Fundraising · Business planning

What are normally key assumptions underlying projections?

Andrew Loader Andrew Loader is a Content Marketer and Freelance Writer

October 2nd, 2016

Working on putting together the fundraising materials. In that process, this question came up. What would those assumptions be for any business?

David M

October 2nd, 2016

Some of this again boils down to what you are projecting, at what stage of implementation etc. Obviously expenses are easier to project and lock down, though many fail to be as detailed as they need to be. You can apply formulas all day long, but my preference is to back up any assumptions with intense market research. You can assume outliers at both ends. Those only become visible and valuable with the research behind them. That includes a fairly complex evaluation of your target market, competition, market saturation, ease of entry, ability to scale..etc.

That wont give you a scientific projection by any means, but it illustrates to an investor you have done serious research. And most projects I look at in any industry are ridiculously sloppy and lazy with their compilation. It is one reason pro-formas and financials are considered so "pie in the sky." It is clear the entrepreneur put all the expenses together and then just threw out revenues that would lead to a healthy ROI. Its absurd.

You should have a financial foot notes section for starters that explains each itemized line in your financials. If you do this, you will be ahead of many. This will also give your investor proof that you didn't just ASSume your entire financial projections. The occasional minor assumption is fine, but if you can't guide your investor through every number in your projection, then it looks like an excel copy and paste job.

You can also look at what the industry will assume about your company. If you project you will capture 10% of your market, most will assume you are delusional, due to the standard assumption that 1% is extremely difficult to capture. Doesn't mean it is impossible given the perfect storm, but it is a gauge.

In otherwords, for example if your business is say virtual reality goggles- A competent investor will ask, "you project x amount in years 1-3. What is the total industry revenue for this presently?" If you assume you will capture any significant portion early on, you better have major players with a history of that level of implementation...which is very possible.

Ankit Manglik CFO Travelspice

October 2nd, 2016

When you are forecasting for the future you make assumptions about your growth rate, cost structure, revenue, conversion rate etc. etc. In a business thats running for some time these assumptions are mostly based by past data and can be justified.

However, when its done for a new venture/new product then mostly everything that goes into the financial projections is based on assumptions and optimism. They key thing to keep in mind is how accurate and grounded those assumptions are and how sound is the logic being the assumption. 

Martin Omansky Independent Venture Capital & Private Equity Professional

October 3rd, 2016

Too many to list. Consult a CPA with relevant experience. Sent from my iPhone

Arthur Lipper Chairman of British Far East Holdings Ltd.

October 3rd, 2016

The early mistakes in projecting revenues is the product or service will be developed and ready for marketing within a budget and schedule. Both are usually wrong and underestimated. The next wrong assumption is the market’s reaction to the new offering. The entrepreneur tends to assume that customers will initially accept and buy. This is usually wrong due to the lack of both marketing funds and the lack of marketing experience of the entrepreneur.