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Bottom Up Forecasting
Bottom up forecasting is a means to estimate the future performance of a company starting with low level data and working up to revenue. Bottom up forecasting begins with a detailed product or customer information set, for example, and broadens up to the company-wide revenue level.
Bottom up Meaning
Bottom up forecasting: the projection of micro-level inputs to achieve an accurate assessment of revenue for a given year or set of years.
For example, a financial analyst may begin creating a 5-year sales forecast template by outlining all of the orders that are expected to be placed for each of the organization’s business channels. This is a standard way to begin a bottom up analysis, however, bottom-up approach management can start further down with something like advertising conversion rates, or even the performance of a single team or employee.
Next, the analyst will need to estimate how much will be charged for products or services. Supposing that an average of $275 per order is exemplary, we may find after-production costs and discounts that the average order is worth about $193.
Once we figure out what the basic value of low-level transaction streams through a given vector are, after refunds exchanges, returns, charge-backs, and production costs, and other pertinent factors, we have a basic metric from which we can calculate revenue in broader terms.
It could be said that bottom up forecasting is like looking at the health of a body by looking first at the health of a cell or at the health of an organ and extrapolating that health to the entire organism as a whole. In using this approach, we can create organization-wide forecasts based simply on the information that is right in front of us.
We might look at a single sales representative, for example, and say- “If the entire company is producing at the rate this single rep is achieving, then company-wide revenue would look like X.” In other words, bottom up forecasting is a way to assess the productivity of a unit by assessing how it contributes to the whole.
Difference Between Top-down and Bottom-up Approach
Clearly, bottom up forecasting is extreme in that it looks at company-wide performance in a very specific way. That being the case, there are clearly alternatives to it. Bottom up forecasting has its benefits and is ideal for coming up with certain types of performance metrics. To understand the true health of a business, we should look at it in more than one way.
Top-down vs Bottom-up
In a top down analysis, we estimate demand for our products or services at the aggregate level. When an investor looks into a company to see whether or not he should buy that company’s stocks, the information he is likely to see will be the product of a top down analysis. He will see total revenues over a given time, stock performance over a given time, and projections. In other words, he will see the organization as a unit. In this instance, a top down assessment is sufficient.
A top down assessment is based on a mathematical conversion of previous historic outcomes to predict future performance. It is useful for reporting to external bodies, government agencies, investors, partners, potential partners, and the like. In short, a top-down vs bottom-up forecasting analysis is about looking at the company from the outside for perspective or to create a presentation for persons outside the organization.
The important difference between the top-down and bottom-up approach is the perspective taken in order to perform your analysis. Similarities between top-down and bottom-up approaches are in how the analysis is performed. Taking the top down perspective, we create a system-wide analysis for the purpose of creating a holistic representation of total performance. We do the same thing in bottom up forecasting, but we do this for internal reporting on the health and functionality of specific internal components of the organization and extrapolate up to the aggregate level. In other words, a top down approach is for looking at the organization as a complete unit, whereas bottom up is about assessing individual parts of the organization for troubleshooting and optimization purposes.
Sales Forecast Template – Excel
Using an Excel template, we can represent the performance of the entire organization over time. This would call for a top down approach. If we wanted to show how a given channel, team, individual, or a specific production line contributes to the total revenue for a quarter, year, or set of years, we could also create an Excel sheet. Excel can do much of the heavy lifting in crunching the numbers, showing variables, and generalizing either upwards or downwards.
Bottom Up Forecasting Advantages And Disadvantages
Whether we look at a company from a bottom up or top down perspective, we’re going to access some quality types of information and miss others. In either approach, we can use the resulting metrics to make certain predictions and fail to make others.
Bottom-up Forecasting Advantages and Disadvantages
You are already spending resources on your staff to perform their functions. You may as well leverage the insights they have developed through day-to-day immersion in operations.
Boost Morale: Employees want to feel valued. Listening to them is just one good way to achieve this. By looking into what they have learned, we can develop valuable insights into day-to-day functions. By analyzing these functions and extrapolating them upward, we can decide whether or not a given individual’s experience is a good thing, a bad thing, or a neutral thing. Either way, your team will appreciate having their perspectives valued.
Flexibility: Using the bottom up approach is a great way to develop the ability to fix problems and to change direction on a dime in order to respond to problems and changes in the business environment.
Naturally, there are some important disadvantages of bottom-up approach that should be understood.
Reduced Cohesion: Any time decisions are made at various levels, there is the risk of moving forward without a clear and comprehensive strategy. The bottom up approach can suffer from what is sometimes called the “fog of war.” This means, what we see and know about our immediate circumstances may not reflect the reality of a nearby and/or connected vector, location, or unit. Doing the bottom up approach from a single point of reference, therefore, is always sub-optimal.
Limited Experience: While the perspective of an individual worker may be valuable, his or her insights will suffer from a lack of understanding about related functions, teams, or components of the company. Similarly, we need to do our bottom up from as many single starting points as possible to create a complete final analysis.
Egos & Conflict: Any time we look at and consider the functions and perspectives of individual units, we run the risk of creating or exacerbating conflicts.
Top-down Forecasting Advantages and Disadvantages
With top down forecasting, we benefit from a reduction in the variability of results. Unlike bottom up forecasting, a top down approach gives us an analysis of the whole organization viewed as a single unit. Therefore, results will be systemic in nature. A top down analysis is also relatively easy, simple, and fast.
With a top down approach, we necessarily lose all of the resolution and detail that the bottom up approach can give. Top down is fast and broad. But if you want to get a more detailed picture, looking in the other direction is needed.
Top-down vs Bottom-up Sales Forecasting: Which is Right for You?
Comparing a company to an automobile, we can compare the top down approach to looking at the car from the outside. Likewise, the bottom up approach would be like inspecting the vehicle’s internal components.
From the outside, we would look at the condition of the exterior, the speed, performance, and other aggregate factors. By looking under the hood, we can diagnose specific problems, assess the value of certain systems
Neither approach is right or wrong. Both are necessary.
Bottom Up Approach Example
The banking company Ernst & Young is a good bottom-up approach example. They use the bottom up approach to scrutinize various aspects of their organization in comparison to similar aspects of competitor firms. This bottom-up analysis example shows how powerful this approach can be. The bottom-up method for forecasting sales relies on accurate reporting from individual team members and may require auditing on occasion. For this, a bottom up forecasting template excel sheet can be a simple solution.
Good use cases for bottom-up market sizing process include telemarketing companies, dog walking services, and food delivery services. In each of these cases, bottom-up demand planning is as simple as looking at the need for an individual unit.
Bottom-up Forecasting HR
Forecasting for a human resources team or company requires both approaches. But only the bottom up approach can help us to identify the efficacy of individual units due to the highly subjective nature of the industry.
Top Down Forecasting Example
Every company needs to take a top down approach to forecasting. One great top-down forecasting example would be Amazon. To predict future revenue growth in this top-down approach example, it is easy to understand why a bottom up approach would be an overwhelming undertaking. Comparatively, creating a top-down sales forecast template for Amazon would look like child’s play.
Using the top-down approach in forecasting demand is always useful if you can leverage consumer data and buying trends accurately.
In another example, an investor looking at Europe may look at GDP and use a growth filter to locate countries in Europe with two or more straight years of consistent growth. He might use a top-down forecasting template to sort out GDP as related to emerging stocks. Or in another top-down analysis example, an investor may look for the largest Asian economy posting strong GDP growth.
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