The role of assumptions in planning

A business plan forecast is based on multiple assumptions.  None of us knows what the future will hold.  How many of us predicted that 2020 would turn out quite as it did?  Those assumptions are the keys to your financial plans.  After all, what gets recorded in your finance system reflects the behaviours in your business.

The trap we often fall into, is we identify too many assumptions.  Perhaps we try to be a bit too clever, resulting in convoluted and complex assumptions.  We get carried away when we build spreadsheets.

If we want to move beyond a forecast and create a useable operational plan, its time to review our assumptions and simplify them.  What are the key metrics that will determine whether or not our plan gets delivered?  Perhaps it is salesperson effectiveness, or rate of churn, or customer onboarding rate?   

We need to keep the list of assumptions as short and simple as possible.  No complex nested assumptions – you know the ones, where the financial output is dependent on something that is a % of something else which is a % of something else…. work out a historical or future average % and use that.

Sales conversion ratios are a great example.  I’ve seen organisations tie themselves in knots defining a scale which is the probability of an opportunity becoming a customer at various points of the sales lifecycle:  if we’ve got to a proposal it’s 35%; if we’re invited to a further meeting it’s 65%, and it’s only 100% when we get a contract. 

Far simpler is to work out for every £ or $ of sales you make, what is the £ or $ value of opportunities you identified.  Then divide the sales by the opportunities and that’s your average conversion ratio.  If this improves (or reduces) over time, you change your assumption.  Simple.

The thing about assumptions is that they are often entwined with a healthy dose of arrogance.  We think we know what the future holds, and how often do we track the accuracy of our assumptions?  In a scale-up with some history, there is a reality to feed into our assumptions, and when the investment is to target a new market, often those assumptions may need to be refined over time.

The challenge with monitoring assumptions, is we often fail to check their validity.  We’re very good at tracking the output of those assumptions, namely our financial performance, however a small variation in one or two of those assumptions can have a significant impact on overall financial performance and if we don’t understand how our assumptions are behaving we may make incorrect decisions. 

Assumptions are a bit like the laws of physics.  They were at one time, all assumptions.  Predictions of what might happen in a given situation.  It is only through experimentation and observation that evidence has moved them from assumptions to laws.

The purposeful planning programme helps tech scale-ups clarify their assumptions to create transaparent operational plans that keep investors feeling safe, secure and supportive.