key financial assumptions business plan

Financial Plan Assumptions

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on July 11, 2023

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Table of contents, what are financial plan assumptions.

Financial plan assumptions are the key variables, estimates, and predictions used to develop a company's financial projections and strategy. They serve as the foundation for forecasting revenues , costs, investments, and taxes , among other elements.

Assumptions are critical in financial planning because they help businesses set realistic goals, allocate resources efficiently, and identify potential risks and opportunities. They also enable management to make informed decisions based on the best available data and industry insights.

Financial plan assumptions aim to create a comprehensive picture of a company's future financial performance by incorporating a range of factors.

These assumptions are designed to be flexible and adaptable, allowing for adjustments as new information becomes available or market conditions change.

Key Financial Plan Assumptions

Revenue assumptions, sales growth rate.

The sales growth rate is a crucial revenue assumption that estimates the percentage increase in a company's sales over a specific period. This rate takes into account factors such as historical sales data, market trends, and promotional efforts.

Pricing Strategies

Pricing strategies help determine the prices of a company's products or services. Assumptions related to pricing may include competitor pricing, price elasticity of demand, and the company's overall pricing objectives.

Market Share

Market share assumptions predict a company's percentage of total sales within a specific market. Estimations consider factors such as target customer segments, marketing strategies, and product or service differentiation.

Customer Acquisition and Retention

Customer acquisition and retention assumptions estimate the number of new customers acquired and existing customers retained. These assumptions depend on factors such as marketing efforts, customer service quality, and competitive positioning.

Cost Assumptions

Fixed and variable costs.

Fixed and variable costs are essential components of a company's financial plan . Fixed costs include expenses that remain constant, regardless of production levels or sales, such as rent and salaries. Variable costs vary with production or sales, including raw materials and shipping costs.

Cost of Goods Sold (COGS)

COGS is the total cost of producing goods or services sold by a company. Key assumptions for COGS may include production costs , labor costs, and manufacturing overheads.

Operating Expenses

Operating expenses are the costs associated with running a business, excluding COGS. Assumptions for operating expenses may include marketing costs, administrative expenses, and research and development expenditures .

Inflation Rate

The inflation rate assumption estimates the increase in the general price level over time. This assumption affects various cost projections, such as wages, raw materials, and utilities.

Investment Assumptions

Capital expenditures.

Capital expenditures represent the funds a company invests in long-term assets, such as property, plant, and equipment. Assumptions for capital expenditures may include the anticipated level of investment , the useful life of assets , and depreciation methods.

Working Capital Requirements

Working capital assumptions estimate the funds needed to cover short-term operating expenses and maintain sufficient liquidity . These assumptions may include projections for inventory levels, accounts receivable , and accounts payable .

Financing Sources and Costs

Financing assumptions help determine how a company will fund its operations and investments. These assumptions include the mix of debt and equity financing, interest rates , and repayment terms.

Tax Assumptions

Corporate tax rates.

Corporate tax rate assumptions estimate the percentage of a company's profits subject to taxation. These assumptions take into account federal, state, and local tax rates, as well as any changes to tax laws.

Tax Credits and Incentives

Tax credits and incentives are reductions in tax liability offered by governments to encourage specific business activities. Assumptions related to tax credits may include eligibility criteria, application deadlines, and the expected amount of tax savings.

Tax Planning Strategies

Tax planning strategies are methods used by companies to minimize their tax liabilities. Assumptions related to tax planning may include the use of tax-efficient structures, deductions, and loss carryforwards.

Economic and Industry Assumptions

Macroeconomic factors.

Gross domestic product (GDP) growth rate assumptions estimate the overall economic growth of a country or region. These assumptions impact a company's revenue projections, as they help gauge the general health of the economy and consumer spending.

Interest Rates

Interest rate assumptions estimate the cost of borrowing or lending money. These rates affect a company's financing costs, investment decisions, and overall financial performance.

Unemployment Rates

Unemployment rate assumptions predict the percentage of the labor force without jobs. High unemployment rates can impact consumer spending and may indicate a sluggish economy, affecting a company's sales projections.

Industry Trends and Competition

Market size and growth.

Market size and growth assumptions help estimate the overall potential of an industry and the opportunities it presents for a company. Factors considered may include historical data, demographic trends, and technological advancements.

Technological Advancements

Technological advancements can disrupt industries and create new markets. Assumptions related to technology may include the adoption of new technologies, the impact of innovations on the market, and the potential for competitive advantage.

Regulatory Changes

Regulatory changes can significantly impact a company's operations and financial performance. Assumptions related to regulation may include potential changes in laws, compliance requirements, and the effects on the industry landscape.

Competitive Landscape

Competitive landscape assumptions evaluate a company's position within its industry and the level of competition it faces. These assumptions may consider factors such as market share, competitor strategies, and barriers to entry.

Sensitivity Analysis and Scenario Planning

Identifying key variables and uncertainties.

Sensitivity analysis and scenario planning involve identifying key variables and uncertainties in a company's financial plan. These variables may include economic factors, industry trends, or company-specific factors.

Developing Scenarios and Assumptions

Scenario planning involves creating alternative future scenarios based on varying assumptions. Companies develop multiple scenarios to explore the potential impact of different events, trends, and risks on their financial performance.

Analyzing the Impact on Financial Performance

Companies analyze the impact of different scenarios on their financial performance to identify potential risks and opportunities. This analysis helps management make informed decisions and adapt their strategies as needed.

Risk Mitigation and Contingency Planning

Based on the results of sensitivity analysis and scenario planning, companies develop risk mitigation and contingency plans. These plans help companies prepare for potential challenges and capitalize on emerging opportunities.

Regular Review and Update of Assumptions

Importance of ongoing monitoring.

Regularly reviewing and updating financial plan assumptions is essential to ensure their continued relevance and accuracy. Ongoing monitoring helps companies stay informed of market changes and adapt their strategies accordingly.

Frequency of Assumption Updates

The frequency of assumption updates depends on the nature of the company and its industry. Companies operating in rapidly changing environments may need to update their assumptions more frequently than those in more stable industries.

Incorporating New Information and Data

As new information and data become available, companies should incorporate them into their financial plan assumptions. This ensures that the assumptions remain relevant and provide an accurate basis for decision-making.

Adjusting Financial Plans as Needed

Based on updated assumptions, companies may need to adjust their financial plans to reflect changes in market conditions, industry trends, or company-specific factors. Regular adjustments help maintain the accuracy and relevance of financial projections.

Financial plan assumptions play a crucial role in the development of a company's financial strategy and projections. By incorporating a wide range of factors and estimates, assumptions help create a comprehensive picture of a company's future financial performance.

Regularly reviewing and updating financial plan assumptions is essential for ensuring their continued relevance and accuracy. As new information becomes available or market conditions change, companies must adapt their assumptions and adjust their financial plans accordingly.

Sensitivity analysis and scenario planning are valuable tools for managing risks and identifying potential opportunities.

By analyzing the impact of different scenarios on a company's financial performance, management can make informed decisions and develop risk mitigation and contingency plans.

In conclusion, financial plan assumptions are critical components of a company's financial planning process.

By incorporating a wide range of factors and regularly reviewing and updating these assumptions, companies can create accurate financial projections, identify potential risks and opportunities, and make informed decisions that drive their long-term success.

Financial Plan Assumptions FAQs

What are financial plan assumptions, and why are they important.

Financial plan assumptions are the underlying estimates and predictions that a financial plan is based upon. They are essential because they provide the framework for determining how much money you need to save, how much you can expect to earn on your investments, and how long your money will last in retirement.

How do I choose the right financial plan assumptions for my personal financial plan?

The right financial plan assumptions will depend on your personal circumstances, financial goals, and risk tolerance. You should consider your current income, expenses, debts, and assets when selecting your assumptions. Additionally, you should consider factors such as inflation, investment returns, and life expectancy.

What are some common financial plan assumptions used by financial planners?

Common financial plan assumptions used by financial planners include assumptions about inflation rates, investment returns, life expectancy, and tax rates. Other assumptions may include future expenses such as college tuition or medical costs, changes in income or employment, and changes in interest rates.

How often should I review and update my financial plan assumptions?

You should review and update your financial plan assumptions regularly, at least annually, and whenever there are significant changes in your life circumstances, such as a new job, a significant change in income or expenses, or a change in your investment portfolio.

What are the potential risks of relying on incorrect financial plan assumptions?

Relying on incorrect financial plan assumptions can lead to a variety of risks, including not saving enough for retirement, running out of money in retirement, or being unable to meet other financial goals. Additionally, incorrect assumptions can lead to poor investment decisions, resulting in lower investment returns and higher taxes. It is essential to ensure that your financial plan assumptions are as accurate as possible to help you achieve your financial goals.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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How to Prepare a Financial Plan for Startup Business (w/ example)

Free Financial Statements Template

Ajay Jagtap

• December 7, 2023

13 Min Read

If someone were to ask you about your business financials, could you give them a detailed answer?

Let’s say they ask—how do you allocate your operating expenses? What is your cash flow situation like? What is your exit strategy? And a series of similar other questions.

Instead of mumbling what to answer or shooting in the dark, as a founder, you must prepare yourself to answer this line of questioning—and creating a financial plan for your startup is the best way to do it.

A business plan’s financial plan section is no easy task—we get that.

But, you know what—this in-depth guide and financial plan example can make forecasting as simple as counting on your fingertips.

Ready to get started? Let’s begin by discussing startup financial planning.

What is Startup Financial Planning?

Startup financial planning, in simple terms, is a process of planning the financial aspects of a new business. It’s an integral part of a business plan and comprises its three major components: balance sheet, income statement, and cash-flow statement.

Apart from these statements, your financial section may also include revenue and sales forecasts, assets & liabilities, break-even analysis , and more. Your first financial plan may not be very detailed, but you can tweak and update it as your company grows.

Key Takeaways

• Realistic assumptions, thorough research, and a clear understanding of the market are the key to reliable financial projections.
• Cash flow projection, balance sheet, and income statement are three major components of a financial plan.
• Preparing a financial plan is easier and faster when you use a financial planning tool.
• Exploring “what-if” scenarios is an ideal method to understand the potential risks and opportunities involved in the business operations.

Why is Financial Planning Important to Your Startup?

Poor financial planning is one of the biggest reasons why most startups fail. In fact, a recent CNBC study reported that running out of cash was the reason behind 44% of startup failures in 2022.

A well-prepared financial plan provides a clear financial direction for your business, helps you set realistic financial objectives, create accurate forecasts, and shows your business is committed to its financial objectives.

It’s a key element of your business plan for winning potential investors. In fact, YC considered recent financial statements and projections to be critical elements of their Series A due diligence checklist .

Your financial plan demonstrates how your business manages expenses and generates revenue and helps them understand where your business stands today and in 5 years.

Makes sense why financial planning is important to your startup, doesn’t it? Let’s cut to the chase and discuss the key components of a startup’s financial plan.

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Key Components of a Startup Financial Plan

Whether creating a financial plan from scratch for a business venture or just modifying it for an existing one, here are the key components to consider including in your startup’s financial planning process.

Income Statement

An Income statement , also known as a profit-and-loss statement(P&L), shows your company’s income and expenditures. It also demonstrates how your business experienced any profit or loss over a given time.

Consider it as a snapshot of your business that shows the feasibility of your business idea. An income statement can be generated considering three scenarios: worst, expected, and best.

Your income or P&L statement must list the following:

• Cost of goods or cost of sale
• Gross margin
• Operating expenses
• Revenue streams
• EBITDA (Earnings before interest, tax, depreciation , & amortization )

Established businesses can prepare annual income statements, whereas new businesses and startups should consider preparing monthly statements.

Cash flow Statement

A cash flow statement is one of the most critical financial statements for startups that summarize your business’s cash in-and-out flows over a given time.

This section provides details on the cash position of your business and its ability to meet monetary commitments on a timely basis.

Your cash flow projection consists of the following three components:

✅ Cash revenue projection: Here, you must enter each month’s estimated or expected sales figures.

✅ Cash disbursements: List expenditures that you expect to pay in cash for each month over one year.

✅ Cash flow reconciliation: Cash flow reconciliation is a process used to ensure the accuracy of cash flow projections. The adjusted amount is the cash flow balance carried over to the next month.

Furthermore, a company’s cash flow projections can be crucial while assessing liquidity, its ability to generate positive cash flows and pay off debts, and invest in growth initiatives.

