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Posted by on Feb 18, 2013 in Business Plan, Finance, Food For Thought | 0 comments

Three Assumption Types You Make In Life… and In Business Plans

Three Assumption Types You Make In Life… and In Business Plans

 

Have you ever had a “deer in headlights” moment? You know when you have that blank, confused, motionless look after someone points out something you did not realize before. You just stand there like a deer staring at an incoming car’s headlights on a highway… clueless. Most of the time, this happens when someone challenges an assumption you had. Its a sure way for investors to lose confidence in your abilities.

We make a lot of assumptions as we go about our lives. They are shortcuts that help us handle the complex world we live in. They save us from wasting energy worrying about too many things. But… they can screw us over if we base decisions on wrong assumptions.

You will make assumptions while building your business plan and doing your work. Think of your assumptions like talking to three types of dudes in a party:

1- The Hunch: you pull these out of your head (or somewhere else if you prefer). These are like the idiot who thinks he knows everything, but is actually full of crap.

An example of this is when a client saw a proposed advertising campaign for his company’s hunting equipment. He loved it, but asked the advertising executive to replace the model hunter in the picture since “good hunters have blue eyes” while the model had brown eyes.

2- The Educated Guess: These are backed by research and past experience. They are like a teacher who knows what he’s talking about, but is missing the actual experience. It’s better than a hunch, but still can miss the mark. These assumptions can also be the “gut instinct”, which are assumptions that rely on past experiences.

3- The Validated Assumptions: These are based on actual experience (e.g. we changed the price of our ice cream to x and sold y% more). They are more solid assumptions than the first two because they are backed up by experience.

Be careful with these because the assumptions might be off if external factors influence the results (e.g. change in ice cream sales might have been due to a heat wave or new rush of tourists that happened the same time the price changed).

Now that we know what assumptions we make, here is how you can manage your assumptions well:

i- The most important thing is to recognize the assumptions you are making. It’s scary how many people don’t even realize they are making assumptions and confuse them for facts.

ii- Next is to make your assumptions clear as you make decisions and projections. This makes it easier to adjust your decisions and projections if you replace assumptions.

iii- Finally, go back and adjust your assumptions as you gain experience. Work to have as many validated assumptions and as little hunches and educated guesses as possible. Adjust your decisions and projections as you replace the hunches & educated guesses with validated assumptions.

Follow these steps and you will have better results and less deer in headlights moments.

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