In a Start-Up

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,

1. Intelligent guesses are made concerning values for these assumptions
2. Financial plans are created based on these assumptions, to confirm whether the company could produce good financial returns
3. The company is launched and experiments are formulated and conducted as early as possible to confirm or refute each key assumption
4. As an assumption is confirmed, risk is reduced
5. As an assumption is refuted, its value should be modified to reflect the now-known truth, financial plans are 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.

In an Ongoing Business

Business owners who are about to make major decisions need to understand the financial ramifications of those decisions. Also, businesses applying for loans need to create pro forma financial statements to show lenders future expected revenues, profits, and cash flows. You could create all these reports by hand. Instead,

1. Intelligent guesses are made concerning values for business assumptions
2. Financial plans are created based on these assumptions, to confirm whether the company could produce good financial returns
3. The company proceeds and experiments are formulated and conducted as early as possible to confirm or refute each key assumption
4. As an assumption is confirmed, risk is reduced
5. As an assumption is refuted, its value should be modified to reflect the now-known truth, financial plans are 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.