Balance Sheet

Your balance sheet is a financial statement that reports your company’s assets, liabilities, and shareholder equity at a given time.

Consider it as a snapshot of what your business owns and owes, as well as the amount invested by the shareholders.

This statement consists of three parts: assets , liabilities, and the balance calculated by the difference between the first two. The final numbers on this sheet reflect the business owner’s equity or value.

Balance sheets follow the following accounting equation with assets on one side and liabilities plus Owner’s equity on the other:

Here is what’s the core purpose of having a balance-sheet:

• Indicates the capital need of the business
• It helps to identify the allocation of resources
• It calculates the requirement of seed money you put up, and
• How much finance is required?

Since it helps investors understand the condition of your business on a given date, it’s a financial statement you can’t miss out on.

Break-even Analysis

Break-even analysis is a startup or small business accounting practice used to determine when a company, product, or service will become profitable.

For instance, a break-even analysis could help you understand how many candles you need to sell to cover your warehousing and manufacturing costs and start making profits.

Remember, anything you sell beyond the break-even point will result in profit.

You must be aware of your fixed and variable costs to accurately determine your startup’s break-even point.

• Fixed costs: fixed expenses that stay the same no matter what.
• Variable costs: expenses that fluctuate over time depending on production or sales.

A break-even point helps you smartly price your goods or services, cover fixed costs, catch missing expenses, and set sales targets while helping investors gain confidence in your business. No brainer—why it’s a key component of your startup’s financial plan.

Having covered all the key elements of a financial plan, let’s discuss how you can create a financial plan for your startup.

How to Create a Financial Section of a Startup Business Plan?

1. determine your financial needs.

You can’t start financial planning without understanding your financial requirements, can you? Get your notepad or simply open a notion doc; it’s time for some critical thinking.

Start by assessing your current situation by—calculating your income, expenses , assets, and liabilities, what the startup costs are, how much you have against them, and how much financing you need.

Assessing your current financial situation and health will help determine how much capital you need for your startup and help plan fundraising activities and outreach.

Furthermore, determining financial needs helps prioritize operational activities and expenses, effectively allocate resources, and increase the viability and sustainability of a business in the long run.

Having learned to determine financial needs, let’s head straight to setting financial goals.

2. Define Your Financial Goals

Setting realistic financial goals is fundamental in preparing an effective financial plan. So, it would help to outline your long-term strategies and goals at the beginning of your financial planning process.

Let’s understand it this way—if you are a SaaS startup pursuing VC financing rounds, you may ask investors about what matters to them the most and prepare your financial plan accordingly.

However, a coffee shop owner seeking a business loan may need to create a plan that appeals to banks, not investors. At the same time, an internal financial plan designed to offer financial direction and resource allocation may not be the same as previous examples, seeing its different use case.

Feeling overwhelmed? Just define your financial goals—you’ll be fine.

You can start by identifying your business KPIs (key performance indicators); it would be an ideal starting point.

3. Choose the Right Financial Planning Tool

Let’s face it—preparing a financial plan using Excel is no joke. One would only use this method if they had all the time in the world.

Having the right financial planning software will simplify and speed up the process and guide you through creating accurate financial forecasts.

Many financial planning software and tools claim to be the ideal solution, but it’s you who will identify and choose a tool that is best for your financial planning needs.

Create a Financial Plan with Upmetrics in no time

Enter your Financial Assumptions, and we’ll calculate your monthly/quarterly and yearly financial projections.

Start Forecasting

4. Make Assumptions Before Projecting Financials

Once you have a financial planning tool, you can move forward to the next step— making financial assumptions for your plan based on your company’s current performance and past financial records.

You’re just making predictions about your company’s financial future, so there’s no need to overthink or complicate the process.

You can gather your business’ historical financial data, market trends, and other relevant documents to help create a base for accurate financial projections.

After you have developed rough assumptions and a good understanding of your business finances, you can move forward to the next step—projecting financials.

5. Prepare Realistic Financial Projections

It’s a no-brainer—financial forecasting is the most critical yet challenging aspect of financial planning. However, it’s effortless if you’re using a financial planning software.

Upmetrics’ forecasting feature can help you project financials for up to 7 years. However, new startups usually consider planning for the next five years. Although it can be contradictory considering your financial goals and investor specifications.

Following are the two key aspects of your financial projections:

Revenue Projections

In simple terms, revenue projections help investors determine how much revenue your business plans to generate in years to come.

It generally involves conducting market research, determining pricing strategy , and cash flow analysis—which we’ve already discussed in the previous steps.

The following are the key components of an accurate revenue projection report:

• Market analysis
• Sales forecast
• Pricing strategy
• Growth assumptions
• Seasonal variations

This is a critical section for pre-revenue startups, so ensure your projections accurately align with your startup’s financial model and revenue goals.

Expense Projections

Both revenue and expense projections are correlated to each other. As revenue forecasts projected revenue assumptions, expense projections will estimate expenses associated with operating your business.

Accurately estimating your expenses will help in effective cash flow analysis and proper resource allocation.

These are the most common costs to consider while projecting expenses:

• Fixed costs
• Variable costs
• Employee costs or payroll expenses
• Operational expenses
• Marketing and advertising expenses
• Emergency fund

Remember, realistic assumptions, thorough research, and a clear understanding of your market are the key to reliable financial projections.

6. Consider “What if” Scenarios

After you project your financials, it’s time to test your assumptions with what-if analysis, also known as sensitivity analysis.

Using what-if analysis with different scenarios while projecting your financials will increase transparency and help investors better understand your startup’s future with its best, expected, and worst-case scenarios.

Exploring “what-if” scenarios is the best way to better understand the potential risks and opportunities involved in business operations. This proactive exercise will help you make strategic decisions and necessary adjustments to your financial plan.

7. Build a Visual Report

If you’ve closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using “what-if” scenarios.

Now, we’ll prepare visual reports to present your numbers in a visually appealing and easily digestible format.

Don’t worry—it’s no extra effort. You’ve already made a visual report while creating your financial plan and forecasting financials.

Check the dashboard to see the visual presentation of your projections and reports, and use the necessary financial data, diagrams, and graphs in the final draft of your financial plan.

Here’s what Upmetrics’ dashboard looks like:

8. Monitor and Adjust Your Financial Plan

Even though it’s not a primary step in creating a good financial plan, it’s quite essential to regularly monitor and adjust your financial plan to ensure the assumptions you made are still relevant, and you are heading in the right direction.

There are multiple ways to monitor your financial plan.

For instance, you can compare your assumptions with actual results to ensure accurate projections based on metrics like new customers acquired and acquisition costs, net profit, and gross margin.

Consider making necessary adjustments if your assumptions are not resonating with actual numbers.

Also, keep an eye on whether the changes you’ve identified are having the desired effect by monitoring their implementation.

And that was the last step in our financial planning guide. However, it’s not the end. Have a look at this financial plan example.

Startup Financial Plan Example

Having learned about financial planning, let’s quickly discuss a coffee shop startup financial plan example prepared using Upmetrics.

Important Assumptions

• The sales forecast is conservative and assumes a 5% increase in Year 2 and a 10% in Year 3.
• The analysis accounts for economic seasonality – wherein some months revenues peak (such as holidays ) and wanes in slower months.
• The analysis assumes the owner will not withdraw any salary till the 3rd year; at any time it is assumed that the owner’s withdrawal is available at his discretion.
• Sales are cash basis – nonaccrual accounting
• Moderate ramp- up in staff over the 5 years forecast
• Barista salary in the forecast is $36,000 in 2023.
• In general, most cafes have an 85% gross profit margin
• In general, most cafes have a 3% net profit margin

Projected Balance Sheet

Projected Cash-Flow Statement

Projected Profit & Loss Statement

Break Even Analysis

Start Preparing Your Financial Plan

We covered everything about financial planning in this guide, didn’t we? Although it doesn’t fulfill our objective to the fullest—we want you to finish your financial plan.

Sounds like a tough job? We have an easy way out for you—Upmetrics’ financial forecasting feature. Simply enter your financial assumptions, and let it do the rest.

So what are you waiting for? Try Upmetrics and create your financial plan in a snap.

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Frequently Asked Questions

How often should i update my financial projections.

Well, there is no particular rule about it. However, reviewing and updating your financial plan once a year is considered an ideal practice as it ensures that the financial aspirations you started and the projections you made are still relevant.

How do I estimate startup costs accurately?

You can estimate your startup costs by identifying and factoring various one-time, recurring, and hidden expenses. However, using a financial forecasting tool like Upmetrics will ensure accurate costs while speeding up the process.

What financial ratios should startups pay attention to?

Here’s a list of financial ratios every startup owner should keep an eye on:

• Net profit margin
• Current ratio
• Quick ratio
• Working capital
• Return on equity
• Debt-to-equity ratio
• Return on assets
• Debt-to-asset ratio

What are the 3 different scenarios in scenario analysis?

As discussed earlier, Scenario analysis is the process of ascertaining and analyzing possible events that can occur in the future. Startups or businesses often consider analyzing these three scenarios:

• base-case (expected) scenario
• Worst-case scenario
• best case scenario.

About the Author

Ajay is a SaaS writer and personal finance blogger who has been active in the space for over three years, writing about startups, business planning, budgeting, credit cards, and other topics related to personal finance. If not writing, he’s probably having a power nap. Read more

Reach Your Goals with Accurate Planning

How Financial Assumptions Can Make Or Break Your Business Plan

May 9, 2022

Adam Hoeksema

A business plan is only as good as its financial assumptions. These are the key input data that your financial projections will extrapolate from and will form a picture of the future of your company. With a robust method of researching for these assumptions, and then the corresponding analysis of the available data, you’re left with more accurate assumptions, leading to a more realistic picture of your financial future. 

Conversely, with weak assumptions from lack of sufficient research or bad analysis, you can get a dramatically different output that doesn’t remotely reflect reality. When looking for outside investment, these are the skills a savvy investor is going to value in an entrepreneur. So how best to improve your assumptions? Keep reading for the answer.

Financial Assumptions

Any entrepreneur, startup founder, or young company is going to need to form detailed financial reports, including forecasts and projections of the financial situation to come. These documents rely entirely on input data to extrapolate from, and these data are based on historical records and key assumptions . 

The accuracy of these financial assumptions determines the accuracy of the output of these projections, and since the divergence from reality increases over time, it’s important for them to be as accurate as possible to precisely depict a realistic situation in the future. 

The importance of these assumptions comes into play significantly when trying to attract capital from outside. These investors or lenders will be looking closely at your assumptions as a metric of your credibility; strong assumptions show you’ve done your due diligence and you know what you’re talking about. Weak ones will greatly harm your chances of success. 

Here we’re going to go over the basics of financial assumptions, what they’re for, and common mistakes people make with them. 

The Role of Financial Assumptions in Forecasting

In business planning, forecasting is a crucial step in visualizing how a company will perform in the future. Companies forecast future outcomes based on past and current data, using assumptions. 

Forecasted elements of a financial plan include revenue, margin, and expenses, among others. When done accurately, these forecasts allow businesses to: 

• Predict future expenses
• Make budgets
• Make informed decisions about the direction of the company
• Plan growth and financing options

However, accuracy requires more than just historical data; it’s important to input the rate of change over time correctly, and this is where assumptions come in. 

Essentially, assumptions are educated guesses about the nature of your business and its market, and how these will affect future outcomes in your forecasts. As projections reach further into the future, the need for accuracy of the input assumptions increases. Small mistakes become significantly larger over time, and this skews projections to the point of making them worthless. 

For investors to take notice, you’ll need accurate and well-thought-out assumptions that aren’t plucked from thin air. We’ll go into more detail about how to find these assumptions shortly, but first, let’s consider why accuracy is so important. 

The Importance of Accuracy in Financial Assumptions

The financial statements of a business plan are an indication of the company’s profitability. They are the strongest display of the worthiness of investment that your company has, therefore, they’re going to need to be founded on accurate assumptions. 

Even with relatively accurate initial figures, long-term projections can still be way off the mark. Essentially, any forecast is a calculation with decreasing accuracy over time, which is why they usually don’t project out past time frames of longer than around five years. Take the following example:

Let’s say you’ve done the research into the market, into the reducing costs of production over time, the rapid expected growth of your company, and the increase in value you’re going to make to your product or service over the next few years. What comes out is an assumed increase in revenue projected into the future.  

