BERKONOMICS – Business insights from Dave Berkus

Accurate assumptions lead to defendable plans

by on Dec.05, 2013, under Finding your ideal niche, Ignition! Starting up, Raising money

The biggest error in planning may not be spreadsheet calculation error.  Or cost estimation.  It is most often missed assumptions about the market, the competition, the speed of adoption, or other critical metrics you’ve researched, or selected, or even just guessed at to create your plan.

Where did you get the data to drive your assumptions of market size or market share?  Most entrepreneurs quote a resource for market size, but fail to then take the next step to eliminate all parts of that market unreachable by the company or product.  For example, if you supply software to the chip design industry, do you segment your market into digital and analog users, into high end or inexpensive buyers, and into which languages or platforms users demand or request?

DB Concordia2It’s easy to find someone to quote a size of market estimate.  I became something of my industry’s source for such a number when I carefully catalogued the 160 players both domestic and international, estimated revenues from knowing the number of employees or installations for each (which were often public knowledge or stated by those companies.)  I then created a gross domestic and gross international annual market size estimate for my industry’s products.  No-one challenged this number, and it became an unattributed source of the metric for market size for years.  Perhaps there was no other way to project the size of that market.  But many decisions were made within my company walls, and surely by competitors, based upon those numbers.

[Email readers, continue here...]  Then there is the famous entrepreneur’s statement about market share: “All I need to sell is one percent of the total available market to make this a rampant success.”  We call that the “gloves in China” syndrome when analyzing assumptions within business plans. Without a trace of how the business will get that one percent, the entrepreneur confidently shows that this is all it takes to make us all rich.  Even if the total number of annual units in a market is known, the leap to a percent of that market without a specific plan is often a fatal one.

And these are just two of the many assumptions that underlie any business plan.  At the very least, all assumptions should be driven by numbers separately listed in an “assumptions section” of the planning spreadsheet, allowing the reader to manipulate those assumptions to see the various outcomes, and challenge the numbers for the benefit of all who have to defend them.


1 Comment for this entry

  • Tim Nguyen

    Thanks, learned something new today! Being relatively new at forecasting and reviewing other entrepreneurs forecasts, I find that most entrepreneurs focus too much on the obvious costs such as rent, insurance and office supplies. While this isn’t wrong, in my opinion the more important forecast items as noted above are much more important and are the only ones that are actually critical. Being off on rent, for example, doesn’t normally put you out of business, while being off on adoption rates does.

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