Solomon Bruce Consulting Blog

Sunday, October 27, 2013

Business Planning Assumptions

     When you make business planning assumptions, are they always high and optimistic?  How are you sure that they are valid, not overly optimistic?
      Our Fort Worth staff attended a business plan competition the other nite.  Although the finalists in the competition had only 7 minutes to present their winning work, some people thought that the assumptions made on growth were very optimistic.  OK, what is optimistic?  Well, perhaps 100% growth per 6 month period for the next 6 years!  Overly optimistic?  Well, we don't know, we did not see the underlying assumptions that were used to found the basis of the projection.
       If you are making business planning assumptions, we always recommend that the projections be conservative as opposed to being optimistic.  Why?  A conservative projection is more likely to be attainable, which an optimistic projection is less likely to be achieved. 
  Let's work a simple example to illustrate the point.

          Assume that your store has sold 50 widgets per month for the past 2 years.  In and out, every month, the store sells 50 Type X widgets.  Now, a new business comes to town that uses the Type X widget and you decide to stock 100 Type X widgets.  You order the additional 50 widgets, without any data to justify the additional product stocking.  You have invested in more product, more inventory, greater possibility of shrinkage and obsolescence without any real justification.  If the new business does not buy from you, or uses another vendor for Type X widgets, you have wasted valuable capital as well as floor space to store/display this product.

       This may seem like a simple example.  It is-- however, it is a real example!  We recommend that the store continue with the 50 Type X widgets and see if sales increase because of the new store.  If the answer is YES, then perhaps we would recommend increasing safety stock until such time that an increase in economic order quantity is justified.  Using this method, you would reduce capital outlay until such time that it was really warranted.  After all, no reason to spend money just to spend money.