Revenue Build-Up
Can someone with some modeling experience explain to me revenue build-up? Especially why someone would choose a specific rate to build the revenue up. Thanks a whole a lot if anyone can.
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a revenue build is a bottoms approach to estimating a company's sales. For example, for a retail company, you might attempt to model out revenue by sales by store taking into account geography, sq footage and various other factors, rather than just taking the previous years actual results and applying a growth rate to it. For a hospital company you might attempt to model out number of admissions and expected growth, pay per admit across various insurances (Medicare, Medicaid, private pay) and might even take into account pay by geography if the data is available among other factors. It leads to more precise estimates or at least has less margin for error than just slapping a growth rate to a previous year's revenue figure. Essentially, you are trying to model as closely as possible how the company makes it's money so that you have a sense of where your projections are coming from and the potential variance in them (also how most corporations think about their revenue generation). Depending on the industry and the amount of time you have, you will have more or less available data to do a detailed revenue build (same goes for COGS build, balance sheet builds, etc)
Ofcouse, most of the time the revenue build will be a one or two step process, and you will find the best research report or just apply median research growth rates to make life easier in banking.
Thanks a lot. Yea let me try to explain the specific rate. I'm basically looking at this old model and trying to teach myself how its done. I'm not completely familiar with modeling so naturally i have a few questions. Basically what is happening in the revenue projection is the model is taking last years revenue + 35% of this years revenue. The 35 % is the specific rate i was referring to. So i just dont know how they arrived at the 35% number to use. Its just labled as "build-up rate". Any ideas?
"taking last year's revenue + 35% of this years revenue"??? LOL
2008 Rev = 2007 Rev * (1.35)?
They probably didn't "arrive" at the 35%. Most likely, it's one of two scenarios... either the 35% is representative of a past historical revenue growth rate the company has experienced and it may have been adjusted based on company projections or it's based on a revenue growth rate from comparable companies. What's driving the revenue growth? New products? New markets? Expanded sales force? That's a high revenue growth rate. A traditional brick and mortar company is not going to make that kind of revenue growth unless there's a "story". Curious, is this company is a startup that just turned a corner or perhaps a tech company in a niche market - e.g. M2M?
good explanation aadpepsi; I think another example/explanation for the fixed growth rate could just be from the company themselves - i.e. from due dilligence.
This was very helpful
This was very helpful
Revenue Builds (Originally Posted: 07/07/2015)
delete
Management knows best.
The problem with revenue builds like your MD's is that it's false precision. Garbage in, garbage out. Often times in banking its better to keep it simple.
this
I'll wait for more responses, but that was my thought as well. I think I was so astounded that he built such a complex and large model, and when I asked him why (I am literally still trying to understand his model 2-3 weeks later and I have firsthand exposure to it), he said this is what the end user wanted to see. No one will be able to understand this model. Just wanted to get a feel if anyone else has to develop absurdly large and complex revenue builds.
Depends on the business ... if this is E&P then you need to build it up by rig. If it is e-commerce with multiple business lines, you need to be detailed. It's pretty common sense - it doesn't always make sense to just multiply revenue by a static % increase. And even if management projects that way sometimes, we have to build it out in a more detailed manner.
If anything think of it as practice for your PE interviews :)
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