Why Making Assumptions is Good!
Tonight working late. Wife came in to say good night. I asked her to sit down and go over The Plan.
She rolled her eyes and said, “Stefan it is 1AM, do we really need to do this now?”
Five minutes later she was saying, “Wow, that is really cool. You’ve made it so tangible and easy to track. And the results are amazing! Now you got me thinking on what else we can do! Thanks for showing me.”
“And NOW can we go to bed?”
My wife and I are buying a apartment in Brooklyn. Needed to really make sure we could handle the payments.
How we were able to feel comfortable with what we are about to take on is what I was showing my wife: building our company’s financial projections for the coming year.
To build out a forecast, any forecast— weather, your Saturday night date, or the immediate future of your business— takes one thing that cannot be avoided:
Now, there are good assumptions and bad assumptions.
Bad assumptions are when you make something “mean” something that doesn’t serve you. It is where the expression we all have heard before:
Assume = making an ASS out of U and ME.
Examples of bad assumptions: you are walking down the street and someone smiles at you and quickly looks away. You make it mean, “Was my fly open?” or “was I speaking too loud on my cell phone?”, or even, “Oh, they think I’m hot!”
In business, bad assumptions take on the form of, “It would be great to double sales this year, but there is no way that is happening!”, or “My client has not called me back in two weeks, they’ve decided to stop using our services!”, and so on.
Bad Assumptions => Unsubstantiated Projections
Good assumptions, on the other hand, require good planning:
- Planning => Tangible Steps
- Tangible Steps => Over Time (Future)
- Future => Unknown
- Unknown + Planning => Assumptions
- Good Planning => Good Assumptions
For example, you want to add a line of products to your business. You assume it will take six months to finish the design and test it out. You assume it will then take another month to build out the prototype. And if these assumptions are correct, you assume seven months of this in today’s economy will cost you $10,000.
You can see how important good assumptions are for good planning.
THIS is how successful entrepreneur think, work and grow their businesses.
Ways to Use (Good) Assumptions
- Your UnReasonable (1-year) goal for your business—that stretch you would normally not be able to achieve on your own that comes from your passion.
- Your company vision—the direction you are taking your company, and why.
- Your need to raise capital—what are your 1-5 year forecasts funders will need to see.
- Your need to know if you have enough cash—to run your company through your (1 year) goal.
It is all how you think. Potential investors, for example, know your projections will be wrong. But one key reason they require them is to see how you think. They get this from the assumptions that went into your projections.
How you think is directly correlated the types of assumptions you make: good vs. bad.
Are your thoughts serving you and moving things forward or are they consuming you and holding you back?
Managing assumptions improves with:
- Historical data from past results in your business
- Experience of you or your team
- Market research to back up your claims
- Competition analysis supporting your assumptions
Two biggest pitfalls to avoid:
- Analysis paralysis—you spend too much time trying to get all your ducks in a row before you go forward.
- Getting it 100% Right—you will never get it right. You will always be wrong. You’ll just be less wrong!
Assumptions => Accelerate Through Mistakes
So the next time someone thinks they are helping you by saying, “Don’t assume!”, just ask them, “Why not?”
Action Steps for the Week
The #1 thing to do right now is create your (1 year) UnReasonable goal. Have a specific and measurable outcome that is a stretch for you (in a way you want to be stretched.)
Translate this into a financial plan for the year: projecting sales, removing cost of goods/services sold, monthly expenses and expenditures.
Create a cash flow statement by month to show how much cash you’ll have and where you might fall short.
Note your assumptions so later you’ll remember how you came up with your numbers.
When you commit to using this plan at least once a month to manage your (1 year) goals, you will quickly accelerate through your mistakes, saving you time and money.
Usually a lot of time and money!