Lesson 1 of 7 · 13 min

The model's structure and the revenue forecast

A sales-based model starts with revenue, built from volume, price/mix and currency for each segment, and then derives almost every other line from that revenue forecast.

In short

  • A financial statement model is the starting point for most valuation models, whether the valuation uses free cash flow, EPS, EBITDA or EBIT.
  • The pro forma income statement is built in order: revenue → COGS → SG&A and other operating costs → EBIT → non-operating items (interest, taxes, shares outstanding).
  • Revenue change comes from volume, price/mix and foreign exchange. Volume and price/mix together are organic growth; acquisitions and divestitures (scope change) and currency are shown separately.
  • Volume and price effects compound: organic growth = (1 + volume growth)(1 + price/mix growth) − 1.
  • Top-down forecasts start from the economy or industry (e.g. GDP growth and market share); bottom-up forecasts start from the company or its units (e.g. its own historical growth); a hybrid combines both.

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The model's structure and the revenue forecast · Introduction to Financial Statement Modeling