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Forecast assumptions

A sentence sorted as observed or expected, the check each kind needs, and a sales forecast split into what the record supports and what each assumption adds.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will sort the lines of a forecast into evidence and assumptions, match each to the check that fits it, and split a sales forecast into the part the record supports and the part that rests on each named assumption. You will also set a cautious, central and hopeful forecast side by side.

2. What you already have

You can build a cash forecast and read its low point. Every figure in it came from somewhere: some from records, some from what the owner expects. This lesson is about keeping the two apart — labeling each line, pairing it with the check that fits it, and measuring in dollars how much of a forecast rests on each assumption, so that a buffer or a loan is sized on what is known and the hopes are visible as hopes.

3. Words this lesson uses

4. Two kinds of sentence, one label each

Two sentences from Corner Bean's forecast notes:

• The Town Hall canteen has paid every invoice this year between 35 and 40 days after its date.
• The canteen will start paying on thirty days from next month.

The first can be checked this afternoon by lining the invoice dates up against the bank statement. The second cannot be checked until next month's payment lands. Both might be true. Only one is known.

A forecast needs assumptions — it is about the future — so the aim is not to remove them. It is to label them, so that anyone reading the forecast can see which figures are record and which are hope, and how much of the answer rests on each.

That can be measured. Corner Bean's takings for three months were 8800, 9100 and 9400: an average of 9100. Alexa expects 5 percent more once the new sign is up.

$$\text{forecast} = 9100 \times 1.05 = 9555$$

Of that 9555, 9100 is evidence and 455 is the sign. If the sign does nothing, the forecast is 455 too high — and a buffer sized on it is 455 too thin.

5. The method, step by step, and how to check it

Go through the notes line by line. Every figure in a forecast came from a sentence, written or not. Write the sentence down.

Label each one. Could a record confirm it today? Then it is evidence. Only the coming months? Then it is an assumption. A sentence that mixes both — sales rose 4 percent last quarter and will keep rising — is two sentences, and is split.

Write the check. For evidence, the document to open. For an assumption, what to watch and when it should show.

Work the evidence figure. From the records alone: an average, the last month, the same month last year — whichever the record best supports, and say which.

Work each assumption's part in dollars. Its percentage of the evidence, or the extra it adds. Add them to the evidence for the forecast.

Check the forecast by taking every assumption out: what is left must be the evidence figure. Then look at the size of each assumption's part against the cash buffer: an assumption whose part is larger than the buffer can empty the account on its own if it proves wrong.

6. Writing an assumption so it can be checked

An assumption earns its place in a forecast when it is written so that the coming months can prove it wrong. That takes four things: what is assumed, as a number; why, in a sentence; when it should start showing; and what to watch. Sales will pick up fails all four. The sign adds 5 percent to takings from May, because the café two streets away saw that; compare May's takings with April's passes them.

Written that way, the forecast carries its own test. When May's figure arrives, the owner knows at once whether to keep the 455 or strike it — before the low month, rather than in it.

7. Evidence that is weaker than it looks

Not every record is equally good evidence for next month. A one-off month — the week a festival came to town, a single large order — is on record and still a poor guide. A seasonal pattern means last month is a worse guide to next month than the same month last year. A changed business — a new product, a new competitor, a new price — makes old records describe a business that no longer exists.

So the evidence figure is chosen, not just calculated, and the choice is written down: the average of the last three months, excluding the festival week, or last December, because December is always different. A reader can then see not only what the forecast assumes about the future but what it assumes about which past is the right guide.

8. A range instead of one number

Once the evidence and the assumptions are separated, a forecast can be written as three figures instead of one. Cautious: the evidence alone, with every assumption left out. Central: the evidence with the assumptions the owner believes most likely. Hopeful: the evidence with every assumption coming true.

Each has its use. The cautious figure sizes the buffer and the line of credit: if the business can survive on it, it can survive. The central figure is the plan. The hopeful figure is useful mainly as a warning: a decision that only works if everything goes right is a decision to be wary of. Showing all three to a lender or a partner is also more honest, and more persuasive, than one confident number that turns out to hide a hope.

