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Top-Down Forecasting

Estimating a company’s future performance by working “down” to revenue

What is Top-Down Forecasting?

Top-down forecasting is a method of estimating a company’s future performance by starting with high-level market data and working “down” to revenue. This approach starts with the big picture and then narrows in on a specific company. This guide will provide examples of how it works and explain why it’s commonly used in financial modeling and valuation.

 

Top-Down Forecasting

 

Example of Top-Down Forecasting

Below is a top-down forecasting example for predicting Amazon’s future revenue growth. This example comes from CFI’s Advanced Financial Modeling Course and Amazon case study.

 

Step #1 Total Addressable Market (TAM)

As you can see in the screenshot below, a financial analyst begins the analysis by outlining the Total Addressable Market (TAM) for each of Amazon’s business segments. This is a common place for starting a top-down analysis, although it is possible to start “further up” at something like Gross Domestic Product (GDP), for example.

 

Top Down Market Analysis - Example

Image: CFI’s Advanced Financial Modeling Course and Amazon case study.

 

In Amazon’s case, since the company operates in several markets, it’s important to find the TAM for each segment. In the course, we provide the TAM figures from sources such as E-marketer, Statista, and Gartner.

 

Step #2 Market Share

The next step is to estimate how much market share you believe the company will capture in the future. Continuing with the Amazon course, you can see that we estimate the company will have a 20% share in the global E-commerce sector, 10% share in global advertising, and 21% share in global cloud computing by the end of 2028.

 

Step #3 Revenue

With the market share figures in place, we can calculate the company’s estimated revenue by multiplying the TAM by the percentage (%) share. Depending on the level of detail in your financial model, you may also wish to add other assumptions such as the volume of order and the average prices of products or services being sold.

 

Top-Down vs. Bottom-Up Forecasting

The opposite approach to top-down forecasting is called bottom-up forecasting, which begins with detailed assumptions such as the number of customers, volume of products, and unit prices to build “up” to revenue. It is also a very common method of building a forecast in financial modeling and valuation.

 

Alternative Forecasting Methods

There are still several other forecast methods, in addition to top-down and bottom-up, such as regression analysis and Year-over-Year (YoY) analysis.

In regression analysis, a financial analyst uses Excel to calculate how changes in independent variables impact the dependent variable (revenue).

Year-over-Year analysis is the simplest method of forecasting where an analyst will look at historical growth rates and apply a growth rate percentage to historical revenue.

Learn more about different forecasting methods in CFI’s Budgeting and Forecasting Course.

 

Additional Resources

Thank you for reading this guide to the top-down method of forecasting. CFI is the official provider of the Financial Modeling & Valuation Analyst (FMVA)® designation, designed to transform anyone into a world-class financial analyst. To learn more, these additional resources will be helpful:

  • Revenue Recognition Principle
  • Startup Valuation Metrics
  • Types of Financial Analysis
  • Valuation Methods

Financial Modeling Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!