S&I Gazette #22: What are examples of assumptions in financial modeling?
Alex Dragan
I help founders secure investment rounds → DM me ‘UTOPIA’ ? Raised $50M for my clients
In today’s newsletter edition, I want to discuss why investors consistently seek clarity on the assumptions behind financial forecasts.
Why providing transparent and well-grounded assumptions can set your business apart, and help you effectively communicate your financial assumptions.
So let’s jump right in:
1. Assumptions mastery
A thorough understanding of the assumptions behind your forecasts is crucial.
These assumptions often include market growth rates, customer acquisition costs, revenue streams, and other vital metrics.
2. Be specific and transparent
Investors appreciate specificity and transparency.
Clearly detail the sources of your data, the rationale behind your assumptions, and how these factors translate into your financial forecasts.
Example: "We've projected a 10% annual growth rate based on comprehensive market research reports from [specific sources] and our own historical growth over the past two years."
3. Conduct a solid research
To build investor confidence, ensure your assumptions are supported by reliable data.
Reference industry reports, market studies, and other relevant data to substantiate your forecasts.
Example:
"Our customer acquisition assumptions are based on current industry benchmarks and our marketing campaign performance, which has shown a steady 8% increase in new customers per quarter."
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4. Address risks and uncertainties
Acknowledge the risks and uncertainties inherent in your assumptions.
Explain the steps you’ve taken to mitigate these risks, demonstrating that you are proactive and prepared for potential challenges.
Example:
"While our revenue projections assume a stable regulatory environment, we have contingency plans in place to adapt to any changes, including a dedicated compliance team to navigate new regulations."
5. Align assumptions with business strategy
Ensure that your assumptions are not just isolated figures but are integrated into your broader business strategy.
This linkage shows investors that your financial projections are part of a cohesive and strategic plan.
Example:
"Our operational scaling assumption of a 15% reduction in COGS over the next three years is part of our strategy to optimise our supply chain and achieve economies of scale."
6. Be ready for deep dives
Investors may want to explore specific assumptions in greater detail.
Be prepared to provide in-depth explanations and data to back up your forecasts.
7. Avoid using jargon and overly complex terminology
Clear, concise language ensures that investors can easily understand and trust your projections, regardless of their background.
By following these guidelines, you can confidently address investor inquiries about your forecast assumptions.
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Consultant/Advisor/Mentor for Startups/Entrepreneurs
7 个月One exercise I encourage entrepreneurs to do with their financial model is to see where it breaks down on the lower end. In other words, what is the absolute minimum performance in assumptions before the company collapses. This can help demonstrate an entrepreneur is paying attention to the true risk of the venture, but also can give confidence to an investor that there is significant margin in the assumptions that will still result in success. 2/2
Consultant/Advisor/Mentor for Startups/Entrepreneurs
7 个月Alexandru, Thank you for your post. Financial modeling is a crucial part of any startup. I agree with everything you say on developing assumptions for a financial model. I might add a couple things to your list. When preparing a company financial model for fundraising, I often encourage entrepreneurs to use their model to do scenario and sensitivity analysis on their assumptions. Scenario analysis is changing your assumptions to see the impact to the model outcomes. I have found when talking with investors, it helps to have already run and understand several different scenarios. An example of scenarios to run might be – how does your forecasted outcome change if don’t achieve the market penetration you are projecting by 20% or 50%. Sensitivity analysis is understanding which assumptions in the model are driving the expected outcomes the most. This helps an entrepreneur understand where their emphasis should be on tightening up their market data around assumptions. An example might be understanding that being low on your COGS assumption by 10% may not effect the forecasted outcome much, but missing your sales projection by 10% might collapse the company. 1/2