9. Reviewing the assumptions as the months arrive

An assumption written with its check is a small experiment, and each month delivers a result. The habit that makes forecasts improve is to read those results on purpose.

At each month's end, go down the assumptions page. For each one that should have started showing, compare what happened with what was assumed, and mark it: confirmed, partly confirmed — the sign added 2 percent, not 5 — or not seen. Move each confirmed assumption into the evidence column for the months ahead; cut each partly confirmed one to what was actually seen; and strike or push back each one not seen, with a note of why.

Two patterns are worth watching over several months. An owner whose assumptions are always too hopeful should build the next forecast on the cautious figure and treat the rest as upside. An assumption that has been pushed back three months running — the office block that will open soon, the contract that will be renewed next month — is usually not an assumption any more but a hope, and belongs out of the central figure altogether.

Done in ten minutes each month, the review keeps the forecast honest, and it gives the owner a record of how good their own guesses are — which is the most useful evidence of all for the next forecast.

10. In the world: a new café's first loan application

A couple opening a second café asks their bank for a loan of 40,000 dollars. Their first forecast shows the new café taking 18,000 a month from its third month and paying back the loan comfortably. The bank's lending officer asks where the 18,000 comes from.

They rewrite the forecast with every line labeled. The evidence: their first café takes 16,000 a month on a similar street, from two years of register reports; the new site's rent and wages are quoted in writing. The assumptions: the new site will do as well as the first (from the first café's record, but a different street); it will reach that in three months (the first café took five); and a nearby office block will add 2,000 a month (from a conversation with its facilities manager).

The cautious forecast — the first café's average, reached in five months, with no office trade — gives 16,000 from month five. The central forecast gives 16,000 from month four. The hopeful one is the original 18,000 from month three.

The bank lends on the cautious forecast, with repayments starting in month six rather than month four, and the couple size their opening buffer on the same figure. Four months in, the café is taking 15,200 and the office block has not produced much trade. Because the plan was built on the cautious figure, it holds.

11. In the world: the assumptions page

Business plans submitted to lenders, investors and grant bodies usually include a page listing the forecast's key assumptions — sales growth, prices, payment terms, costs — each with its source. Reviewers often turn to that page first, because it says in a few lines how much of the forecast is known and how much is hoped for.

12. Where this goes wrong

A figure in a spreadsheet is evidence. Typing a hope into a cell does not make it observed.

Every line of a forecast is a guess. Many are records, and they are the forecast's foundation.

A good forecast has no assumptions. It has labeled ones.

Precise means reliable. 9555 looks exact and 455 of it is a sign nobody has hung yet.

Any record is good evidence. A one-off month, or a record from before the business changed, can be a poor guide to next month.

An assumption pushed back is still an assumption. One that has slipped three months running is a hope, and belongs outside the central forecast until something in the records shows it starting, such as a signed order or a first payment received.

13. Fixit Mobile's clinic contract

1. Add the three months from the register reports: 6,600, 7,200, 6,900.

   $6600 + 7200 + 6900 = 20700$

   Only the records.

2. Divide for the evidence.

   $20700 \div 3 = 6900$

   Checkable today.

3. Raise it by the assumed 10 percent if the clinic renews.

   $6900 \times 1.10 = 7590$

   The forecast with the assumption.

4. Find what rests on the renewal.

   $7590 - 6900 = 690$

   The assumption's part in dollars.

5. Write its check.

   $\text{the clinic's answer, due before the month}$

   An assumption tested by what happens next.

14. Corner Bean's forecast as a range

1. Find the evidence: three months of 8,800, 9,100, 9,400.

   $(8800 + 9100 + 9400) \div 3 = 9100$

   The cautious figure.

2. Add the sign's 5 percent.

   $9100 \times 0.05 = 455$

   The first assumption.

3. Add the canteen paying on time, bringing 400 into this month.

   $400$

   The second assumption.

4. Write the central figure: the sign only.

   $9100 + 455 = 9555$

   What Alexa believes most likely.

5. Write the hopeful figure: both.

   $9555 + 400 = 9955$

   Everything coming true.

