3 Reasons You Should Love the Reverse Income Statement (RIS)

Even if you get vision, culture, and brand right, success is still measured by the things you can capture in a spreadsheet. My favorite spreadsheet, though, are the ones that tie all those things together.
This past summer, the students in my MBA class took special note of my, perhaps, overwrought appreciation of the Reverse Income Statement (RIS) as a tool for developing strategy.  Admittedly, it is not sexy or flashy and will not offer any sort of output you can use in a Powerpoint.  It is a solid tool for rationalizing your assumptions and keeping track of all those “testable theories” that accumulate when you are business planning.
First, let’s accept that the RIS is like Pad Thai – there are endless variations on the basic premise.  I have a version that I rely on often enough that I have it as a template in 4 different apps: Excel, G-suite, Numbers and Calc.  I offer the Microsoft Excel version here:

Creative Commons License
The Official BizDevGuy Reverse Income Statement Template by Jim Haviland aka BizDevGuy is licensed under a Creative Commons Attribution 4.0 International License

My advocacy for this particular instrument is less important than reasons why I think it is so valuable for strategy development and business planning. I will offer details on using it below but first, the reasons I think business planners and strategists should love it as much as I do.

  1. Focus on the outcome: The very top of your RIS is your business goal and it is a number.  Yes, you need to know your WHY and have a mission and other organizing thoughts but you also have to be able to communicate to yourself and your stakeholders what success looks like in concrete, measurable ways that convey value.  It doesn’t have to be a currency figure but it has to be a number that you can use as the basis for the rest of your calculations. Even if you are guessing, you start with an outcome.
  2. Catalog your “testable theories”: The best and worst part of Entrepreneurs is their optimism.  Over time, optimism can turn reasonable assumptions into unimpeachable myths and false hopes unless they are informed by new insights or challenged by data.  I have noticed that business plan assumptions and press release logic can quickly become common knowledge unless you have tactics and disciplines in place to check them and keep exuberance in check.  In the RIS, everything you input to the calculations are listed as assumptions. On my version you also include sources and how frequently you should recalibrate.
  3. Know your numbers:  One of my favorite modern fictional characters is fake President Josiah Bartlett.  He had Mrs Linninham to ask “what’s Next?” but the rest of us need guidance, day by day, hour by hour, to determine what’s the next best thing for us to work on.  Business strategy can become complex math pretty quickly but we shouldn’t use that as an excuse not to know the numbers that best align with our predictions and the intended future. In my version of the RIS, you are asked to capture when and how you validate your assumptions and assign a member of the team to do the validating.  The more you share ownership of your numbers, the more everyone on the team can see, in very real terms, how their contribution in action or measurement impacts the overall outcome. The RIS wont relieve you of having the usual financial statements, but it is easier for everyone to look at a determine whether the effort is headed in the right direction.
The hardest part of working from a template like this is getting started.
In my template, I offer a sample of a RIS for a pizza restaurant.  It includes financial calculations as well as operational considerations.  For me, the operational metrics are the most important part of the power of this tool as it allows clear linkage between operations and the front office.  Many parts of an organization of any size can struggle to feel their connectivity to the financial performance of the organization.  
For smaller organizations, marketing offers an even bigger problem than operations.  Many of the business leaders I have worked with ask the age old “attribution” question: “How do I know my marketing dollars are growing the bottom line?”  The RIS doesn’t make the absolute causality of sales or profitability any easier to track but it does offer a pretty easy way to look for correlation, which is almost as good and sometimes better.
When I start a new RIS, I like to start small, capturing a few dozen assumptions and then using them a number of ways to calculate some things that will be easy to track like daily activities or outcomes.  In my example in the template, you should be able to get to the end of a day and, from the number of pizzas sold, decide on ordering for the next day and whether you are on track for the week or month.  After a week, you could add a new marketing campaign to the mix.  Your assumption would be number of emails sent or ads purchased.   The impact on sales could be seen even though you wouldn’t want to pretend that you know it is causal because lots of factors that you haven’t captured yet could be at play.  I like to keep adding Assumptions as time goes on and I realize what I am assuming and what can make a difference.
The really power of my version comes from using it to validate results and allow everyone to contribute to the numbers.  Weekly or monthly sessions reviewing the document will expose differences in opinions that can be very meaningful to catching problems before they grow to tragedies.
Over time, some of your assumptions will “lock in” and become pretty reliable facts – understandings that all your team can own and use to make decisions everyday, fully bought-in on their meaning and impact.
That level of alignment is something, I think, everyone can love.

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