If you assume your total revenue will increase by 20% over 5 years with a starting revenue of $20,000, the first-year outcome will be $24,000, an increase of four thousand dollars. The fifth-year outcome will be $49,767; an increase of almost thirty thousand dollars. 

If your initial assumption is off by only 5% in either direction, the first year will show a difference from the above forecast of $1000 , either returning $23,000 or $25,000 at the low and high ends, respectively. 

This isn’t a huge amount of money at this stage, so a misjudgment of 5% seems reasonable. However, if we extend this effect to the fifth year, an error of 5% brings a difference of either $9,500 or $11,268 to what you had projected, depending on whether your assumption was low or high.

If you’re smart or lucky enough to have made a conservative assumption, you’re now $11k better off. On the other hand, if you were too hasty and overestimated in your assumption, you may now owe somebody over $9k. 

So, the effect of an assumption is greater with distance from the starting point. This means that when you’re designing a business plan to show to potential investors, they’re going to be very critical of your assumptions in order to assess the chances of their ROI in your company. 

Regardless of whether you assumed low or high, if there’s a discrepancy that becomes obvious to investors, it will make them question the rest of your estimates and how accurate you will be in future calculations. 

Therefore, accurate assumptions are critically Important to not only the precise understanding of the state of your company in the future but any chances of investors taking you seriously. Without good assumptions there is no forecast. Without a forecast, there’s not going to be any investment.

If your business is going to be relying on VC or other investors helping out, you’re going to find yourself out of luck. So, with that in mind, let’s take a look at some of the classic assumptions you’ll need to make when designing your forecasts and projections. 

Key Financial Assumptions Examples 

Building a business plan relies on numerous assumptions. These are the where, when, and how’s of your company, and will create projections in order for you to know where to direct your energy. The most important assumptions are called key assumptions, and without these, it’s going to be impossible to make informed decisions on the direction of your company. 

Changes in assumptions can dramatically alter the outcomes of your forecasts. If you assume, for example, that your product or service is going to have a decreasing churn rate - or loss of customers - over the coming years of service improvement, you have to know what that rate is going to decrease by each year for your forecast to be of any use.  

It’s worth thinking about these assumptions in terms of how you will persuade investors to commit. Here is a list of some of the areas in which key assumptions are needed for financial planning, for use as financial assumptions examples:

• Market – There’s no business without a market. This assumption isn’t so much a financial one as a general business one, but it has strong financial implications. 

By the time you come to financial planning for your startup, you should know who your ideal customer is and how you’re addressing their pain points.

You should also know how much they’re willing to spend on your product or service, which will come in handy for your income statement and cash flow projections. 

• Cost of production - Production cost changes over time. Even if it’s simply an increase in outgoings to match an increase in demand, this needs to be assumed. Usually, production costs can be reduced as economies of scale come into play, but regardless, it’s easy to overlook some data here.  

Calculating production costs involves covering rent for manufacturing spaces, materials, utilities such as power and water, and essentially every little thing that goes into the manufacture of your product or provision of your service. Obviously, these will be more or less complicated depending on the type of business you’re running.

This step is crucial for the following revenue and costs to be accurate.

• Cost of Sales – This one is closely related to the cost of production and there may be some overlap in these costs such as labor, so separate them as you wish, however, make sure to calculate the cost of distribution; shipping, handling, marketing, etc. it’s possible to combine these assumptions under production and sales for convenience.  
• Cost of Administration – This is a monthly expenditure covering all the outgoings related to your workforce and company maintenance. Payroll needs to be financially covered by any income or capital funding you’re expecting and this includes any bonuses you’re expecting to put out. One key assumption regarding bonuses will be in their timing, should you choose to pay them, and this needs to be factored into projections for costs.
• Pricing – This assumption should be made with detailed research backing it up. Since pricing alone can make or break your company, investors are going to want to see how you came up with your figures here. The costs of sales and production are going to determine your range of pricing options.

To accurately calculate prices, you’re going to need to understand how much value your product or service has to your customers, which is where the key assumptions from the Market section above come in. Pricing needs to match the value of what you’re offering, so this is the opposing force to the production and distribution costs, since it will always be pulling your price down towards its value, while costs of production and distribution will be pushing it up. 

• Sales Forecast – For every different service or product that you’re offering, a sales forecast needs to be calculated. For an accurate sales forecast, you’re going to need to know the desired sales funnel in detail and how long the conversion process will take. These assumptions need to be backed up by your market research.

Further, you’re going to have to make assumptions on when your sales will complete; this means how long banking processes will take, etc. These assumptions will be critical to accurately forecast your profits in your financial plan. 

• Cash Flow – This section will involve numerous key assumptions. Capital will hopefully be flowing into the company from numerous streams, and these need to be calculated well in order to project financial coverage of the aforementioned costs. 

Timings of loan payments, loan repayments, cash equity, and others need to be reliably assumed to make sound predictions in these cases. Interest adjustments or early repayment fees are also things to take into consideration, and if you will be offering customer credit, this will create more complexities to look into in terms of when you’ll see that capital again. 

These are some of the major areas in which financial assumptions are necessary, and their need for accuracy is obvious. An accurate assumption comes down to reliable and robust research and analysis practices, and for these, it’s important to follow the best practices of business planning, and consider expert help where needed. 

Of course, the specifics of these areas and their significance to your company will depend entirely on the type of service, product, business, or market you’re involved with. As such, there’s no standard template, but there are some key practices worth following.

Find Your Industry Specific Projections Template to Help Create Assumptions:

Why There are no one-size-fits-all Financial Assumptions

Startup founders and entrepreneurs need to provide convincing projections of the financial state of the company over the following years to reassure investors that their capital will be returned. They do this by creating robust assessments of their current state and the state of company and market metrics as accurately as possible and factoring them into projection calculations as assumptions.  

The best way to begin building your financial assumptions is to consider them from the perspective of an investor. If you’re looking to put down a significant investment in a project you’re going to want to guarantee your ROI, and to do that, you need to be persuaded of the project’s profitability.

Every company is different, and every market has its own needs and challenges. This is why there’s no strict financial assumptions template to follow, but by following these four basic principles, you’ll be closer to developing more accurate assumptions. 

At the planning stage of a company, the historical financial data simply won’t exist. This reduces the power of the financial assumptions, and even further necessitates their precision. The trouble is, this is a lengthy process. AQPC showed that even financial analysts spend almost half their time collecting and validating data, and they’re experts at it. 

This means you have to expect a grind. If you’re going it alone with this process, make sure to get a handle on your research methods, and which areas to focus on and in the right order. This is a topic for its very own article, but the point is, expect to dedicate and schedule a lot of time for this part of the process.

So we know the research is important, but how do you go about it? For costs of manufacturing, meeting with suppliers is essential to get written quotes for supplies covering any wholesale discounts that might be available. Then, for marketing and distribution, studying your market in depth is crucial to making accurate assumptions about the value of what you’re offering and how much it’ll cost to get it out there. 

Find out exactly where and how to look, and gather the necessary data on all the elements your company needs to be able to predict. From this, you will work on the analysis. 

Outsourcing 

There are definitely ways to go this alone, especially if this relates to a field you’re familiar with, but the option to use outside help shouldn’t be overlooked. ProjectionHub offers a range of services that can help with the financial planning process. From basic projection templates to detailed, expert guidance and tailored forecasting spreadsheets specifically designed for your business, there are a lot of useful options that can help speed up the process and improve your accuracy. 

Demonstration 

Finally, show your workings! If you’ve spent the due time and energy collecting and analyzing the data, it’s not going to matter if you can’t demonstrate how you came to the conclusions you did. Putting in the work is how you get accurate assumptions, but describing your process is how you persuade others to trust them. 

Financial forecasts are the backbone of a business plan for investors. They’re a demonstration that you’ve done your homework and you know what you’re doing, and with bold claims, there comes the need for strong evidence. 

Making assumptions is the key to any projection. Assumptions about change over time, consistency over time, and any other incomings and outgoings that you anticipate as part of the process. The accuracy of these assumptions is what makes or breaks a business plan, as they hold the key to future, long-term investment as well as countless other business choices made by decision-makers. 

If this seems like a daunting task, don’t’ worry. There are countless opportunities to take advantage of expert help with services like ours at  ProjectionHub , which provides templates and expert advice to get you started. 

Accurate assumptions should not be underestimated. Putting in the work at this stage of your financial projections will pay dividends and command great respect from investors. 

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 40,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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What Are the Key Assumptions of a Business Plan?

by Mariel Loveland

Published on 28 May 2019

We make more assumptions in business plans than you might realize. It is, after all, a plan for something you’re going to do, not something that’s already happened. In order to have the most successful business plan, you need to have a few key assumptions that point to certain areas of your business and how it’s going to function. These assumptions attract potential investors, help secure bank loans and help put you on a path to having a profitable venture.

Before making serious decisions about your startup, you must examine the key assumptions in your business plan.

Key Assumptions Definition

In a business plan, a key assumption’s definition is basically the most important who, what, when and how you need to run your business. Every business plan is filled with assumptions. We can’t accurately say whether a business will for sure be profitable or that you’ll be able to pay off your loan in some number of years, but you can make a really educated assumption.

The most important of these assumptions are called key assumptions, and potential investors usually need to see this information before they decide to put in money. Business plan assumptions examples range from financing, consumer base and profitability to management and resources.

Key Assumption 1: Finances

One of the business plan assumptions examples is finances. Do you have the funding to run your company until it becomes profitable? How are you going to pay for all of the expensive things a business requires – this includes office rent, salaries, insurance, products and marketing.

It’s extremely important to include financial projections in your business plan to help convince investors or banks that your company has a realistic path to success. It doesn’t have to be immediate. Companies often take years to turn a profit, and one of the largest mistakes that business owners make is assuming that sales alone will support business operations.

Your business will be most attractive to potential investors if you have enough capital to run until you think you’ll break even. As a key assumption, you should disclose investment figures and loan amounts in your business plan.

Key Assumptions 2: Consumer Base

The key assumptions definition is assumptions that are key (i.e. your business plan is a failure without them). When it comes down to it, nothing is more important to a business than having actual customers. Who are you generating sales from? Are you a "b2b" business (selling to other business) or "b2c" (selling directly to individual customers). Who are the people you’re servicing?

As one of the key assumptions in a business plan, your customer base must be outlined carefully. Yes, a niche business can be successful, but you should really show that there’s enough of a customer base to turn a profit. You should also note the potential to tap into other markets or expand to different types of consumers.

Key Assumptions 3: Need

Your company isn’t worth anything if nobody actually needs what you’re offering. Yes, you might have a certain consumer base, but investors need to know why people will choose your product over others. This is one of the key assumptions in a business plan that might just be the most important of all.

As one of the many business plan assumptions examples, need might require the most research. You’re going to have to look into your competitors – be it locally or nationally – and figure out what makes your product different. Outline the need and how your product fills that hole. If you can’t figure this out, your business will undoubtedly fail.

Key Assumptions 4: Resources

You can’t run a business if you’re short on resources. That’s why this is a key assumption that should be worked into every business plan. You need to make sure you have the resources – whether that’s access to qualified employees or specialized equipment – before securing a loan or funding. No one is going to want to invest in a company that can’t get off the ground.

One of the most dangerous assumptions for potential startup owners is believing you’ll have access to top talent. In reality, that talent might not want to work for you in favor of a fully-funded tech startup with a fat paycheck and some history of proven success. Keep an eye out for talent pools and try to secure some talent before approaching investors.

Key Assumptions 5: Profitability

We might really believe in our products and the value they give our communities and consumer base, but investors really only care about the bottom line: can you turn a profit? Outline this clearly in your business plan. How many months do you think it will take to start becoming profitable. What steps do you have in place to make sure this ultimate goal is realized?

Free Financial Templates for a Business Plan

By Andy Marker | July 29, 2020

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In this article, we’ve rounded up expert-tested financial templates for your business plan, all of which are free to download in Excel, Google Sheets, and PDF formats.

Included on this page, you’ll find the essential financial statement templates, including income statement templates , cash flow statement templates , and balance sheet templates . Plus, we cover the key elements of the financial section of a business plan .

Financial Plan Templates

Download and prepare these financial plan templates to include in your business plan. Use historical data and future projections to produce an overview of the financial health of your organization to support your business plan and gain buy-in from stakeholders

Business Financial Plan Template

Use this financial plan template to organize and prepare the financial section of your business plan. This customizable template has room to provide a financial overview, any important assumptions, key financial indicators and ratios, a break-even analysis, and pro forma financial statements to share key financial data with potential investors.

