How to present key assumptions in your business plan?

The financial forecast you include in your business plan needs to convince banks or investors that your plan is achievable.

Your forecast rests solely on the assumptions you make and that is, therefore, what you need to sell to the reader. 

In this guide, we’ll show you in details how to present your assumptions in your business plan. We'll cover what to include, how long it should be, and more.

Ready to dive-in? Let’s get started.

Why do I need to provide key assumptions in my business plan?

The key assumptions subsection is the second subsection of the financial plan section. It follows the sources and uses, and precedes your sales forecast.

The goal of this subsection is to give readers on overview of how you built your forecast. So that they can understand both the methodology and the key drivers used to model your revenues, costs, and cash flows.

This allows readers to understand how you got to your figures and to challenge them constructively, if needed. Or to ask you to run stress tests against some of your assumptions (what if sales are 5% lower, for example).

No-one likes a black box, and knowing that your forecast was built using a proven methodology and reasonable assumptions will provide the transparency needed for the readers to gain confidence in your numbers.

What key assumptions might my business plan contain?

The key assumptions you must include in your business plan depend on your business model, but as a rule of thumb you want to touch on the drivers which have the most impact on your projected cash flows.

Let’s now look at a couple examples of assumptions that you should include.

Methodology used to forecast sales

This is the most crucial assumption, your readers will want to know how you modelled your sales. This includes both how you organized your forecast (did you model by customer segment, distribution channel, or categories of products or services, for example), and how you derived the sales figure itself.

Average selling price

Needless to say, price is one of the most important assumptions you need to disclose as readers will be keen to understand the details about the average selling point you anticipate.

How you pick and report on this metric will depend on your business model. For example, a retailer might focus on average order value (AOV) rather than the price of individual products.

Beyond the actual figure, you should also provide information about factors that may influence your own prices. Discounts offered to new customers, seasonality, or changes in the prices of competitors, for example.

Sales volume

This is another key assumption that you need to include in this section. Here, you need to provide details about the quantity of products or services you think the business will achieve on a monthly basis.

Here also, the unit used will vary based on your business model. A law firm might focus on the number of billable hours or cases signed, for example, while a manufacturer will focus on the individual products.

Payment terms 

The next assumption you should include in this section is the payment terms. This is key as it will have a direct impact on your working capital requirements.

When writing this part, you need to mention both the payment terms you may offer customers and the terms your suppliers will offer you.

Procurement policy and cost of sales

This will impact both your level of profitability and your working capital requirements.

The level of details here will vary depending on your business model. A manufacturer will need to provide details of how much it costs to produce their goods and what level of inventories have been assumed in the forecast, but a service business might not have anything to report.

Planned capital expenditures 

Planned capital expenditures are projected funds used by a company to acquire, retain, and upgrade physical assets like business equipment, vehicles, or office buildings.

These are usually large purchases which have a significant impact on your business cash flows.

Go-to-market

This is highly situational and will depend on how aggressive you are with your growth.

If you plan to open multiple new physical stores, build factories to expand your production capacity, or hire a significant amount of new staff to fuel expansion, the readers will be keen to understand what phasing has been assumed.

Business cost structure 

There are two types of costs. Variable costs, which evolve with the level of business activity. For example, payment card transaction fees: the more sales your business makes, the more you pay in fees. And fixed costs, which don't vary based on the level of business activity. For example, the monthly rent on an office, which will need to be paid no matter how many sales your business made in the month.

Fix costs are riskier because they stay constant when the activity slows down, putting pressure on the business's cash flows. For this reason, the readers of your business plan will be keen to understand what proportion of your business expenses are fixed or variable, so that they can assess the level of risk associated with your business plan.

Funding assumptions

You will also need to provide information about assumptions you made regarding your business funding requirements.

You can expand on the amount of money that you need. In addition, you can also include information about the timing, sources of funding (e.g. bank loan, equity investor), and key terms (interest rates, % of equity sold) assumed in your forecast.

How long should the key assumptions section of your business plan be?

The key assumptions subsection is short and precise and should generally fit on one to two pages maximum.

As we've seen just before in this guide, you should focus on explaining the overall financial modelling methodology and listing the most impactful assumptions for your forecast. 

For example, if you were starting a microbrewery business, a key assumption would be how you forecasted sales for each distribution channel:

“We will use bars as our primary sales channel and assumed that each bar will buy 35 kegs of 40L each week from us.” 

This assumption is important to disclose because it impacts both revenues and production. For example, if bars were to buy more than the volume of beer planned in our forecast, we would need to invest in bigger production facilities to meet the demand. 

When writing the assumptions, you have to focus on providing concise details. You don’t need to write down how you calculated the cost for each item. That much detail is not needed here.

One of the best things you can do to keep this section short is to add visuals, if necessary, and refer the readers to the appendices for more details. 

Example of the key assumptions section in a business plan 

Below is an example of what the important or key assumptions subsection of your business plan might look like. As you can see, it coincides with the startup funding and sales forecast subsections.

In this case, the important assumptions subsection highlights the main assumptions used by the business to set up its financial forecast.

This example was taken from one of our business plan templates.

What tools do you use when writing your business plan?

The modern way of writing a business plan is to use online business plan software.

There are several advantages to using specialized software:

• You are guided through the writing process by detailed instructions and examples for each part of the plan
• You can be inspired by already written business plan templates
• You can easily make your financial forecast by letting the software take care of the financial calculations for you without errors
• You get a professional document, formatted and ready to be sent to your bank
• The software will enable you to easily track your actual financial performance against your forecast and update your forecast as time goes by

If you're interested in using this type of solution, you can try The Business Plan Shop for free by signing up here.

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