Business Plans--The Rules of Forecasting, Part 2 of 2

This article completes our two-part discussion about the rules regarding forecasting that we apply in writing business plans. We share them with you in this article in the hope that you will find these rules worthy of adopting in your efforts to write business plans as well.

Rule 5: Question basic assumptions.

It is always a good exercise to question the basis for any assumption. You may find the basis is not defendable. You may even learn a better way to develop or present the assumption.

Corollary 5A: When a forecast is developed around a specific policy or procedure, question that policy or procedure.

Rule 6: Develop forecasts in the context of the entire system and properly reflects all relationships.

It is important to understand that everything in the company affects everything else. For example, if you need to adjust the number of employees, you may also need to adjust the office space needed.

Rule 7: The granularity (time divisions; e.g., monthly, quarterly, etc.) of the forecast must match the granularity of the system.

Corollary 7A: The granularity must match the frequency of review and decision-making.
It makes sense that you should review your projections whenever you review your actual operations. Most businesses are managed on a monthly basis. Therefore, their forecasts should be based on monthly numbers.

Corollary 7B: Use the same granularity throughout the forecast.
Changing the granularity of the forecasts often introduces errors. The longer the time period of the forecast, the more you have to rely on averages when reviewing your progress. See my article "Business Plan Mistakes--The Phantom Growth Rate" for a good example of this.

Rule 8: Build projections using the most basic assumptions as a foundation.

It is much easier to defend basic assumptions that are used to "roll up" into the larger forecasts. For example, if an investor were to ask you to reduce your payroll from $1,000,000 to $750,000, you may not be able to adequately explain why that would not work unless the payroll total was determined from the more basic assumptions of personnel counts and pay scales.

Corollary 8A: A forecast should show its basic assumptions.
More plans are rejected because they fail to show the basic assumptions than probably any other single reason.

Rule 9: An exception to a rule is valid if it can be defended.

As in any other system, every rule has its exception. Just make sure you can adequately defend the deviation from the accepted norm.

Rule 10: Every forecast must have at least two supporters.

"Two heads are better than one." When is comes to defending a number or assumption, it helps to have allies.

Corollary 10A: Even if a forecast is intended for your sole use, it helps to have it reviewed by someone else.