Download Financial Plan Template

Word | PDF | Smartsheet

Financial Plan Projections Template for Startups

This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business.

‌ Download Startup Financial Projections Template

Excel | Smartsheet

Income Statement Templates for Business Plan

Also called profit and loss statements , these income statement templates will empower you to make critical business decisions by providing insight into your company, as well as illustrating the projected profitability associated with business activities. The numbers prepared in your income statement directly influence the cash flow and balance sheet forecasts.

Pro Forma Income Statement/Profit and Loss Sample

Use this pro forma income statement template to project income and expenses over a three-year time period. Pro forma income statements consider historical or market analysis data to calculate the estimated sales, cost of sales, profits, and more.

‌ Download Pro Forma Income Statement Sample - Excel

Small Business Profit and Loss Statement

Small businesses can use this simple profit and loss statement template to project income and expenses for a specific time period. Enter expected income, cost of goods sold, and business expenses, and the built-in formulas will automatically calculate the net income.

‌ Download Small Business Profit and Loss Template - Excel

3-Year Income Statement Template

Use this income statement template to calculate and assess the profit and loss generated by your business over three years. This template provides room to enter revenue and expenses associated with operating your business and allows you to track performance over time.

Download 3-Year Income Statement Template

For additional resources, including how to use profit and loss statements, visit “ Download Free Profit and Loss Templates .”

Cash Flow Statement Templates for Business Plan

Use these free cash flow statement templates to convey how efficiently your company manages the inflow and outflow of money. Use a cash flow statement to analyze the availability of liquid assets and your company’s ability to grow and sustain itself long term.

Simple Cash Flow Template

Use this basic cash flow template to compare your business cash flows against different time periods. Enter the beginning balance of cash on hand, and then detail itemized cash receipts, payments, costs of goods sold, and expenses. Once you enter those values, the built-in formulas will calculate total cash payments, net cash change, and the month ending cash position.

Download Simple Cash Flow Template

12-Month Cash Flow Forecast Template

Use this cash flow forecast template, also called a pro forma cash flow template, to track and compare expected and actual cash flow outcomes on a monthly and yearly basis. Enter the cash on hand at the beginning of each month, and then add the cash receipts (from customers, issuance of stock, and other operations). Finally, add the cash paid out (purchases made, wage expenses, and other cash outflow). Once you enter those values, the built-in formulas will calculate your cash position for each month with.

‌ Download 12-Month Cash Flow Forecast

3-Year Cash Flow Statement Template Set

Use this cash flow statement template set to analyze the amount of cash your company has compared to its expenses and liabilities. This template set contains a tab to create a monthly cash flow statement, a yearly cash flow statement, and a three-year cash flow statement to track cash flow for the operating, investing, and financing activities of your business.

Download 3-Year Cash Flow Statement Template

For additional information on managing your cash flow, including how to create a cash flow forecast, visit “ Free Cash Flow Statement Templates .”

Balance Sheet Templates for a Business Plan

Use these free balance sheet templates to convey the financial position of your business during a specific time period to potential investors and stakeholders.

Small Business Pro Forma Balance Sheet

Small businesses can use this pro forma balance sheet template to project account balances for assets, liabilities, and equity for a designated period. Established businesses can use this template (and its built-in formulas) to calculate key financial ratios, including working capital.

Download Pro Forma Balance Sheet Template

Monthly and Quarterly Balance Sheet Template

Use this balance sheet template to evaluate your company’s financial health on a monthly, quarterly, and annual basis. You can also use this template to project your financial position for a specified time in the future. Once you complete the balance sheet, you can compare and analyze your assets, liabilities, and equity on a quarter-over-quarter or year-over-year basis.

Download Monthly/Quarterly Balance Sheet Template - Excel

Yearly Balance Sheet Template

Use this balance sheet template to compare your company’s short and long-term assets, liabilities, and equity year-over-year. This template also provides calculations for common financial ratios with built-in formulas, so you can use it to evaluate account balances annually.

Download Yearly Balance Sheet Template - Excel

For more downloadable resources for a wide range of organizations, visit “ Free Balance Sheet Templates .”

Sales Forecast Templates for Business Plan

Sales projections are a fundamental part of a business plan, and should support all other components of your plan, including your market analysis, product offerings, and marketing plan . Use these sales forecast templates to estimate future sales, and ensure the numbers align with the sales numbers provided in your income statement.

Basic Sales Forecast Sample Template

Use this basic forecast template to project the sales of a specific product. Gather historical and industry sales data to generate monthly and yearly estimates of the number of units sold and the price per unit. Then, the pre-built formulas will calculate percentages automatically. You’ll also find details about which months provide the highest sales percentage, and the percentage change in sales month-over-month. 

Download Basic Sales Forecast Sample Template

12-Month Sales Forecast Template for Multiple Products

Use this sales forecast template to project the future sales of a business across multiple products or services over the course of a year. Enter your estimated monthly sales, and the built-in formulas will calculate annual totals. There is also space to record and track year-over-year sales, so you can pinpoint sales trends.

Download 12-Month Sales Forecasting Template for Multiple Products

3-Year Sales Forecast Template for Multiple Products

Use this sales forecast template to estimate the monthly and yearly sales for multiple products over a three-year period. Enter the monthly units sold, unit costs, and unit price. Once you enter those values, built-in formulas will automatically calculate revenue, margin per unit, and gross profit. This template also provides bar charts and line graphs to visually display sales and gross profit year over year.

Download 3-Year Sales Forecast Template - Excel

For a wider selection of resources to project your sales, visit “ Free Sales Forecasting Templates .”

Break-Even Analysis Template for Business Plan

A break-even analysis will help you ascertain the point at which a business, product, or service will become profitable. This analysis uses a calculation to pinpoint the number of service or unit sales you need to make to cover costs and make a profit.

Break-Even Analysis Template

Use this break-even analysis template to calculate the number of sales needed to become profitable. Enter the product's selling price at the top of the template, and then add the fixed and variable costs. Once you enter those values, the built-in formulas will calculate the total variable cost, the contribution margin, and break-even units and sales values.

Download Break-Even Analysis Template

For additional resources, visit, “ Free Financial Planning Templates .”

Business Budget Templates for Business Plan

These business budget templates will help you track costs (e.g., fixed and variable) and expenses (e.g., one-time and recurring) associated with starting and running a business. Having a detailed budget enables you to make sound strategic decisions, and should align with the expense values listed on your income statement.

Startup Budget Template

Use this startup budget template to track estimated and actual costs and expenses for various business categories, including administrative, marketing, labor, and other office costs. There is also room to provide funding estimates from investors, banks, and other sources to get a detailed view of the resources you need to start and operate your business.

Download Startup Budget Template

Small Business Budget Template

This business budget template is ideal for small businesses that want to record estimated revenue and expenditures on a monthly and yearly basis. This customizable template comes with a tab to list income, expenses, and a cash flow recording to track cash transactions and balances.

Download Small Business Budget Template

Professional Business Budget Template

Established organizations will appreciate this customizable business budget template, which  contains a separate tab to track projected business expenses, actual business expenses, variances, and an expense analysis. Once you enter projected and actual expenses, the built-in formulas will automatically calculate expense variances and populate the included visual charts. 

‌ Download Professional Business Budget Template

For additional resources to plan and track your business costs and expenses, visit “ Free Business Budget Templates for Any Company .”

Other Financial Templates for Business Plan

In this section, you’ll find additional financial templates that you may want to include as part of your larger business plan.

Startup Funding Requirements Template

This simple startup funding requirements template is useful for startups and small businesses that require funding to get business off the ground. The numbers generated in this template should align with those in your financial projections, and should detail the allocation of acquired capital to various startup expenses.

Download Startup Funding Requirements Template - Excel

Personnel Plan Template

Use this customizable personnel plan template to map out the current and future staff needed to get — and keep — the business running. This information belongs in the personnel section of a business plan, and details the job title, amount of pay, and hiring timeline for each position. This template calculates the monthly and yearly expenses associated with each role using built-in formulas. Additionally, you can add an organizational chart to provide a visual overview of the company’s structure. 

Download Personnel Plan Template - Excel

Elements of the Financial Section of a Business Plan

Whether your organization is a startup, a small business, or an enterprise, the financial plan is the cornerstone of any business plan. The financial section should demonstrate the feasibility and profitability of your idea and should support all other aspects of the business plan. 

Below, you’ll find a quick overview of the components of a solid financial plan.

• Financial Overview: This section provides a brief summary of the financial section, and includes key takeaways of the financial statements. If you prefer, you can also add a brief description of each statement in the respective statement’s section.
• Key Assumptions: This component details the basis for your financial projections, including tax and interest rates, economic climate, and other critical, underlying factors.
• Break-Even Analysis: This calculation helps establish the selling price of a product or service, and determines when a product or service should become profitable.
• Pro Forma Income Statement: Also known as a profit and loss statement, this section details the sales, cost of sales, profitability, and other vital financial information to stakeholders.
• Pro Forma Cash Flow Statement: This area outlines the projected cash inflows and outflows the business expects to generate from operating, financing, and investing activities during a specific timeframe.
• Pro Forma Balance Sheet: This document conveys how your business plans to manage assets, including receivables and inventory.
• Key Financial Indicators and Ratios: In this section, highlight key financial indicators and ratios extracted from financial statements that bankers, analysts, and investors can use to evaluate the financial health and position of your business.

Need help putting together the rest of your business plan? Check out our free simple business plan templates to get started. You can learn how to write a successful simple business plan  here . 

Visit this  free non-profit business plan template roundup  or download a  fill-in-the-blank business plan template  to make things easy. If you are looking for a business plan template by file type, visit our pages dedicated specifically to  Microsoft Excel ,  Microsoft Word , and  Adobe PDF  business plan templates. Read our articles offering  startup business plan templates  or  free 30-60-90-day business plan templates  to find more tailored options.

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How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

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How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

• Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
• Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
• Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
• Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
• Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
• Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

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Business Plan Assumptions

Financial projections business plan assumptions.

All financial projections are based on business plan assumptions. Listed below is a selection of the most important assumptions which need to be considered and decided upon when using the Financial Projections Template to produce the financials section of your business plan.

Business Plan Assumptions List

Inflation rates and foreign exchange rates, sales and marketing, cash collection, distribution, research and development, fixed assets, gross margin, operating expenses, depreciation.

You need to prepare a business plan assumptions sheet as part of your plan, however, the important point to remember is that the assumptions should be kept simple and to a minimum, to avoid over complicating the financial projection. Remember this is planning not accounting. The calculation of key assumptions is further discussed in our financial projection assumptions post.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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The Snowball Effect of Financial Assumptions

Joe Garafalo

Founder and COO

The way you manage financial assumptions could make or break your business. Your financial assumptions are the levers you pull to project how strategic finance plans will impact revenue, expenses and cash flow forecasts . They’re the bedrock of financial planning that drives growth and efficient operations.

But staying in control of key assumptions as they evolve in volume and complexity is easier said than done.

Entrepreneurs can’t afford to let financial assumptions snowball out of control. Take a more agile approach to financial planning to make your forecasting more flexible and scalable.

Table of Contents

How Financial Assumptions Snowball Out of Control

Financial assumptions snowball out of control when they’re overly complex and intertwined. You might be able to get away with creating financial models with granular assumptions at a small business or early-stage startup. But over time and as a company grows, hyper-specific assumptions become unwieldy and ruin financial forecasts. Assumptions tied to 3 or 4 different dependencies may sound sophisticated but often lead to false precision.

Take assumptions about travel expenses as an example. With a granular approach, you might decide to base your travel expense assumption on historical financial data for every employee. You start building the financial model with assumptions like “Employee 1 will spend $X per month on travel,” “Employee 2 will spend $Y per month on travel,” and so on until you’ve accounted for all of your staff.

But unless you only have a handful of employees, you’ll have to manage a massive amount of transaction data to maintain those assumptions at the individual level. Any time you wanted to update the financial model after the initial setup, you’d have to pull new data for every employee and get stuck in Excel for hours reworking one small piece of a much larger model.

Overly precise financial assumptions just don’t scale.

Multiply that one example by dozens or even hundreds of assumptions across the 50+ spreadsheets that house all your different financial models, and it’s easy to see how it can all snowball out of control.

