Explicit assumptions are assumptions of which the intention that is fully revealed or expressed without vagueness, implication or ambiguity. However, explicit statements in a plan often have hidden implicit assumptions. Implicit assumptions are assumptions that are not expressed and may go undetected. If implicit assumptions prove to be wrong, this can damage projects. Assumption-based planning. The blue part of the figure depicts the process steps of a general assumption based planning method, the white part identifies the separate deliverables. Every step is described in the assumption based planning process list. The steps of assumption-based planning are:
1. Identify assumptions: Collect all assumptions implicit, explicit, primary and derivative, out of the (business) plan.
2. Determine criticality: Try to quantify the assumptions as much as possible in order to determine which assumptions have the greatest (financial) impact.
3. Design tests: Design a test for every critical assumption. In a test design you state how to test the assumption and what proves the assumption wrong or right.
4. Schedule tests: Every critical assumption needs to be tested, but not all assumptions can be tested in the present. So future assumptions tests are scheduled in a test schedule. Some possible reasons to schedule a test in the future are a lack of information in the present or a dependency on the test outcomes of other tests.
5. Test assumptions: Then an assumption is tested this results in a test outcome, which proves the assumption right or wrong.
6. Reassess plan: Based on the test outcomes and the test schedule one might decide to reassess the venture plan and update the business plan with the new insights gathered in the ABP process.
7. Plan re-testing: The assumptions need to be re-tested regularly if not constantly. There should be a retest schedule of every critical assumption.
8. Create or update the assumption plan: The assumption plan holds all data gathered during the ABP process.
Assumptions in the Planning and Budgeting process are essential because, no matter how good your crystal ball may be, the nature of forecasting always leaves something to the unknown. Defining and documenting the assumptions is a critical step during the initial stages of the planning process. Key assumptions related to the overall strategy of the company should be included in the planning guidelines and communicated to all participants in the planning process. Assumptions should span all operational facets of the business, the marketing outlook, and the financial ground rules to work harmoniously throughout the planning and budgeting process.
Assumptions can relate to both long and short term aspects. Long term assumptions should be tied to the long term goals and strategy. Short term assumptions should focus on the operational initiatives within the immediate 12 month outlook. Information used to form assumptions is usually more relevant in a one year budget than in the 5th year of a 5 year budget. The accuracy of assumptions is also dependent on the length of time taken for the planning process. Companies who usually take three to six months to establish their budgets may find that assumptions originally submitted with planning guidelines may be obsolete. Assumptions should be reevaluated and updated to be in sync with current business conditions and other budget decisions before the budget is approved, which could be associated with the number of budget iterations throughout the planning process.
No other management process has as much dependence on assumptions as planning & Budgeting. Some major categories of assumptions are: Organization, Competition, Regulatory, The Economy, Customer, Supplier, Process, etc. Some assumptions may be trivial and not worth the effort to document them while other may be extremely important. The criteria for documentation should be the reliance by and impact on other assumptions and decisions. Three significant factors drive the necessity to document assumptions. First, at some time in the future, a decision will be re-evaluated. Meanwhile, time will pass, memories will fade, and conditions will change.
A past decision may have been perfectly valid based on the assumptions present when it was made. However, after time has passed, an evaluation of the decision must look to the assumptions that it was based on. If the same decision would have been made, then the decision was valid but the results were not as expected. If the same decision would not have been made, then the decision-making process should be examined and improved.
Second, reviewing past assumptions after the cycle is completed is a path to improving the planning and budgeting process particularly in terms of new assumptions. Significant assumptions should be reviewed to determine how they played out to determine whether the assumption process can be improved, whether the execution can be improved, or whether it was simply out of the organization's control. Third, the planning and budgeting process interacts with many processes as well as organizations and organizational levels. Documenting assumptions assists the essential communication process embedded within Planning and Budgeting.