All language subtitles for 5 - L2 05 Bottom Up Approachv1 - lang_en

A bottom up approach takes a micro approach to forecasting.

The approach starts by looking at historical data.

The more data you have, the better.

But often, even as little as six months to one year data is used in this approach.

The model forecasts are based on these data to make

assumptions about how the key metrics will behave,

and then we forecast out the revenue based on these assumptions.

Let's look at a sample income statement that uses

bottom up approach to forecast out revenues and net income.

For instance, we started with the historical data.

For example, last year's income statement metrics,

then we use this historical numbers to calculate out

margin metrics as well as historical income tax rates and interest expenses.

The next step is to use those margins and

metrics to come up with the assumptions for the future,

in this case, the following year.

Finally, using those assumptions in our model,

we forecast out the key metrics for next year.

As you can see, bottom up approach is based on assumptions as well,

but it is built on previously attained numbers.

There are specific to how the company has performed,

and not generalizations that relate to the market as a whole.