And yet, many finance leaders continue to take the granular approach to financial assumptions. Why? Because it seems to create the most accurate representation of how the business operates.

But your business is constantly evolving. When those financial assumptions no longer accurately represent the business one, three, six, or twelve months down the road, you’re left with two options—rebuild the entire financial model from scratch or waste countless hours in Excel hell trying to update existing spreadsheets.

Neither option gives you the right level of flexibility to change financial assumptions. So, when the C-suite or your board asks you a question, you can’t actually give them an answer. They might think the question was fairly simple. But the reality is that tweaking the financial model could take you hours or days—and by then, your answer to the question may not even be relevant anymore.

How to Make Key Assumptions for Scalable, Dynamic Financial Projections

There are two things you need to do to make financial assumptions that support more scalable, dynamic financial projections . First, you need to deeply understand your business, including how it’s currently operating and what its strategic plans are. And second, you need to identify the right level of sophistication for individual assumptions.

Great models start with great collaboration. Start your planning processes off right.

These tasks might sound basic. But there’s no one-size-fits-all answer to what financial assumptions you should add to your models. They’ll be different for every business. And it’s your job as the finance lead to build the model that represents the business—not just in a way that you can understand, but in a way that helps business stakeholders truly understand financial data.

Creating sustainable, dynamic financial projections is all about marrying intuition with data in your key assumptions. When you strike the right balance, you’ll be able to give your CEO a roadmap for running the business better.

Take the Time to Collaborate and Understand Your Business

The only way you can create a model that represents the business is to step out from behind the spreadsheets and collaborate deeply with your stakeholders. Even though you have full control over which assumptions to put into the model, the only way they’ll be valuable to anyone in the business is if business leaders can understand the financial data.

According to Kalor Lewis , VP of Finance at Fivetran, “building an effective financial model requires a really strong bottom-up understanding of the business . . . You need to know what the sales capacity model looks like, how the marketing team spends its budget, and how the company makes money. Getting that understanding requires deep collaboration with leaders across the company.”

Your business leaders don’t want to get bogged down in financial statements. The cash flow statement, the income statement, accounts payable and accounts receivable data in the balance sheet, tax rates—they’re all critical to building your financial model. But it’s your job to go beyond the financial statements and look through the lens of what matters to the business.

“Building an effective financial model requires a really strong bottom-up understanding of the business . . . Getting that understanding requires deep collaboration with leaders across the company.”

Think of your financial assumptions as the levers business leaders can use to forecast the financial performance of your business plan and answer strategic questions. They care most about answering questions like:

• How can we drive more revenue growth?
• How do we create a faster path to profitability?
• How will strategic plans impact gross profit and gross margins?
• How do our operating expense projections impact how much working capital we will need?

Model your assumptions with a clear focus on answering strategic business questions like these and others that you find are most important to your stakeholders.

Find the Right Level of Sophistication for Your Assumptions

Instead of getting the most granular data possible for your financial assumptions, focus on finding the right level of sophistication for them. That means finding the point of “good enough.” Strike a balance between accounting for 80% or 90% of expenses with maintaining the flexibility to change assumptions quickly.

Grouping expenses is the best way to strike a balance between granular financial data and financial model flexibility.

Start by rolling up as many related expenses as possible into your financial assumptions for headcount planning . This category will account for as much as 70% to 80% of total expenses for a SaaS startup. Do you really need vendor-level assumptions for every GL account, such as software licenses or office expenses? Probably not, because managing these will get unwieldy as your business scales. Simplify your model by grouping these expenses into a broader headcount category and assigning a per employee expense assumption.

Then, pull out your biggest drivers of spend in each category and get granular on things that move the needle. For example, you might find there are certain aspects of your cost of sales that require a dedicated assumption in your financial model. You might need granular insight into large hosting costs from Amazon Web Services (AWS). But maybe you could simplify the model with a three-month or six-month average for generic software licenses. We’re not saying you should ignore the detail of who you’re actually spending money with, but you don’t need a bespoke, manually updated forecast for every single vendor within your business.

Grouping expenses keeps you from getting overly precise with your financial assumptions. The simpler you keep the model (without losing accuracy), the easier it will be to run dynamic forecasts that empower business leaders.

Build Financial Forecasts & Models with Real-Time Data

Take an Agile Approach to Financial Forecasting and Planning

Your financial assumptions should be so flexible that you’re able to take an agile approach to financial planning and forecasting. That means getting out of the familiar monthly or quarterly cycle of going into your financial model, running a budget variance analysis , figuring out where your forecast went wrong, and spending hours updating assumptions.

But the only way to break that cycle is to stop relying on Excel to build your models. A tool like Mosaic can help.

Mosaic Planning is financial modeling software that connects to all of your underlying business systems to collect financial analytics data in real-time. And it’s preloaded with best-practice financial modeling, driver-based planning , and forecasting methodologies. This combination eliminates the back-office Excel work that financial analysts would have to do to keep models and rolling forecasts up to date.

With Mosaic, you no longer have to worry about whether or not you’ve made your financial assumptions too granular. You can model different scenarios quickly—and, as you can see in this image, visualize them in a way that your business leaders will actually understand.

Scenario planning in Mosaic

With Mosaic’s financial forecasting software , you can forecast new scenarios in just a few clicks and provide real-time answers to strategic questions from your C-suite or board members.

If your CEO wants to see travel expenses broken down by department, you can do that with a quick filter. If a board member wants to see how a more aggressive hiring plan for the sales team impacts runway, you can quickly visualize the financial data with an expense and cash flow analysis . The image below shows how simple it is to update financial assumptions and forecasts with Mosaic.

The process in this picture might take an analyst a few hours of work in an Excel spreadsheet. And that’s just one of 50+ analyses they have to do to keep the forecast up to date.

Modern CFOs and other finance leaders don’t need to power through the snowball effect of financial assumptions anymore. Get a personalized demo of Mosaic today and learn how you can take a more agile, continuous approach to your financial planning.

Financial Assumption FAQs

What are financial assumptions.

Financial assumptions are hypotheses you make about your financial future while conducting business forecasting. They are the foundation of developing a business plan. CFOs and finance teams may make financial assumptions regarding the impact on sales volume, revenue, liabilities, cash flows, and other financial benchmarks to ensure efficient operations and drive business growth.

What are examples of financial assumptions?

Financial assumptions can include forecasts on new business based on historical data, predictions of long-term debt and amortization following business growth, and other estimates informed by financial reports on line items. Say, for example, your historical data shows that Account Executives at your company each close about $30K in new MRR on average per month. Based on that historical data, you may assume that next year, you could see a $60K increase in new MRR closed each month if you hire and onboard two new Account Executives before the end of this year.

How do you make financial assumptions?

Financial assumptions should be based on rigorous data while being flexible to account for fluctuations. It is important to examine past assumptions and how they compare to actual results to determine overall accuracy. This allows for more agile forecasting and financial planning.

Continue reading...

The dangers of one-size-fits-all saas financial modeling templates (and how to create the best one for your business), revenue forecasting guide: 4 models for planning your top line, the latest mosaic insights, straight to your inbox, own the   of your business..

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Financial Modeling Assumptions

By Victoria Collin |

 Reviewed By Gerard Kelly |

October 12, 2021

What are “Financial Modeling Assumptions”?  

Financial modeling assumptions form one of the four components in the forecasting process within the realm of financial modeling – which is used to project or forecast a company’s financial performance over a specific period of time (eg. 5 years, 10 years, etc.). These assumptions play a pivotal or central role in forecasting financial data , as the forecasts are based on these assumptions. For example, if historical revenue has gone up 10% every historical year, the assumption can be for this to continue (at 10%) into the forecasting period. Therefore, based on assumptions, if year 0 (historical period) revenue was US$100, this year’s forecast revenue would be US$110. 

The four components of the forecasting process are: 

• Inputting publicly available or private company historical data 
• Constructing ratios and statistics on this historical data  
• Creating assumptions for future performance based on the historical performance 
• Forecasting financial data based on the assumptions

The forecasting process necessitates the preparation of the company’s financial statements – balance sheet , income statement , and cash flow statements , based on financial modeling assumptions.

Key Learning Points  

• Financial modeling assumptions refer to the creation of assumptions about a company’s future growth based on analyzing its historical performance
• The set of assumptions made about future business conditions drive the forecasts of a company’s financial statements and is the basis of building a financial model
• The financial modeler has design choices to make while constructing a financial model and the forward assumptions which drive the model output

Future Assumptions – Salient Features

Modeling assumptions dictate the forecast figures in a financial model. The assumptions will decide the forecasts of a company’s balance sheet, cash flows, and income statement, for example, forecasts of line items such as revenues and costs. 

Further, financial modeling assumptions such as earnings and cash flows must be forecast carefully into the future, as the outlook for these items are important determinants of share price.

Where Do Assumptions Come From?

So, how do we come up with assumptions figures? Historical figures are an important first step. If we see the historical sales going up by 5% in every historical period, we may assume that the future sales in the forecast period will also go up by 5%. If last year’s sales were 100, forward sales would be 105. Our forecast assumption would be 5%. However, assumptions can include sales growing faster or slower than the previous year.

The other place to look for future assumptions is within industry research in case there are any factors that may have a positive or negative impact on this company. Our initial 5% assumption for the future sales growth may be increased to reflect strong economic conditions.

Assumption Design Choices

The financial modeler has several design choices to make when constructing a model – how many excel sheets to use, where to put the model assumptions, and how to format the numbers. 

The first design choice is where to put the assumptions figures. The first option is to put all of the assumptions in one place in the model i.e. they are ‘blocked’ together. This would mean that the assumptions regarding revenue growth, operating costs, taxes rate, etc are all together. Blocked assumptions are important in large models – and often mean having them all in one tab.

A second option is to have the assumptions spread throughout the output or model. These are called “threaded” assumptions. For example, if you have the revenue growth assumption (say 3%), you would then have the output revenue in the row above or below the assumption – so you have the driver (3%) and the output (forecast revenue) together. The benefit here is that having both together means that we can see what is driving the output, and can spot errors more easily.

Financial modeling assumptions should always be explicitly documented in a model so that a user can see them easily and then change them when required. It is best modeling practice to put the assumption in its own cell, which is then linked to when building the forecast data. This means that the output can be changed simply by amending the content of the assumption cell (for example sales growth changing from 4% to 5%). It is never appropriate to embed the assumption in the output formula. Doing this means that the driver is invisible and cannot be changed without adjusting formulas.

Formatting Assumptions

Now that the assumptions are hard-coded in their own cell, they need to be formatted as assumptions. The font color is changed from black to blue, and the background fill color is changed from white to pale blue. See the screenshots below.

Assumptions are formatted differently to historical numbers. Historical numbers are facts and are formatted with just a blue font, no background color. Whereas assumptions are only estimates which may change – they are facts. These have a blue font with a pale blue background.

Assumptions Placed Near Historical Numbers

Many financial modelers will position the forecast assumption and the equivalent historical ratio next to each other, so that it is easy to see how the ratio changes over time, and so the forecast assumptions can be seen to be in line with the historical number. This is a sense check and is an important part of building an error free model . Any variation in this trend should be adequately explained with a well-documented comment. 

Historical Ratios and Forecast Assumptions – Generating Assumptions From Historical Data Example

Below, we see two years of actual historical data and 5 years of estimated forecast assumptions in Year 1 – Year 5. We can see that in the historical period for Year -1 and Year 0, annual revenue growth was 6.2% and 6.6% respectively. Looking at this historical data helps us to understand the business in the past and consider where it is likely going in the future. As revenue has grown by 6.2% and 6.6% in the past, the modeler may think it reasonable to assume growth of 6.5% in the first projected year, and then slightly lower growth of 5% and 4% after that.

We can use the historical figures to come up with the forecast assumptions as well as using additional research for this purpose such as information from the company’s management or our own opinion. The revenue growth assumptions are laid out below. These forward assumptions will drive the forecast model for 5 years into the future. Notice how the formatting of the assumptions in the projected years is different to the historical hard-coded numbers.

Forecast Model – Income Statement and Balance Sheet 

In the free download is a template file where you can build an income statement and balance sheet using assumptions.  Historical figures are also given, from which historical ratios and statistics are calculated. These historical ratios help in coming up with the forecast assumptions in forecast periods 1 to 3. 

