Here is an inflation-adjusted chart of 100 high-tech companies (click for interactive chart):

This chart is a useful reality check on business plans.  It’s very hard to be a “rocketship” – one of the red curve companies in the chart that attains $50mm within 5 years.  Neither Microsoft nor Oracle did so and if your business plan says you will, it’s probably incorrect.

Typically, what happens when somebody designs a conventional plan is they start off with the revenues they hope to get. They estimate what the costs are. They subtract the costs from the revenues and that tells them what the profits are going to be. A reverse income statement starts with the profits I must earn to make it worthwhile. I can then calculate what the maximum cost can be in order for me to make those profits, and then what the revenue should be in order for me to make the profits.

So, you start with the income statement at the bottom and you work up instead of starting at the top and working down. That’s what we mean by the reverse financials. Very rapidly, you may find that in order for you to be able to make the numbers that you plan to make in terms of profits, all you need is 5000% market share — at which stage you say, “Oops, let’s go and do something else.” You really don’t know, but it gives you a sense of what the scope is.

[By Rita Gunther McGrath, courtesy knowledge@wharton]