Entrepreneurs who are starting businesses must make hundreds of assumptions about their business, their market, and their industry. If they waited until all of these were confirmed before starting their business, they would likely be too late to enter the market. Instead,
- Intelligent guesses must be made (and documented!) concerning values for these assumptions
- Financial plans must be created based on these assumptions, to confirm whether the company could produce good financial returns
- The company should be launched and experiments formulated and conducted as early as possible to confirm or refute each of the assumptions
- As an assumption is confirmed, risk is reduced
- As an assumption is refuted, its value should be modified to reflect the now-known truth, financial plans should be once again created based on these new assumptions. If the financials no longer indicate good financial returns, then other assumptions need to be modified to compensate. If these modifications return the company to one of solid financial outcome, then continue running the company and conducting experiments (return to step 3). If what has been learned from the experiments makes it impossible to modify any assumptions to produce financials with acceptable outcomes, then it may be time to quit.
The question I want to answer in this blog entry is “what types of assumptions need to be made?”
Assumptions fall into a variety of categories:
- What products will you sell? What features will they have ? See my www.offtoa.com/wp/?p=168 blog.
- Which markets will you sell to? Which vertical market will be your initial target market? What are their biggest pain points? See my www.offtoa.com/wp/?p=176 blog.
- At what price(s) will you sell each product for in each market? What type of promotions or sales will you conduct? See my www.offtoa.com/wp/?p=213 blog.
- How much will it cost you to acquire each new customer? This is called your customer acquisition cost (CAC). How long does it take to acquire them? This is called the sales cycle.
- For each customer who purchases from you, how much will they spend each time they purchase? This is called average order size (AOS). How often will they make such a purchase (it could be just one time, or it could be monthly, or quarterly, or annually, etc.). This is called purchase periodicity.
- How many customers remain customers after one year? This is called the retention rate.
- For each new customer, how many other customers do they refer? This is called the viral coefficient. How long does it take for them to make the referral? This is called the viral cycle.
- If you are a reseller, wholesaler, retailer, or distributor, what does it cost you to purchase your products? If you are a manufacturer, what do you raw materials cost and what does it cost you to manufacturer? This is called cost of goods sold.
- How many employees will you hire? How will you compensate them?
- Will you be paying commissions?
- What expenses will you incur? Travel? Legal? Rent? and so on.
- What major purchases will you be making? These are called fixed assets. Machinery? Computers? Real estate? and so on.
- What loans do you expect to receive? How much? When? What terms?
- What investments do you expect to receive? How much? When? What terms?
- Payments. How soon do you expect customers to pay you? How soon do you expect your suppliers will want you to pay them?
The above is extracted from my latest book, Will Your New Start Up Make Money? Buy your copy in Kindle or paperback format at http://www.amazon.com/Will-Your-Start-Make-Money-ebook/dp/B00JOOZQNE.