, thereby assisting in the development of a business plan that addresses resources needing improvement.  Figure 2 illustrates risk exposure by resource category.

Figure 1. Assessing Strength of Business Resources

Adapted from Olsen (2007)

Organizational Resources

Organizational resources are the glue which binds together physical, financial, human resources, and information technology, giving direction and meaning to a farming operation.  Organizational resources include business reputation, core values, operational structures, and systems, and play a vital role in differentiating your farm from competitors.  For example, most operations can effectively produce yellow corn, but consistent product quality, reliable logistics, trustworthy relationships with input suppliers and product distributors are ways in which your organizational resources may yield a competitive advantage.

Many risks associated with organizational resources are considered strategic risks.  Strategic risks are caused by external shocks or stresses which create a misalignment between a farm’s business strategy and available resources and capabilities (Lippsmeyer, et al., 2023).  These risks lack off-the-shelf risk mitigation strategies, making them particularly threatening for businesses.  Risks to organizational resources exemplify strategic risk: coming from a variety of sources, are known to cause brand erosion, tarnish reputation, obscure business strategy, and lack effective tools to mitigate these risks.

Adverse weather conditions reducing crop yield is often categorized as a production risk.  However, if as a consequence your operation fails to fulfill a sales contract, the risk becomes a strategic risk, impacting your business’s reputation.  Although distributors may have alternative sources to compensate for your shortfall, your farm’s reliability in meeting contractual obligations could come under scrutiny.  This could adversely affect your future prospects of securing contracts with the same distributor.

Brand erosion and loss of reputation frequently relate to three factors: price, timeliness, and quality.  Balancing a competitive price and product quality is a challenge which impacts a farm’s ability to maintain a positive reputation and retain customers.  Moreover, perceptions of certain farming practices (i.e., production using certain chemicals or hormone treatments), negative publicity, or increases in competition may also contribute to brand erosion and reputation loss.

The clarity of a business strategy is another component of strategic risk.  Business strategy may become compromised due to complexities of relationships between operators, employees, and outside parties; or through attempts to expand to seize economies of scope.  For example, business strategy may become unclear during periods of high employee turnover or when a business expands into new market channels.  Periods high turbulence, when structure, goals, and values become unclear, are when resilience is most necessary.  Operational resilience can serve as a dynamic buffer, enabling quick adaptation to internal and external pressures, and sufficient slack resources to provide leeway while maneuvering through unforeseen challenges (Lippsmeyer and Langemeier, 2023).

Information Technology

Information technology draws parallels between the collection and use of farm data to the concept of ‘surveillance capital’ used to enhance social media platforms (Lippsmeyer, Langemeier, and Boehlje, 2024b).  In the context of production agriculture, information technology provides data-driven insights, helping producers identify operational inefficiencies, and assisting in on farm decision-making.  The effectiveness of this resource is highly dependent on data collection, organization, and ability to accurately analyze the data and draw correct interpretations.

A common risk associated with information technology is data security.  Whether it is financial data collected by a lender, input supplier data, or your farm production data, there are significant concerns about how to protect data from being stolen or accessed without permission.  Strategies to limit data accessibility include user authentication to ensure only authorized users can access your farm records, data encryption for sending sensitive information, and access control limits to restrict who can view, modify, or delete data.  In the age of increasing data collection and use, it is critical to read and fully understand contracts with equipment or information technology companies prior to signing away rights, and subsequently, knowing how to revoke access if necessary.

Risks relating to information technology span beyond data security.  Often even if data collection and storage is done in a secure manner, there remain difficulties or limitations associated with data processing.  This poses potential issues of uninformed or ill-informed farm decisions if incorrect conclusions are drawn from analysis, despite best efforts to use data driven insights.

Financial Resources

Financial resources include cash, investments, equity, and receivables, all of which provide liquidity to fund business expenses and updates to physical resources.  Sufficient financial resources ensure farming operations can pursue new opportunities when they arise and have ability to weather through unexpected periods of high input costs or low market prices.  Risks to financial resources include limited access to debt or equity capital and insufficient liquidity.  Without the availability of financial resources, the ability to grow or seize new opportunities is significantly constrained, if not entirely unfeasible.

Physical Resources

Physical resources include land, machinery, buildings, and inventories.  These assets are characterized by significant initial investment, continual need for maintenance, and a lack of liquidity relative to financial resources.  Assessments of physical resources may vary based on the type of farming operation and the type of resource but generally take into account the resource’s useful life, initial level of investment, quality of maintenance, and salvage value.  For example, maintaining land resources may involve soil testing, use of fertilizers to improve nutrient content, or use of cover crops to prevent erosion.  While other physical resources like planters and combines need much more frequent maintenance and replacement after exhaustion of their useful life.

One of the major risks related to physical resources is inefficient use (i.e., low utilization rates).  Inefficient use of machinery or storage facilities results in higher than necessary production costs.  However, inefficient use may be justified in some scenarios.  While inefficient use of physical resources is undesirable in the long run, for an operation that plans to grow, having some degree of slack may increase flexibility.

Other risks include improper care and overuse of a resource.  These risks are often attributed to poor management or lack of investment due to ownership structure – for example, producers who rent versus own machinery or farm ground are typically more hesitant to make major investments because there is no guarantee they will reap the future benefit from the investment.

Inventories are the final physical resource we will address.  Inventories, particularly stored crops, present unique risks including contamination with aflatoxin, insect infestation, or fire in storage bins from inadequate drying procedures.  Inventories are the most liquid physical resource for farming operations, typically being sold within one year of harvest, and often used to supplement financial resources.

