How do you build a bottom-up business plan?
Hi all,
I had a couple of interviews where the interviewers asked if I had experience building a bottom-up and detailed business plan. For example, someone from a BB industrials team mentioned that it is important to break down each line item. Take COGS, for instance. He said you would need to list all the components such as raw materials, freight costs, direct labor, and so on. Then, for each raw material like iron or aluminum, you can use market indexes to forecast the pricing. When it comes to operating expenses, salaries are often split between white-collar and blue-collar employees. You would then forecast the number of employees in each group and apply expected salary increases. (p.s. I answered that one can observe the trend of this cost item's % of revenue. Obviously, the interviewer didn't like this too simple method.)
He was not alone. I also spoke with a few BB TMT bankers who asked about my experience with building bottom-up business plans. I understand that in SaaS, key drivers such as ARR, retention, upsell, and new customer acquisition are crucial to forecasting. However, I work at a full-service bank in the M&A team, and I have never had to build a business plan from scratch. All of our clients provided their own. I had assumed that BBs typically work with more mature companies rather than first-time sellers, and that those clients would already have business plans in place. Also, on the buy-side, it seems difficult to obtain detailed enough data to construct a fully bottom-up business plan?
That said, I do not have much experience as an analyst yet. I would really appreciate it if you could share your experiences. How often and under what circumstances do you build a detailed bottom-up business plan? How granular do you usually go? Do you break down every income statement item? What about the balance sheet or cash flow statement lines? And what are some typical methods or approaches you use in this process? How do you typically answer this kind of question in an interview?
Many thanks in advance!
following
Building a bottom-up business plan is a highly detailed and granular process, often required in investment banking, private equity, or corporate finance roles, especially when working with companies that lack robust financial models or when conducting due diligence. Here's a breakdown of how to approach it, based on the most helpful WSO content:
1. Key Components of a Bottom-Up Business Plan
2. Granularity
3. Typical Methods and Approaches
4. When and Why You Build a Bottom-Up Plan
5. How to Answer in an Interview
Example Response
"In my current role, I haven't built a bottom-up business plan from scratch, as our clients typically provide their own. However, I understand the process involves breaking down each line item into its components. For example, in forecasting COGS, I would analyze raw material costs using market indexes, freight costs, and direct labor. For operating expenses, I would separate white-collar and blue-collar salaries, forecast headcount, and apply expected salary increases. While I haven't done this end-to-end, I have experience analyzing and refining client-provided models, and I would approach this task by leveraging historical data, market benchmarks, and driver-based modeling."
By demonstrating your understanding of the process and your ability to think critically, you'll show interviewers that you're capable of handling this task, even if you haven't done it before.
Sources: 21 Finance Interview Questions and Answers, 21 Finance Interview Questions and Answers, Investment Banking Interview Questions - 15 Answers to Land the Job, How would you approach a 4 hour case study?, Investment Banking Interview Questions - 15 Answers to Land the Job
Depends on the type of deal.
I have worked with a company weeks away from bankruptcy so we had to get super granular with AP and AR and timing of inventory orders. Totally sucks to do but had to do it. If a company is in normal operation situation, just assumed a % of COGS or whatever as working capital needs to blanket pre-fund that account. We looked at each contract the company had (~25 contracts) and modeled out the revenue timing terms, had detailed inventory order and payments linked to production (~8 major inventory components ordered and paid for on different terms), G&A was projected by actual headcount, etc. All super detailed monthly basis.
Normally just add $Xmm at close for working capital and call it a day, run G&A proportional to sales / unit growth to a point (# of employees will scale roughly with revenue, more so for blue collar vs white collar however). This is basically all I do, and grow costs with inflation. If a commodity with a futures market is a significant driver, easy enough to pull in the futures data and just use that for the volume of commodity you need.
You need to be careful with super detailed forecasts for longer than a year, they are basically useless past that point so just be conservative with the mechanics of the projections if building a longer term model, no need to over complicate it. Just remember, the financial model should not be more complicated than the business- a simple business needs a simple financial model where a complicated business will need a complicated financial model.
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