How to Avoid Bad Business Planning Assumptions!

A good business plan should act as a path to success in an unknown future. Where businesses run in to trouble is when they either don’t have one or they have one that is full of wishful thinking rather than being grounded in realistic predictions.

Like any effort to predict the future though, it can be a challenge. What separates a good business plan from one that is wishful thinking are the assumptions and the experience of the person behind it. Good plans have a healthy does of experienced business judgement and good analysis. As we all know, numbers can be manipulated to say anything you want. The trained eye can sniff out misleading indicators and ask penetrating questions to uncover erroneous assumptions.

Nothing is more unnerving than presenting a business plan to a savvy executive that can cut through the song and dance faster than a hot knife through butter to see that a plan is more wishful thinking than a good opportunity.

A good business plan will have three critical arguments: Strategic, financial and competitive. If these three areas have been addressed with sound business points of rationale then the business plan should warrant strong consideration.

In many cases the person/s preparing a business plan that fails to meet the “sniff” test has likely not spent enough time on the key assumptions that drive the strategic, financial or competitive points of rationale. So how do you avoid this potential pitfall?

1. Don’t rely on one (1) data point to support an argument. Like underwear with a lose thread, nothing unravels faster than a single data point to pull on. Make sure you have two or three data points to support a key assumptions. You can bet that an experienced executive will pull a few out of his hat that you haven’t thought about. Challenge you’re own thinking about the data you are using.

2. Give your assumptions the test of reasonableness. For example, ask yourself if it is reasonable to assume that you will experience a 40% increase in sales with a new product when the best the company has ever done is a 25% increase? What other factors would suggest the incremental lift? Perhaps the additional marketing spend might get you there but maybe it won’t. If it doesn’t feel right then it probably isn’t.

3. Use reliable sources. Authoritative sources of information are the most credible. Using Wikipedia for example is not a recommended source for business information or a sound business decision. Primary research is. Talking to a source is better than getting it third hand. Use reliable industry sources to uncover and support your business plan. It may take longer or a bit more work but will save you a lot of embarrassment down the road.

4. Don’t over promise. It is always better to present a reasonable or conservative plan than to present a plan that is over-reaching and ambitious. Successful business people know how to manage the risk profile of a business opportunity. Business pitches that guarantee a 1%/week return on investment should scream “risk” whereas a 10% ROI is more realistic and achievable.

5. Test your assumptions. Use your industry contacts or use primary research to support your key assumptions. Talk to other people in the company about your project and use them as a sounding board for your assumptions about prices, or what the competition may be doing. Other people, outside your business circle, can be invaluable in the planning process and help you avoid erroneous assumptions that don’t hold up under scrutiny.

And remember…….strategy without tactics is a slow route to victory but tactics without strategy is the noise before defeat.

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