6. Size the buffer on the cautious figure.

   $9100$

   If the café survives on this, it survives.

15. Long Row Gardens and a festival week

1. List the last three months' takings: 3,900, 6,300 and 4,400.

   $3900, \ 6300, \ 4400$

   The middle month includes a festival.

2. Find the plain average.

   $(3900 + 6300 + 4400) \div 3 \approx 4867$

   Pulled up by the festival.

3. Take out the festival's 2,000.

   $6300 - 2000 = 4300$

   The month as it would have been.

4. Find the average without it.

   $(3900 + 4300 + 4400) \div 3 = 4200$

   Better evidence for an ordinary month.

5. Raise it by the assumed 15 percent from the irrigation.

   $4200 \times 1.15 = 4830$

   The central forecast.

6. Find what rests on the irrigation.

   $4830 - 4200 = 630$

   The assumption's part.

7. Compare with a forecast built on the plain average.

   $4867 \times 1.15 \approx 5597$

   Nearly 770 higher, from counting a one-off as ordinary.

16. Your turn: three months of 3900, 4300 and 4400, with 15 percent assumed

1. Find what the record supports.

   $(3900 + 4300 + 4400) \div 3 = 4200$

   Average the three months.

2. Raise it by the assumption.

   $4200 \times 1.15 = 4830$

   The forecast.

3. Your turn: work this step out. Its working is at the end of the packet.

   Find what rests on the assumption.

17. Guided practice

A line from the notes to the cash forecast at Corner Bean: “Sales will grow five percent a month once the new sign is up.” Is it evidence or an assumption?

• Evidence: it reports what has already happened
• An assumption: it says what will happen
• Evidence, because it is written in the forecast with a figure
• An assumption, because every line of a forecast is a guess

18. Guided practice

Complete the worked solution: a shop's takings for three months were $6500$, $7700$ and $6500$ dollars. The owner assumes $11$ percent growth next month. Split the forecast into evidence and assumption.

1. Add the three recorded months.

   $6500 + 7700 + 6500 =$ _s

   Only what the records show.

2. Divide by three for the average.

   $(\text{total}) \div 3 =$ _a

   What the evidence supports.

3. Raise it by the assumed growth.

   $(\text{average}) \times 111 \div 100 =$ _f

   The forecast with the assumption.

4. Find the part that rests on the assumption.

   $(\text{forecast}) - (\text{average}) =$ _w

   What disappears if the growth does not come.

5. Write the check beside it.

   $\text{compare next month's takings with the average}$

   An assumption is tested by what happens next.

19. Guided practice

Takings at Long Row Gardens for the last three months, as recorded, were $3900$, $4300$ and $4400$ dollars. The owner expects $15$ percent more next month if the new irrigation lifts the yield. What monthly figure does the record on its own support, as the average of the three months?

Answer:

20. Practice

Takings at Corner Bean for three months were $8800$, $9100$ and $9400$ dollars. The owner assumes $5$ percent growth because the new sign brings people in. Fill in the two lines of next month's forecast, in dollars.

21. Practice

Four lines from the three businesses' forecast notes. Match each one to the check that fits it.

22. Practice

A bakery's takings average $9100$ dollars a month over the last quarter, from the register reports. For next month its owner assumes $7$ percent more from a new wholesale customer and $3$ percent more from a price rise. Fill in the evidence, the part resting on each assumption, and the forecast, in dollars.

23. Somewhere new

A bike rental shop by the river is forecasting its summer. Label each sentence in its notes as evidence or an assumption.

24. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

25. Test question

The forecast at Fixit Mobile puts next month's takings at $7590$ dollars: the average of three recorded months, $6600$, $7200$ and $6900$, raised by the $10$ percent the owner expects if the clinic contract is renewed. How many dollars of the forecast would disappear if that assumption proved wrong and takings stayed at the recorded average?

Answer:

26. What you can do now

You can label a forecast's lines and measure how much of it is hope. Tell someone why a forecast needs assumptions and why each one needs a label. Next: finding which assumption could overturn a decision.

Working for the steps left to you

16. Your turn: three months of 3900, 4300 and 4400, with 15 percent assumed, step 3