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How Far Out Can You Plan?

By its nature, a business plan requires you to project how events will turn out in the future. If the assumptions on which you base your planning are sound, the results of your operations may be very close to what you predicted. Over time, however, small deviations add up, and a plan that accurately predicted how your first few months would turn out will become increasingly inaccurate.

When you hear an extended weather report, you know that the predictions for today and tonight are more likely to be accurate than the five-day forecast. Similarly, many of the variables that can affect businesses in general or your business in particular aren't easily predicted. The value of the dollar compared to foreign currencies, interest rates, and many other factors that can affect a business's profitability change constantly. There are no guarantees. So how far out do you plan?

The answer is: it depends. For example, there were no doubt hundreds of aspiring entrepreneurs in Atlanta who figured out a way to profit from the Olympic Games. Some of these businesses came into being, operated, and shut down in less than a year, as one-time opportunities. On the other hand, some businesses may spend months or years in a product development stage before any sales activities begin. A software business may expend tremendous amounts of money and time developing a product, with the expectation that the product will be sold, and upgraded, for a number of years to come. Obviously, the planning horizon for the software business would be far longer than a business designed around the Olympics.

As a general rule, for an "average" business, a five-year plan is a reasonable starting point. But that doesn't mean mapping out, month-by-month, or week-by-week, what is going to happen over the next 60 months. The level of detail will drop as your plan covers periods further into the future. The cash flows that are tracked weekly or monthly during the first year of operation may be projected by quarter in the second year, and annually in the third through fifth years. Just how this transition from detail to the big picture is managed will depend on your specific business.

Predicting your sales, costs of goods, or what the prevailing wage rates will be one, two or five years down the road is no easy matter. Obviously, the assumptions relating to the very near future are more likely to be accurate than those relating to periods further out. For example, if interest rates have held reasonably steady for the past six months, assuming that it won't double or halve in the next month is a fairly safe bet. But you would be much less certain where the rates might be in 12 or 24 months.

Example

If you're a consultant, and you tend to work on one or two projects at a time, it will be extremely difficult to plan out beyond the job or jobs you're currently working on, plus perhaps a few more. This may not take you through a five-year planning period. But it doesn't foreclose making rough estimates for the later periods.

You'll also want to consider how often you'll be updating your plan. For example, if you're planning to update every year, you'll probably want to have at least 13 months of detailed projections in your plan, so that if circumstances knock you off of your schedule you'll still have a month's worth of information while you develop next year's plan.