Developing Realistic Financial Assumptions

Dave Lavinsky

Visitors: 771

Many investors skip straight to the financial section of the business plan. It is critical that the 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 firm 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 break-through product in their market, and no other company compares. In such a case, base revenue growth on companies in other industries that have had break-through 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 financials 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 company 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.

As President of Growthink Business Plans , Dave Lavinsky has helped the company become one of the premier business plan development firms. Since its inception, Growthink has developed over 200 business plans. Growthink clients have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share.


Article Source:

Rate this Article: 
Managing Your Team (Part 10) - Why Assumptions Are Dangerous
Rated 4 / 5
based on 5 votes

Related Articles:

Bookkeeping Business Tips For Developing Reliable Financial Projections

by: Linda A. Hunt (June 22, 2008) 
(Business/Small Business)

Financial Crisis and Threat to Asian Developing Countries (Ex Japan)

by: John Chng Kean Siang (April 08, 2008) 
(Business/International Business)

Developing a Basic Financial Model - Part V - More on the Cash Conversion Cycle

by: Russ Steward (January 16, 2009) 

Assumptions - How Accurate Are Yours?

by: Teri Samuels (December 07, 2005) 
(Business/Sales Training)

Invisible Assumptions

by: Rebbie Straubing (December 09, 2005) 
(Self Improvement/Attraction)

Unexamined Assumptions

by: Kate Loving Shenk (June 15, 2007) 
(Self Improvement)

5 Steps to Avoid Assumptions That Are Self Defeating

by: Paul Mobley (July 25, 2008) 
(Self Improvement/Positive Attitude)

Reading to Your Kids: Challenge Your Assumptions!

by: Holly Jahangiri (December 08, 2005) 
(Home and Family/Parenting)

Assumptions - The Hidden Sales Killer

by: Kelley Robertson (January 14, 2005) 
(Business/Sales Training)

Managing Your Team (Part 10) - Why Assumptions Are Dangerous

by: Andrew Gowans (March 18, 2006) 
(Business/Team Building)