The example below shows the template file. Notice the formatting, and how it is slightly different to the previous example above. Below, the historical ratios are not hard-coded inputs. Instead they are calculated from the historical numbers. So the historical ratios have a black font color to indicate they are calculations, and instead it is the historical figures e.g. Revenues, that are blue font as they are the hard-coded numbers in this model. The assumptions remain the same as the previous example, with blue font and blue background to indicate they are hard-coded estimates rather than historical facts.

For the forecast process, we first have the historical data, then ratios calculated using the historical data, which gives us suggested numbers for the forecast assumptions and ultimately our financial forecasts.  

Other steps to do at the beginning of a model include calculating historical subtotals. Calculations are needed for:

• Historical net income (revenues minus costs)
• Historical total assets (cash + inventories) 
• Historical total liabilities, and total liabilities plus equity 
• A balance check to ensure that total liabilities + equity – total assets = 0

Notice in the example below that the subtotals are black font color, to indicate they are calculations rather than hard-coded numbers.

With the historical subtotal done, next we move onto the forecast period, using the assumptions. To calculate the revenues for the forecast period we will grow the last historical year’s revenue with the revenue growth assumption (5%). For costs, the assumption is 85% of revenues (i.e. 85% of US$110.3 revenue). We can then calculate the net income for the forecast period.

Moving down to the balance sheet, the cash assumption is already given. For the calculation of inventories for the forecast period, we use the inventories as a % of costs (13%) assumption and multiply it by the costs in the forecast year (period 1 to 3). Thereafter, adding cash and inventories, we get the total assets for the projected years.

To arrive at total liabilities, we compute long-term debt for the forecast period, using the long-term debt change assumption (0%) i.e. no change from last year in the first projected year. There is no specific assumption for equity. So, we take the net income from the income statement and add it to last year’s equity (i.e. US$16.5 + US$14 = US$30.5) which assumes that all net income is retained by the company, and not paid out as a dividend. We see that the balance sheet balances. 

Learn how to build financial models with our financial modeling course – The Modeler .

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• Business Plans

Questioning Key Assumptions in Your Business Plan

Asking the hard questions now will save you time and money in the future

Amanda McCormick is an entrepreneur, marketing consultant, and content strategist who has worked with arts and government organizations, including the New York City Ballet. She is the co-founder of a small marketing agency focused on arts and media companies.

Is There a Need for Your Product or Service?

Is there a significant customer base, can your business turn a profit, are you the right person to run your business, is your business funded appropriately, the swot analysis, frequently asked questions (faqs).

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Constructing a business plan is all about looking at and confronting assumptions. Consider the five following key assumptions, and you'll have a business plan—and future—in which you can be confident.

Key Takeaways

• A business plan is a document that helps a business communicate and organize its plans and strategies for the future.
• Sufficient market research is perhaps the most important part of starting a business.
• A SWOT analysis clarifies the business' strengths, weaknesses, opportunities, and threats.
• Asking yourself if you have the expertise to run all aspects of the business and whether or not you have sufficient capital is also important.

It's an obvious question, but many entrepreneurs overlook it. Knowing that there's a need for your product is different than having a hunch or a feeling. How do you know the difference? You do the research to find out. First, look at the competition. Are there others who have a similar offering and are they profitable?

Maybe you are breaking new ground -- that's no excuse for saying "there is no competition." Look around for evidence that your proposed business fulfills a concrete need. Without evidence to validate the need for your business, your business plan will fail.

As of December 2021, there were 32,540,953 million small businesses in the U.S.

The second assumption that's important to look at in your business planning preparation is whether or not there is a significant customer base for the business you are proposing. It can be a highly subjective question, as there are a number of successful niche businesses that serve small markets quite profitably. You are well-served to look at the concrete size of a potential market and to assign real dollar values to its potential.

Once you can decide that A) there is a need for your business and B) there is a sizable market for it, you are on solid ground to establish your business's potential profitability. But don't pluck numbers from the air.

You'll need to figure out what your startup costs are, as well as ongoing business-related expenses. You'll need to figure out a pricing structure that your customers will pay and will generate enough cash flow to keep the business running. After generating a set of realistic financial projections, you'll have a solid picture of your business' profit potential.

You believe in your business. You eat, sleep, and breathe it. But you're still going to have to make the case why you are uniquely qualified to start and run the business. As CEO, you'll also need to demonstrate the ability to delegate and find employees to complement your weaker points. First, know yourself, and second, be able to find the right people to bring into your management structure.

Financial projections are the place in the business plan that investors will flip to first. They want to know if you can understand the financial bottom line of running a business, or if your vision is unrealistic. Demonstrate in your business plan that you have a realistic startup budget, and you don't expect revenue to pour in within the first few months magically. Show that you have sufficient capitalization to run the business to break even.

Lack of sufficient capital is cited again and again as one of the top reasons why businesses fail.

A SWOT analysis , which stands for Strengths, Weaknesses, Opportunities, and Threats and is a popular strategic framework for business planners, is a great tool for questioning assumptions. The first two items refer to qualities that are internal to the business. The second two items are external factors. Consider the following in questioning your assumptions in writing a business plan around your fledgling operation:

• What does this company do well?
• What are our assets?
• What expert or specialized knowledge does the company have?
• What advantages do we have over competitors?
• What makes us unique?
• What resources do we lack?
• Where can we improve?
• What parts of the business are not profitable?
• What costs us the most time and money?

Opportunities

• What has the competition missed?
• What are the emerging needs of the customer?
• How can we use technology to cut costs and enhance reach?
• Are there new market segments to exploit?
• What are our competitors doing well?
• How do larger forces in the economy affecting our business?
• What is happening in the industry?

What is a SWOT analysis?

A SWOT analysis is a popular strategic framework used by business owners. It is performed throughout a business' existence and asks about its Strengths, Weaknesses, Opportunities, and Threats.

What percent of businesses fail within the first year?

According to data from the Bureau of Labor Statistics, around 1 in 5 (18.4%) of businesses fail within the first year and nearly half (49.7%) fail in the first five years.

Small Business Association. " Frequently Asked Questions ."

Small Business Association. " Selecting a Business That Fits ."

Bureau of Labor Statistics. " Survival of Private Sector Establishments by Opening Year ."

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 Planning

Business Plan Financial Projections

Written by Dave Lavinsky

Financial projections are forecasted analyses of your business’ future that include income statements, balance sheets and cash flow statements. We have found them to be an crucial part of your business plan for the following reasons:

• They can help prove or disprove the viability of your business idea. For example, if your initial projections show your company will never make a sizable profit, your venture might not be feasible. Or, in such a case, you might figure out ways to raise prices, enter new markets, or streamline operations to make it profitable. 
• Financial projections give investors and lenders an idea of how well your business is likely to do in the future. They can give lenders the confidence that you’ll be able to comfortably repay their loan with interest. And for equity investors, your projections can give them faith that you’ll earn them a solid return on investment. In both cases, your projections can help you secure the funding you need to launch or grow your business.
• Financial projections help you track your progress over time and ensure your business is on track to meet its goals. For example, if your financial projections show you should generate $500,000 in sales during the year, but you are not on track to accomplish that, you’ll know you need to take corrective action to achieve your goal.

Below you’ll learn more about the key components of financial projections and how to complete and include them in your business plan.

What Are Business Plan Financial Projections?

Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:

1. Income Statement Projection

The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

There are a few key items you will need to include in your projection:

• Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
• Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.

Sample Income Statement

2. Cash Flow Statement & Projection

The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.

There are a few key items you will need to include in your cash flow projection:

• The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
• Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
• It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.

Sample Cash Flow Statements

3. Balance Sheet Projection

The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.

A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.

It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.

Sample Balance Sheet

How to Create Financial Projections

Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.  

Cost Assumptions

When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.

It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.

Capital Expenditures, Funding, Tax, and Balance Sheet Items

You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.

Capital Expenditures

When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.

When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.

When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.

Balance Sheet Items

When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.

Financial Projection Scenarios

Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.

Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.

Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.

Conduct a Ratio Analysis

A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.

There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:

• Gross margin ratio
• Operating margin ratio
• Return on assets (ROA)
• Return on equity (ROE)

To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.

Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.

Be Realistic

When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.

Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.

Sales Forecast

One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.

Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.

Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.

Create Multi-Year Financial Projections

When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.

It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.

Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.

Business Plan Financial Projections FAQs

What is a business plan financial projection.

A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.

What are annual income statements? 

The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.

What are the necessary financial statements?

The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.

How do I create financial projections?

You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.

Simple Business Plan Template for Startups, Small Businesses & Entrepreneurs

Financial plan, what is a financial plan.

A business’ financial plan is the part of your business plan that details how your company will achieve its financial goals. It includes information on your company’s projected income, expenses, and cash flow in the form of a 5-Year Income Statement, Balance Sheet and Cash Flow Statement. The plan should also detail how much funding your company needs and the key uses of these funds.

The financial plan is an important part of the business plan, as it provides a framework for making financial decisions. It can be used to track progress and make adjustments as needed.

Why Your Financial Plan is Important

The financial section of your business plan details the financial implications of running your company. It is important for the following two reasons:

Making Informed Decisions

A financial plan provides a framework for making decisions about how to use your money. It can help you determine whether or not you can afford to make a major purchase, such as a new piece of equipment.

It can also help you decide how much money to reinvest in your business, and how much to save for paying taxes.

A financial plan is like a roadmap for your business. It can help you track your progress and make adjustments as needed. The plan can also help you identify potential problems before they arise.

For example, if your sales are below your projections, you may need to adjust your budget accordingly.

Your financial plan helps you understand how much outside funding is required, when your levels of cash might fall low, and what sales and other goals you need to hit to become financially viable.

Securing Funding

This section of your plan is absolutely critical if you are trying to secure funding. Your financial plan should include information on your revenue, expenses, and cash flow.

This information will help potential investors or lenders understand your business’s financial situation and decide whether or not to provide funding.

Include a detailed description of how you plan to use the funds you are requesting. For example, what are the key uses of the funds (e.g., purchasing equipment, paying staff, etc.) and what are the future timings of these financial outlays.

The financial information in your business plan should be realistic and accurate. Do not overstate your projected revenues or underestimate your expenses. This can lead to problems down the road.

Potential investors and lenders will be very interested in your future projections since it indicates whether you will be able to repay your loans and/or provide a nice return on investment (ROI) upon exit.

Financial Plan Template: 4 Components to Include in Your Financial Plan

The financial section of a business plan should have the following four sub-sections:

Revenue Model

Here you will detail how your company generates revenues. Oftentimes this is very straightforward, for instance, if you sell products. Other times, your answer might be more complex, such as if you’re selling subscriptions (particularly at different price/service levels) or if you are selling multiple products and services.

Financial Overview & Highlights

In developing your financial plan, you need to create full financial forecasts including the following financial statements.

5-Year Income Statement / Profit and Loss Statement

An income statement, also known as a profit and loss statement (P&L), shows how much revenue your business has generated over a specific period of time, and how much of that revenue has turned into profits. The statement includes your company’s revenues and expenses for a given time period, such as a month, quarter, or year. It can also show your company’s net income, which is the amount of money your company has made after all expenses have been paid.

5-Year Balance Sheet

A balance sheet shows a company’s financial position at a specific point in time. The balance sheet lists a company’s assets (what it owns), its liabilities (what it owes), and its equity (the difference between its assets and its liabilities).

The balance sheet is important because it shows a company’s financial health at a specific point in time. A strong balance sheet indicates that a company has the resources it needs to grow and expand. A weak balance sheet, on the other hand, may indicate that a company is struggling to pay its bills and may be at risk of bankruptcy.

5-Year Cash Flow Statement

A cash flow statement shows how much cash a company has on hand, as well as how much cash it is generating (or losing) over a specific period of time. The statement includes both operating and non-operating activities, such as revenue from sales, expenses, investing activities, and financing activities.

While your full financial projections will go in your Appendix, highlights of your financial projections will go in the Financial Plan section.

These highlights include your Total Revenue, Direct Expenses, Gross Profit, Other Expenses, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), and Net Income projections. Also include key assumptions used in creating these future projections such as revenue and cost growth rates.

Funding Requirements/Use of Funds

In this section, you will detail how much outside funding you require, if any, and the core uses of these funds.

For example, detail how much of the funding you need for:

• Product Development
• Product Manufacturing
• Rent or Office/Building Build-Out

Exit Strategy

If you are seeking equity capital, you need to explain your “exit strategy” here or how investors will “cash out” from their investment.

