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Lesson 2 of 9 · 15 min
Forecasting revenue: top-down, bottom-up and non-recurring items
Revenue is forecast from top-down drivers (growth relative to GDP, or market size × market share) or bottom-up drivers (volume × price, segments, capacity, yields), with non-recurring effects stripped out and the two views used to check each other.
In short
- Top-down drivers: growth relative to GDP (a premium in basis points or a relative multiple of nominal GDP growth) and market growth and market share.
- Bottom-up drivers: volume × average selling price, product-line or segment revenues, capacity-based measures (stores × sales per store, same-store sales) and return- or yield-based measures (loans × yield).
- Combining top-down and bottom-up exposes implicit assumptions and errors, e.g. a bottom-up build that implies an unrealistic market share.
- Non-recurring items are forecast separately: some are disclosed (currency, extra selling days, acquisitions, one-offs), others need judgment (a temporary demand boom).
- Any of the four approaches can be applied to revenue objects; every forecast embeds a view on competition, the business cycle, inflation/deflation and technology.
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