Business Plan Assumptions

Business Plan Assumptions-83
As an example, you might implicitly assume that the whole mobile-user base is your market and would have explicitly assumed that of that market, you will capture 2% with your super-duper app.

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For example, companies must make several assumptions in computing the value of pension and medical benefits that will be provided to retirees in the future.

These funds—which are built up over time and held as investments until needed, but are actually owed to employees at some future point—are reported by companies as assets and liabilities on their financial statements.

Assumptions form the very basis of every business model.

The picture looks perfect and you are raring to go… And many-a-times, it is just imperative to take the plunge, whatever the consequences. You will invariably run into trouble even before the very first hurdle, a battle that you could have avoided with a little more planning and a dive into the validation of the assumptions that go into your business plan.

For example, increasing the discount rate reduces the present value of the company's liabilities and the amount of annual contributions that must be made to fund the retirement accounts, and therefore increases the company's current earnings.

The ease with which a company's current earnings may be "improved" by changed assumptions in forecasting highlights the need to avoid the natural inclination towards overly optimistic assumptions.The assumptions made by a company help determine the monetary amounts that are reported, and thus may affect the company's current reported earnings and tax liability.In the case of pensions that are provided to employees following retirement, companies must make assumptions regarding the likely rate of wage inflation and the discount rate to be applied to projected future payments.Though tedious and initially frustrating, this process also provides some interesting insights and gives you many points to ponder upon.Also, sometimes it helps to run your plan thru multiple people / rounds / iterations.Explicit are the ones that you think impact the business directly and are highlighted / made aware to a person looking at your business plan.Now, the deal is that while we pay a lot of attention to the explicit assumptions (and do sensitivity analysis on them to test the robustness / feasibility of our business plan), it is usually the implicit assumptions that form the basis / core of the business and will make-or-break your model.Nonetheless, the mass failure of companies to accurately assess pension fund requirements in the 1990s shows just how important it is to base assumptions on as sound a footing as possible and avoid overly optimistic forecasts.Experts recommend that companies review their accounting assumptions every few years to see whether making a change would be beneficial and to verify that assumptions about the economy generally are still accurate.You might be playing either in a much larger market of all devices running internet around the world or in a much smaller market of users using model 6S plus of i Phone in GK-1 in Delhi in India during lunch hour on Mondays.2% of the latter would be an abysmal number and 2.5% or 3% would not make it any better!!


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