Based on a column by Marlin Steel President Drew Greenblatt on Inc.com:
1. Craft a well-conceived list of assumptions
Spend most of your time here. This is where the heavy thinking happens. What do I think the economy is going to do? Will I need additional help? What product lines are apt to grow? Which aren’t? What kind of raises should I give my employees?
2. Lay these assumptions into three scenarios
A bad year, a good year and a great year. The purpose of this exercise isn’t just to create a game plan for all the bad things you could conjure up. It’s also to shape aspirations and to set high goals for the best scenario you can envision.
3. Use the conservative scenario
It’s obvious why. You have to ensure that you can handle surprises. Your assumptions shouldn’t be too optimistic. Even in good times, challenges arise that must be managed: a key employee retires or leaves for another opportunity. An important account goes away. Something affects a relationship with a vendor. You’re more vulnerable when you overestimate positives that never arrive. Nevertheless, you’re trying to be aggressive as possible in order to grow your business and flourish.
4. When you’re done, go back and reduce the revenues by 10%
… Then increase the costs in your plan by 10%. This was probably some of the best advice I've ever received. You’re going to face surprises along the way. A 10% cushion on both sides of the equation will help you through those.
5. Create a balance sheet, an income statement and a cash-flow statement
They will help provide a full picture of your assets and liabilities, your financial operations and of the flow of cash in and out of the business. Some small businesses wrongly forgo this exercise, assuming they’re too tiny to bother. They should not suppose that. Plugging your assumptions for the coming year into a financial framework helps validate them. It holds them to a higher standard. They’re not just pie in the sky.
6. Review your assessments
Especially with your accountant and your trusted mentors.