To add credibility to your exit strategy, conduct market research. Specifically, find other companies in your market who have exited in the past few years. Mention how they exited and the amounts of the exit (e.g., XYZ Corp. bought ABC Corp. for $Y).  

Business Plan Financial Plan FAQs

What is a financial plan template, how can i download a financial plan template, how do you make realistic assumptions in your business plan.

When forecasting your company’s future, you need to make realistic assumptions. Conduct market research and speak with industry experts to get a better idea of the key trends affecting your business and realistic growth rates.

You should also use historical data to help inform your projections. For example, if you are launching a new product, use past sales data to estimate how many units you might sell in Year 1, Year 2, etc.

Learn more about how to make the appropriate financial assumptions for your business plan.

How Do You Make the Proper Financial Projections for Your Business Plan?

Your business plan’s financial projections should be based on your business model and your market research. The goal is to make as realistic and achievable projections as possible.

To create a good financial projection, you need to understand your revenue model and your target market. Once you have this information, you can develop assumptions around revenue growth, cost of goods sold, margins, expenses, and other key metrics.

Once you have your assumptions set, you can plug them into a financial model to generate your projections.

Learn more about how to make the proper financial projections for your business plan.

What Financials Should Be Included in a Business Plan?

There are a few key financials that should be included in a traditional business plan format. These include the Income Statement, Balance Sheet, and Cash Flow Statement.

Income Statements, also called Profit and Loss Statements, will show your company’s expected income and expense projections over a specific period of time (usually 1 year, 3 years, or 5 years). Balance Sheets will show your company’s assets, liabilities, and equity at a specific point in time. Cash Flow Statements will show how much cash your company has generated and used over a specific period of time.

BUSINESS PLAN TEMPLATE OUTLINE

• Business Plan Template Home
• 1. Executive Summary
• 2. Company Overview
• 3. Industry Analysis
• 4. Customer Analysis
• 5. Competitive Analysis
• 6. Marketing Plan
• 7. Operations Plan
• 8. Management Team
• 9. Financial Plan
• 10. Appendix
• Business Plan Summary

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Financial modeling spreadsheets and templates in Excel & Google Sheets

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How to Make Assumptions in Financial Modeling: Strategies for Everyday Use

Making assumptions in financial modeling involves establishing reasoned hypotheses based on historical data and industry trends. These educated guesses impact revenue, cost projections, and overall forecasts.

Financial modeling stands as a pivotal tool in business strategy and investment appraisals, often driving crucial decisions. Crafting a robust financial model entails integrating assumptions that are clear, justified, and appropriately conservative to steer through uncertainties inherent in predicting future financial performance.

Accurate financial assumptions streamline the decision-making process and arm stakeholders with the insights needed to mitigate risks and maximize opportunities. In the following guide, I will dissect how to refine this skill, ensuring that your financial models align closely with potential business realities while remaining adaptable to ever-evolving market dynamics.

The Role Of Assumptions In Financial Modeling

The Role of Assumptions in Financial Modeling is pivotal for realistic and reliable projections. Financial models forecast future financial performance. Assumptions guide these forecasts. They are educated guesses about future events. Without assumptions, financial models cannot predict what lies ahead. Properly managed, they bridge the gap between mere speculation and informed forecasting.

Balancing Accuracy And Practicality

Creating a financial model involves a delicate balance. You want it to be accurate. Yet, it must also be practical. Achieving this balance is a skill. It requires understanding your model’s purpose and the data you have. You base your assumptions on these elements. Too many details can make your model complex. Too few can make it vague. Aim for a middle ground where assumptions are realistically simplifying the future.

Assumptions As The Backbone Of Projections

Think of assumptions as the skeleton of your financial model. They support everything else. Without strong assumptions, your model may fall apart. Consider future sales, costs, and market trends. These rely on assumptions you set. Base them on past data, industry standards, or expected changes. This way, they provide a strong foundation for your projections. Remember, good assumptions lead to good decisions.

Types Of Assumptions In Financial Models

Understanding the types of assumptions in financial models is crucial. These assumptions guide decisions and forecasts in the world of finance. They form the foundation for predicting future financial performance. Let’s dive into the different types of assumptions you will encounter.

Revenue Growth And Cost Projections

Revenue growth and cost projections are the lifeblood of any financial model. They are predictions about future earnings and expenses.

• Revenue projections consider past trends and future expectations.
• Cost assumptions evaluate both fixed and variable expenses.

Companies often use historical data to estimate future revenues. They examine past sales patterns. They incorporate new information such as product launches.

For costs, both current and future market conditions are vital. Prices of materials and labor can change. Understanding these elements is critical for accurate cost projections.

Market Trends And Economic Factors

Market trends and economic factors play a significant role in financial modeling.

Models must adapt to shifting market dynamics. They also must predict how these trends will affect future performance.

Similarly, economic indicators like inflation and GDP growth are key. They help in understanding the broader economic landscape. This understanding is essential to model future financial outcomes accurately.

Strategies For Developing Realistic Assumptions

Realistic assumptions anchor the credibility of any financial model. While crystal balls don’t exist, certain strategies help us forecast sensibly. These approaches rely on concrete data and informed predictions. They balance ambition and caution, weaving the future from threads of the known.

Using Historical Data As A Guide

The past often predicts the future. Historical data offers a window into trends, patterns, and business cycles. It captures the essence of past performance. This allows us to extrapolate future outcomes with greater accuracy.

Start by collecting relevant data points. Look at sales figures, growth rates , and market fluctuations . Remember, conditions do change. Adjust this data to account for new variables or shifts in the market.

Incorporating Industry Expert Opinions

Why not tap into the minds that sculpt industries? Expert opinions can enhance the robustness of your assumptions. Their insights fill gaps that raw data can’t cover. They also provide a qualitative aspect to your predictions.

Reaching out to professionals, attending panels, and reading authoritative publications are great ways to gather this valuable feedback. But remember to vet your sources rigorously . Balanced views mitigate the risk of bias.

Key Takeaways

• Analyze historical records to forecast with precision.
• Balance statistical data with qualitative insights from experts.
• Ensure your sources are credible to strengthen your model’s foundation.

Common Pitfalls To Avoid When Making Assumptions

Common Pitfalls to Avoid When Making Assumptions in financial modeling can lead to inaccurate predictions and poor decision-making. This section delves into several typical missteps and how to navigate around them. By recognizing these pitfalls, financial modelers can enhance the reliability of their analyses.

Overly Optimistic Or Pessimistic Scenarios

Striking a balance between optimism and pessimism is crucial in assumption-making. Overly rosy outlooks can mislead stakeholders with undelivered promises. On the flip side, excessively bleak scenarios might hinder potential growth opportunities. Consider these strategies:

• Past performance analysis: Refer to historical data to set realistic expectations.
• Market trends: Align assumptions with current industry trajectories.
• Expert consultations: Gather insights from seasoned professionals.

Ignoring Black Swan Events

Black swan events, or highly improbable occurrences with severe consequences, pose significant risks. They may be rare, but their impact can be devastating. Ensuring models account for such events is vital:

• Integrate stress test scenarios: Analyze the model’s resilience to extreme conditions.
• Set aside contingency reserves: Prepare for unexpected financial hits.
• Adopt flexible strategies: Structure models to rapidly adjust to new data.

Updating Assumptions: When And How

Financial models must adapt to reflect real-world complexities and uncertainties. The backbone of making sound financial decisions lies in the robustness and adaptability of your assumptions. Knowing when and how to update these assumptions is crucial.

Regular Review Cycles For Assumptions

Embedding a regular review cycle into your financial modeling process is essential. Such cycles ensure assumptions remain relevant and accurate.

• Monthly checks on key assumptions can keep your model aligned with recent trends.
• Quarterly deep-dives can uncover shifts in market dynamics, affecting projections.
• Annual reviews might align with comprehensive business strategy reassessments.

Setting calendar reminders ensures you don’t overlook these critical updates.

Responding To Market Changes And New Data

Staying informed about the market is vital for maintaining an accurate financial model. React promptly to new information:

• Monitor industry news and market reports.
• Adjust your model with emerging trends and data.
• Communicate changes and their impacts with stakeholders immediately.

Using real-time analytics tools can streamline this process and improve response time.

Case Studies: Assumptions In Action

Assumptions form the backbone of financial modeling. They guide projections and influence outcomes . This section dives into practical scenarios where businesses have made critical assumptions, highlighting both triumphs and setbacks.

Successes And Failures In Financial Modeling

Successes in financial modeling often stem from well-estimated assumptions . They align closely with reality and data trends . For example, a tech startup may project its user growth based on current market analytics . This assumption, backed by data, can lead to an accurate forecast and substantial investor interest .

Conversely, failures occur when models rest on flawed or unrealistic assumptions. An eCommerce company might overestimate holiday sales, ignoring economic downturn signals. Such a misstep can result in overstocking and unexpected losses .

Lessons Learned From Real-world Experiences

Real-world examples offer invaluable insights into the art of making accurate assumptions. Industry veterans emphasize the need for continuous monitoring and adjustments. Reflecting on a retail giant’s experience, we see that anticipating changes in consumer behavior helped maintain profitability .

On the flip side, a well-known smartphone maker’s oversight of market saturation led to declining sales . The key takeaway? Assumptions need regular review to stay relevant.

• Review assumptions against market changes .
• Use historical data to inform projections .
• Keep models flexible for updates .

Frequently Asked Questions

What are financial modeling assumptions.

Financial modeling assumptions form the foundation upon which projections are built. They involve estimating variables like revenue growth, expenses, and discount rates to create realistic projections. Using historical data and industry benchmarks helps ensure the model’s accuracy.

How To Determine Assumptions In Financial Modeling?

Determining assumptions in financial modeling starts with understanding the business and its environment. Analysts typically use historical data, industry trends, and market research to estimate future outcomes. Reasonable, defendable, and clearly stated assumptions are key for a credible model.

Why Are Assumptions Critical In Financial Models?

Assumptions in financial models are critical because they impact projections and decision-making. Accurate assumptions lead to reliable models, helping stakeholders make informed choices. They are the very variables that can change output significantly if estimated incorrectly.

Best Practices For Testing Financial Model Assumptions?

Testing financial model assumptions involves sensitivity analysis and scenario planning. Check how changes to your key assumptions affect the outcome. Regularly update assumptions with new data, and always document the rationale behind each assumption for transparency and validation purposes.

Embarking on the journey of financial modeling necessitates a thoughtful approach to assumptions. By integrating the strategies outlined, you can refine your financial blueprint. Embrace precision and conservative estimates, while remaining adaptable. Your models will become invaluable tools, guiding sound financial planning and decision-making.

Keep assumptions realistic, and success will follow.

Solar Energy Financial Model

The Solar Energy Financial Model Excel template forecasts the expected financials for a Solar Park project and calculates the relevant project metrics... read more

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Financial Model for Mobile App | Mobile App Business Plan

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Commercial Real Estate Valuation Model Template

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Private School Financial Model

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Wind Energy Farm Financial Model

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Hotel Financial Model Excel Template

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Three Statement Model

The three statement model provides a simple template in Excel to forecast the three financial statements over the next 5 years: Income Statement, Bala... read more

Grocery Store Financial Model Excel Template

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Waterfall Profit Distribution Model (up to 4 Tiers)

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Dynamic Financial Planning & Analysis Model providing up to 10 Years of Financial Projections.

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Gasoline and EV Charging Station Financial Model

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Airbnb Financial Model

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Simple Cap Table Template – Free Download

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Fitness Center 10 Year Financial Model

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Green Hydrogen (Simple Electrolysis Financial Model)

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Gold Mine Investment Model

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Cafe Financial Model Excel Template

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Authority Matrix Template

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Biogas Financial Model

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Airport Operator Financial Model

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Due Diligence P&L – Exhaustive Revenue and Costs Analysis Template

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Rental Property Financial Model

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Hair Salon Financial Plan | Beauty Salon Business Plan

Plan out the financial plan your hair or beauty salon. The beauty & hair salon business plan goes up to 10 years and has plenty of granularity.

Online Clothing Store Financial Model Excel Template

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Financial model for FMCG

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Startup Company Financial Model – 5 Year Financial Forecast

Highly-sophisticated and user-friendly financial model for Startup Companies providing a 5-Year advanced financial forecast.

