Where is the Devil in Business Plans ....in the Assumptions?

...is in the details, right? Well if you know where to look. I have often been asked what I look for when I check a business plan. Many people I know spend a lot of time going through the data, the data-sources, the formulae, the methodology (e.g. discounted cash flow valuation) etc. Some even check for links between data-sheets, references and so on. Where I spend 90% of my time, based on my experiences so far, is on the assumptions sheet.

I'm not saying, for a moment, that the output sheet is not sensitive to the other things highlighted above. I'm saying something else. Most people who build business plans can be trusted for accuracy on formulae and linking of cells. Where competence has a smaller role to play is on the assumptions. Assumptions are futuristic, they are usually based on data but there is a choice of data to choose from e.g. for the GDP or inflation data, one could have different sources, all authentic, saying different things. Which source you pick determines which data point is picked up and how your business plan results look. A lot of assumptions are not even data based e.g. assumptions of how much market share one will get in year-3. There is no sure-shot way of getting that data. All you have in such cases are scenarios.

Next interesting point, how many business plans have scenarios built up? Even if it's not a complex monte-carlo simulation here, just basic scenarios - base case, pessimistic, optimistic etc. Now when you apply scenarios on the end-results, which is how it's commonly done, you'll end up pushing up results by 15% for one scenario and down by 10% in another - but that means little. What one could and should do is apply those to the assumptions sheet. Pick up the lowest GDP growth estimate in the pessimistic case, the most probable estimate in the base case and the best estimate in the optimistic case - and so on for all the assumed variables. This gives you a much wider range of what is the worst that might happen when all goes downhill and what is the best case when all looks up.

Now let's take yet another perspective, of biases and vested interests. Often the person who creates the business plan is the person who stands to gain or lose the most by the overall verdict on the plan. If this person were to have an ulterior motive, where do you think he / she plants his / her biases? It'll probably not be in the formulae or methodology - since getting caught there could be the end of that career. It's more likely to be in minor tweaks of assumptions one could easily reason or argue out of.

One more perspective is on what happens to business plans over time. The calculations don't change, what changes is all on the assumptions sheet. Interest rates change, market or competition developments happen, new products hit the market, and the impact is again on the assumptions sheet, and still when we look at our follow-up processes, so very often we tend to focus on the summary sheets e.g. RFP vs. actuals, projections vs. latest forecast etc, rather than setting up a frequency where all the past business plans are reopened and the assumptions revised.

Either way we look at it, checking assumptions is most critical. Updating assumptions periodically is also very important. Finally scenarios - do not accept business plans without scenarios, and without those scenarios being linked back to the assumption-sheet where - you guessed it - each assumption has scenarios.

What has been your experience? Have you caught more devils elsewhere? Or is your experience the same?