Human Resources

There are two varieties of human resources we will discuss: those internal to an operation and those which are external.  Internal human resources include employees, management, company owners, as well as the relationships, knowledge, and competencies of each.  These resources have extensive operational and industry knowledge which is built through time.  Prior research shows experience displays positive relationships with profitability and financial efficiency (Vanhuyse, Bailey, and Tranter, 2021).  Lippsmeyer, Langemeier, and Boehlje (2024b), discuss the importance of human resources and provide strategies for how to attract and retain quality employees.  Risks relating to internal human resources include talent shortages, insufficient workforce, employee retention, and lack of experience.  Losing employees incurs significant operational costs, both directly (due to insufficient labor availability) and indirectly (due to loss of tacit operational knowledge) (Spender and Grant, 1996).

External human resources include customer relations, interactions with and knowledge of suppliers.  These relationships are more challenging to control due to their indirect connection with a business, yet remain critical for success.  Risks relating to customer relations include losses of long-term customers and related market opportunities.  Often these risks are closely related to product quality, pricing, and timeliness, as well as organizational resources.  If customers perceive you as an unreliable supplier, relationships will deteriorate quickly.  Maintaining consistent product quality, efficient logistics, knowledgeable employees, and quality service are all strategies businesses use to encourage longevity of reliable customer relationships (Claycomb and Martin, 2001).

Supplier risks include untimely deliveries, varying quality of inputs, and excessive or unexpected costs.  These factors have the potential to influence quality or price of a product, potentially reflecting poorly on your business.  Careful and frequent evaluation is necessary to decide which suppliers to continue doing business with, how to set and maintain input standards, and strategies to reward suppliers for desirable behaviors.

Setting Business Objectives

Obtainable business objectives are a critical part of every good farm business plan, so a direct path can be plotted from current performance levels to improved performance where objectives are met.  Objectives may vary by enterprise, but likely revolve around improving quality standards, profitability metrics, and timeliness.

Objectives may include achieving specific quality benchmarks for products, retaining a specific proportion of contract agreements from year to year, ensuring a given percentage of deliveries are completed on time, or having management take part in strategy, business, or leadership improvement workshops.  Objectives relating to information technology include learning to collect and store yield data, or developing systems to analyze the impact of different inputs on crop health.  Objectives for financial resources include achieving specific financial ratio benchmarks, paying off high-interest lines of credit, or saving to invest in a new piece of machinery.  Objectives to enhance and maintain human resources might involve hiring additional staff, offering career development opportunities, or offering incentives for loyal customers.

Developing A Business Plan

Using Figure 1, we encourage you to evaluate each of your farm’s key resources to help pinpoint any weaknesses in your resource base and subsequently identify areas in your operation needing improvement.  Business plans should begin by identifying strengths or weaknesses of current resources, assessing the implications of relative strengths (or weaknesses) in achieving business objectives, and then focus on setting up step by step plans to achieve those objectives.

Once your business plan has been created, considerations also need to be made for the timing of major organizational changes or substantial investments.  Both external shocks (e.g., macroeconomic uncertainties) and available operational slack must be considered to identify optimal timing to improve your resource base (Lippsmeyer, Langemeier, and Boehlje, 2024b).

In order to identify actions effective in making change, regular evaluations with consistent standards must be used to assess resource strength and progress made towards achieving objectives.  Continually assessing strengths and weaknesses of key resources and identifying potential improvements can prevent businesses from developing a ‘needs-based strategy’ which waits for major issues to arise, then scrambles to control damage.

Conclusions

This article has provided a discussion of key resources and risks associated with each.  By considering the strengths and weaknesses of your resource base, combined with the appropriate timing for investments, you will be better equipped to develop an effective business plan.  Using the tools provided in this article, we prompt you to critically assess your farm’s key resources and develop a business plan which progresses from your current resource base to achieving business objectives.

Claycomb, C. and C.L. Martin, C. L. (2001). “Building Customer Relationships: An Inventory of Service Providers' Objectives and Practices.” Marketing Intelligence & Planning, 19 (6). https://doi.org/10.1108/EUM0000000006109

Lippsmeyer, M. and M. Langemeier. (2023). “ Agility and Absorption Capacity .”  farmdoc daily (13):75, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, April 24.

Lippsmeyer, M., M. Langemeier, J. Mintert, and N. Thompson.  (2023). “ Resilience to Strategic Risk .”  farmdoc daily (13):115, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June 23.

Lippsmeyer, M., M. Langemeier, and M. Boehlje.  (2024a). “ Integrated Risk Management: Developing an Asset-Based Business Strategy .”  farmdoc daily (14):54, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 18.

Lippsmeyer, M., M. Langemeier, and M. Boehlje.  (2024b). “ Key Resources Determining the Future of the Farm .”  farmdoc daily (14):60, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 27.

Olsen, E. (2007). Assessing Your Business and Its Capabilities. In Strategic Planning for Dummies (pp. 121-140). Indianapolis: Wiley Publishing, Inc.

Spender, J., and R. Grand, R. (1996). Knowledge and the Firm: Overview. Strategic Management. https://doi.org/10.1002/smj.4250171103

Vanhuyse, F., A. Bailey, and R. Tranter. (2021). "Management Practices and the Financial Performance of Farms." Agricultural Finance Review, 81(3) . https://doi.org/10.1108/AFR-08-2020-0126

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