Small Business Planning Pillar #6.4: Financial Assumptions
There is one more financial statement which is often overlooked in small business planning but vital to make sense of the previous three and it’s probably not what you’re thinking… …ASSUMPTIONS.
Your financials are constructed on a foundation of financial assumptions. They must be assumptions because your new business hasn’t started yet.
– What sales are you expecting? (example assumption: my product will sell at the same rate as baked beans or perhaps my quantitative research show that 10% of all shoppers will buy 2 widgets per week)
– How much do you estimate your energy costs to be? (example assumption: gas and electricity will rise at 5% year on year.)
– What interest rate do you think you will be borrowing at in year three? (example assumption: base interest rate estimates on current rates as market undecided which way they will go over three years)
– How many widgets per hour will you be able to produce once the plant is bedded in? (example assumption: prototype trials have suggested 125 widgets per hour, budget at full production to be twice as fast, ie 250 widgets per hour.)
The answers to these questions are little more than educated guesses at this stage, a.k.a. assumptions.
Your assumptions statement needs to be completed in some detail. Give a full description of the assumptions associated with each figure listed on each of the other three financial statements. Include any workings and anything else that clarifies how you got to that number.
It can be quite tricky when you go back four weeks later to understand how you got to a number in the first place so be thorough. If you are struggling, think what it would be like for an investor trying to make sense of it.
Above all, if you’re ambitious about your new small business and have high growth expectations, possibly raising money from external sources, then your financial assumptions and other financial statements must be water tight.
In the same way that water will always find a leak in your boat, so will a savvy investor in your financials.
So do your small business planning a favour and furnish yourself with robust financial statements using the techniques and suggestions highlighted on the previous pages.
……Small Business Planning Pillar #6.4: Financial Assumptions