Lesson 2 of 11 · All lessons in this module
- Disaggregated models: why and how to build a forecast valuation model
- Forecasting revenue: top-down, bottom-up and non-recurring items
- Forecasting operating costs: COGS, SG&A and segment margins
- Expense models: regressions, itemized costs and margin assumptions
- Working capital, capital investments and capital structure
- Asset and financing models: investment, financing needs and FCFE
- Integrated cases: a regional revenue build and richer financing assumptions
- Scenario analysis: risk factors, cost structure and sensitivityVideo lesson
- Matching the model to the company: life cycle, distress and control
- From forecast statements to equity value: FCFF, terminal value and scenarios
- Integrated case: from assumptions to equity value, step by step
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 2 of 11 · 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.
Unlock this lesson free for 7 days
Create a free account to get 7 days free: every lesson, video and flashcard, and the question bank. No card needed.