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Clothing Store Financial Model Excel Template

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IRR Project Finance Analysis

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Hotel Valuation Financial Model

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Consolidated Financial Statements

The purpose of this model is to provide a simple way to see the financial statements for many companies in i file

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NPV, IRR, & Payback Calculator

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Start Up Car Park Excel Model and Valuation

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Waste to Energy Financial Model

The purpose of this financial model is to evaluate the financial feasibility of a waste to energy project such as e.g. a landfill gas plant. The model... read more

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Green Hydrogen (Electrolysis) Production Financial Model

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Dental Practice Financial Model Excel Template

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Real Estate Developer Model

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Hospital Financial Model

Simply open the file in Excel

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Simple Fundraising Model

This is a simple fundraising financial model template in Excel. Enter your business plan, calculate the amount of funding required and allocate the eq... read more

10 Year P&L, Balance Sheet, Cash Flow, and Break-even Analysis

This excel template is great for those wanting a professional-looking forecast 10 years of financial statements, those starting out as an entrepreneur... read more

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Budget to Actual Comparison

This monthly budget-to-actual dashboard allows for at-a-glance performance analysis. In addition to analyzing YTD performance, it also provides a revi... read more

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Financial Dashboard Excel Template

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Residual Land Value Calculation

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Real Estate Financial Model Templates Package

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Poultry Project Financial Feasibility Model

This poultry financial model template in Excel provides a framework to determine the financial feasibility of a new poultry project for producing bro... read more

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Mixed-Use Real Estate Model: Leverage / JV Options

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Digital Marketing Agency Financial Model Excel Template

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Spa Financial Model Excel Template

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Start Up Solar Farm Excel Model and Valuation

Start Up Solar Farm Excel Model presents the business case of an investment in the construction of a solar farm and the sale of the energy generated f... read more

Nail Salon Financial Model Excel Template

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Budget vs. Actual (Logistic Company)

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Multiple Loan Repayment Planning with Extra Principal Applied

Optimize where an extra principal payment should go and see the total cash flow savings when you have multiple loans.

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Profit and Loss Statement Actual vs Budget & Previous Year

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Restaurant Financial Model Excel Template

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Insurance Agency Financial Model Excel Template

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Real Estate Brokerage Firm Financial Model Template

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Travel Agency Financial Model Excel Template

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DCF Valuation Model Restaurant

The DCF Valuation Model for Restaurants provides a business plan in the form of an Excel Template to value a restaurant based on the Discounted Cash F... read more

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Commercial Bank Financial Model

Commercial Banking Financial Model presents the case of a commercial bank with regulatory thresholds based on Basel 3. The model generates the three f... read more

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Infrastructure Private Equity Wind Energy Modeling Test Solution (Associate level)

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Open Pit Mine Financial Model

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Equipment Rental Cash Flow Model

Highly dynamic financial model that is specific to renting equipment out. High attention paid to the cash flows and timeliness of them so the user has... read more

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Payroll Budget Plan Excel Template

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Beauty Salon Financial Model Excel Template

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Inventory Dashboard Model Template

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Mergers & Acquisitions (M&A) Model

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Medical Practice Financial Model Excel Template

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Coffee Farm Financial Feasibility Model Template

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Pizzeria Financial Model Excel Template

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Generic Cost Benefit Analysis Excel Model

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Solar Panel Manufacturing Plant Business Plan Financial Model Excel Template

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Budget vs Actual Excel Template

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WACC Calculator | Discount Rate Estimation

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Resort Financial Model Excel Template

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Airline Operator Financial Model

Airline Operator Financial Model presents the case of a company operating an airline business. The model generates the three financial statements, a s... read more

Golf Course Financial Model – Startup

A 5-year financial model tailored to starting a golf course and projecting financial performance for its business plan. Includes financial statements.

Generic Startup Financial Projection 3 statement Excel Model

User-friendly Excel model intended for the preparation of a 3 statement (Income Statement, Balance Sheet and Cashflow Statement) financial projection ... read more

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Insurance Pricing Model

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Mergers and Acquisition (M&A) Financial Model

Merger and Acquisition Model template consists of an excel model which assists the user to assess the financial viability of the resulting proforma me... read more

Renewable Energy Financial Model Bundle

This is a collection of financial model templates for projects or ventures in the Renewable Energy Industry and its related sectors.

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IPO Valuation Model

This financial model can be used to value any Initial Public Offering (IPO) using Option Value, DCF and Relative Valuation.

Real Estate Financial Model Bundle

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Skin Care Financial Model Excel Template

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Debt Securitization Model

The Debt Securitization is the process of packaging debt into a Securitization Vehicle sold to a Fiduciary where it is converted into bonds sold to in... read more

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Bar Financial Model Excel Template

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Flower Shop Financial Model Excel Template

Discover Flower Shop Financial Model Template. Allows investors and business owners to make a complete financial projection in less than 90 mins... read more

Shopping Mall Financial Model

Shopping Mall Financial Model presents the case of an investment into a shopping mall and its operation. The model generates the three financial state... read more

Real Estate Portfolio Template – Excel Spreadsheet

The Real Estate Portfolio Template forecasts the financial performance when building a real estate portfolio. The model allows simulating various scen... read more

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Mini Storage Business Plan Template

We understand that your storage needs are unique, so we've created a comprehensive mini-storage business plan that will help you chart your course to ... read more

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Barber Shop Financial Model Excel Template

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Full Service Hospital Financial Model

This financial model attempts to give the user a full scope of starting a 250 bed (adjustable) hospital. It will allow for all revenue and cost assump... read more

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Manufacturing Startup Feasibility Model

Launching a manufacturing startup can be complex, and securing financing requires a solid financial plan. Our Manufacturing Startup Financial Feasibil... read more

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Steel Industry Financial Model

Steel Industry Financial Model presents the business case of the operation of a steel plant using the mini mill technology. The model generates the th... read more

Monte Carlo Simulation in Excel

The model presents an example of a Monte Carlo Simulation using excel to estimate the Net Present Value of an investment.

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E-Commerce 3 Statement Financial Projection Model with Valuation

Highly versatile and user-friendly Excel model for the preparation of a rolling 3 statement (Income Statement, Balance Sheet and Cash flow Statement) ... read more

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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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Lean Business Planning

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List Business Plan Assumptions

Identify and list business plan assumptions. You will get real business benefits from the assumptions list in your business plan. Planning is about managing change, and in today’s world, change happens very fast. Assumptions solve the dilemma about managing consistency over time, without banging your head against a brick wall.

Assumptions might be different for each company. There is no set list. What’s best is to think about those assumptions as you build your twin action plans.

If you can, highlight product-related and marketing-related assumptions. Keep them in separate groups or separate lists.

You will use your business plan assumptions often

The key here is to be able to identify and distinguish, later (during your regular reviews and revisions, in Section 3), between changed assumptions and the difference between planned and actual performance. You don’t truly build accountability into a planning process until you have a good list of assumptions that might change.

Some of these business plan assumptions assumptions go into a table, with numbers, if you want. For example, you might have a table with interest rates if you’re paying off debt, or tax rates, and so on.

Many assumptions deserve special attention. Have a bullet point list. Maybe in slides. Maybe just a simple list. Keep them on top of your mind, where they’ll come up quickly at review meetings.

Maybe you’re assuming starting dates of one project or another, and these affect other projects. Contingencies pile up. Maybe you’re assuming product release, or seeking a liquor license, or finding a location, or winning the dealership, or choosing a partner, or finding the missing link on the team.

Maybe you’re assuming some technology coming on line at a certain time. You’re probably assuming some factors in your sales forecast, or your expense budget; if they change, note it, and deal with them as changed assumptions. You may be assuming something about competition. How long do you have before the competition does something unexpected? Do you have that on your assumptions list?

An Assumptions Example

The illustration below shows the simple assumptions in the bicycle shop sample business plan.

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More From Forbes

Empowering americans’ financial futures in these turbulent times.

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Mike Vietri is Chief Distribution Officer for AmeriLife , a national leader in distributing and marketing insurance and financial solutions.

According to the September 2023 Harvard-Harris Poll, half of voters say their personal financial situation is getting worse. And with fewer than 3 in 10 people believing we’re on the right track in this country, perception of the U.S. economy remains particularly low.

As overall inflation remained at about 3% in October—still above the Federal Reserve’s 2% target—core inflation (which excludes the impact of fluctuating food and energy costs) trended downward . This could bode well for annual inflation numbers at the end of the year, but that doesn’t stop consumers from tightening their pockets as we head into the holidays.

Most Americans—more than three-quarters of Harris poll respondents—are rightly prioritizing saving versus spending, given our current economic conditions. The fiduciary responsibility of knowing what to do with that savings is on those of us who have devoted our careers to helping others secure their financial future.

Consumers Actively Adjusting Their Financial Plans

In the insurance and retirement planning industry, we have to focus on the needs of Americans in real time. Regardless of how the market is performing and future predictions, what do our clients need right now? The role we play in serving the market is particularly important when consumers, feeling vulnerable, begin searching for more secure protection solutions.

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As data shows 71% of Americans are likely to set financial goals in 2023, it’s clear the marketplace is impacting consumers and causing them to cut back. We must be prepared with a talented team of wealth agents and advisors armed with the tools and resources to give their customers the answer to living a longer, healthier life.

As consumers pivot, annuities have emerged as a compelling strategy for navigating uncertain economic conditions. Unlike other assets under management, annuities offer clients a guaranteed and lifelong income stream, providing a sense of financial security and peace of mind.

By having access to a holistic platform that allows them to incorporate annuities and protection solutions like life insurance into their offerings, wealth professionals can address their clients’ concerns about market volatility and provide them with a secure future. In an era of ambiguity, the combination of annuities and life insurance can offer a welcome dose of certainty.

Supporting Sustainable Careers, Providing Vital Services

We’re rounding out 2023 and looking toward 2024 with pessimism, according to recent numbers, with nearly 7 in 10 Americans claiming it’s difficult for them to be happy about positive economic news when they’re not feeling it in their own wallets. But it doesn’t have to be like that for everyone—especially for wealth professionals.

We know the confidence an education can instill—whether it’s a client learning the right retirement strategy for them or a new agent finding success in wealth management. As 43% of Americans report interest in learning about investment strategies due to high anxiety over their finances, wealth agents and advisors enjoy the luxury of a sustainable, recession-proof career.

Our industry is all about helping people ensure they don’t outlast their retirement savings, and that need won’t go away—no matter how much the economy struggles. In fact, during past economic crises like the Great Recession, financial advisors were some of the most secure professionals, with even more job opportunities while other industries were cutting back.

With advancements in technology, advisors can reach more clients and provide even more personalized advice than ever before. This means they can keep serving their clients and earning a steady income, even when times are tough for our country.

Wealth agents and advisors should have the opportunity to leverage a platform that expands their offerings, providing clients with access to valuable insurance and ancillary products. By diversifying their services, they can ensure a consistent flow of clients and policies, adding even more stability to their income stream.

Five Key Factors To Consider When Diversifying And Expanding

Here are some considerations and best practices to follow when broadening your team’s financial services:

1. First, understand the client’s needs. Using your organization’s resources to conduct thorough market research, engage with your target audience through surveys and conversations. Taking the time to analyze the data can provide valuable insights into emerging trends and client demands. By identifying common pain points and areas where current services may be falling short, leaders can tailor their offerings.

2. Instill a holistic approach. Shifting from a product-centric approach to a holistic, goals-based advisory framework can be essential in today’s financial world. This approach involves training agents and advisors to provide comprehensive advice that encompasses clients’ financial goals, life stages and personal needs. Investing in ongoing training programs equips agents and advisors with the necessary skills and knowledge to deliver holistic advice.

3. Invest in technology and tools. To support the diversification of services, leaders should provide their teams with access to cutting-edge software and tools. This may involve partnering with third-party providers or developing in-house solutions that align with the specific needs of your client base.

4. Offer a wide range of products and services. Expanding product offerings beyond traditional investment advice is key. Providing access to a diverse range of financial products, such as insurance, estate planning, tax optimization and retirement planning, allows growing agents to build solutions that include a comprehensive suite of services.

5. Align compensation and incentives. Reviewing the compensation structure to align with any new services or goals-based approach should be considered crucial. Incorporating performance metrics related to client satisfaction, goal achievement and overall client well-being can incentivize advisors to provide comprehensive advice.

With this approach, it is possible to have a fulfilling and secure career while helping people with their finances, no matter how the economy is performing.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?

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