In my effort to provide useful information to entrepreneurs and aspiring entrepreneurs, I share articles that I find around the web and think can help my followers move your businesses forward. Often, people write asking me to elaborate on those articles or so I’ve started a series that will do just that.
I recently posted an article from RockthePost about common misconceptions people have about launching a new company. The next of those misconceptions that I want to tackle here is the idea that your assumptions and projections are accurate and that everything will go according to plan.
There are two things that are true about creating financial projections for your company and the assumptions that come with that:
- Firstly, projections and assumptions are necessary, are all over your business planning, and you can’t successfully build a new business without them.
- Secondly, projections and assumptions are pretty much always wrong and they’re very dangerous for new entrepreneurs and new companies.
Wait, what?!? Yup, it might not seem to make a lot of sense just yet, but building a successful business requires that you both plan around a set of projections and assumptions and that you accept the fact that those projections and assumptions are almost certainly wrong. It can be pretty alarming when you realize that both of those things are true, but becoming an entrepreneur is full of alarming realizations.
Let’s start with why projections and assumptions are an integral part of building a new business:
As an entrepreneur, your entire career is built around assumptions: you assume that your idea is valid, you assume that you can execute that idea, you assume that customers will want to buy what you have to sell, you assume that all of that will be true at margins that allow you to profit and grow. You simply cannot build a company from scratch without making assumptions and you can’t do it responsibly and effectively without turning some of those assumptions into formal projections that help you plan the financial future of your company. Yes, of course, eventually you will validate or disprove those assumptions, but at the beginning they are nothing more than assumptions.
I am a huge proponent of business planning – especially for those of you who are new to entrepreneurship. That old saying that “if you fail to plan you plan to fail,” has held true in my experience and I do not support new entrepreneurs diving in without doing any research or creating any form of strategy. Now, that doesn’t necessarily mean you need to create a formal business plan with all of the aesthetic bells and whistles, but it does mean you should spend some time figuring out the basics of how you’ll build your company before you throw your life savings into it. Business planning allows you to work through potential problems and come up with potential solutions before those problems arise and it gives you a much better idea of what to expect because, if done well, it forces you to face facts and stop going off passion and hunches.
Planning and creating projections does not, however, mean you’ll know exactly how your entrepreneurial journey will progress and exactly how much you’ll make from your business and when you’ll make it. This is real life and in real life there are simply too many variables to be able to predict exactly what will happen. If you stay completely attached to those projections and assumptions to the exclusion of the real life situation, you’ll be in just as much trouble as if you hadn’t come up with a plan at all.
The point of creating projections is to force you to think through your concept and iron out any major issues in advance. It’s not to give you the impression that a business launch occurs in lab conditions where you can control and predict everything.
Let me give you an example: Meteorology is a science and there are complex models that can tell meteorologists what weather patterns are likely to develop where and when and how they’ll travel. It’s all basically just the physics of different levels of moisture and pressure interacting with each other and it’s fairly straight-forward to make these weather predictions. We all know, however, that, in the real world, things can change and the weatherman might be wrong, but it’s still wise to bring an umbrella when he predicts rain or to make sure you have a shovel handy when he’s predicting a blizzard.
The projections and assumptions that you come up with during the business planning process are just the same: they’re probably not going to be accurate and it would be silly for you to stick to them regardless of what else happens (just because the weather man predicted rain doesn’t mean you should stay inside if it’s a gorgeous, sunny day), but they still give you an idea of what’s probably to come and allow you to be prepared.
Finding the balance between developing a thorough plan based around assumptions and projections and recognizing that those assumptions and projections are almost certainly inaccurate is one of the tricks of being a greatly successful entrepreneur.
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