Financial Assumptions and Your Business Plan

Financial Assumptions and Your Business Plan

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 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 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.

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

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

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

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