A Back of the Envelope P&L (sometimes referred to as a Simple Income Statement) is a relatively quick method of evaluating whether a business opportunity is even feasible based on your constraints, or worthy of pursuing based on your business objectives and success metrics. It’s effectively a high-level and very quick financial analysis for your opportunity, but using uncertainty and statistical analysis to produce insightful results.
The general idea is to start with the required outcome of what a successful opportunity would look like at a mature state and work backward from there to identify what key assumptions would need to be true or of a certain value to support or enable that desired outcome. If those assumptions seem reasonable based on what you know, then it’s probably worth exploring further. However; if the required assumptions are clearly unrealistic, then you may want to revisit your hypothesis or simply pass on this one and focus on a better opportunity.
Like a financial viability triage tool, it can help quickly illuminate potential show-stopper level hurdles before you invest significant time, energy, and resources pursuing an opportunity that just isn’t worth it. It will also force you to start to roughly quantify some of your key assumptions. Doing so can reveal where you may need better evidence or basis for those critical assumptions, as well as which might present critical risks or opportunities for upside.
These are the actions that the results or the Back of the Envelope P&L evaluation will likely drive:
