Often when we make plans, the last thing we do is test our assumptions.
We based our sales projections or plans for the following year based on certain assumptions we hold dear.
So we plan to make about R1 million sales next year? Great stuff.
What is the assumption that we base the R1 million on?
There is this client and that client that promised that they will sign up for our services, so yeah if we get them, we should make our R1 million target.
What happens if our assumption is wrong, what if they don’t sign up?
A manager I respect a lot was fanatical about understanding financial data.
He refused to get any analysis started without sitting down with the data provider and asking all the basic questions.
“Why this number? What exactly does it mean? Do the numbers make sense to you?”
Here is why, you often begin by making simple assumptions, oh sales must refer to gross sales and very soon, you build on these assumptions and make a few more of your own.
As you begin looking at the data in various ways, your initial assumptions become embedded.
When Disney were building their theme park in France, the projections always assumed there would be 3 million people/year visiting the theme park, the same as the Orlando theme park.
At the end of the first year, the projected 3 million people had shown up but the revenues were significantly smaller. Why?
The theme park in France was smaller than the one in Orlando. As a result, most people just made it in and out with just a day trip.
This was not possible in Orlando because people stayed for 2-3 days when they visited. This assumption about size just got embedded within the numbers until no one questioned it.
It took Disney a year or so to modify assumptions and fix this problem by adding attractions.
D’oh? Well, yes and no.
If you are an accountant who has made financial models and projections, you know that such errors can happen to anyone.
The lesson I have taken away is, if you are inheriting data, a tool, or a framework created by someone else, don’t assume anything.
Go through each and every part of it with the creator making sure you understand everything where possible.
A startup business is one big series of assumptions. Assumptions that the product will be well received by the market, assumptions that your business will start small and grow, assumptions about your financial projections etc.
Some assumptions will prove true and most will come out false.
Once you understand that you are in the business of making assumptions, once you ask and understand the ‘why’, go crazy with the ‘why not’ and the ‘what if.’