The question is often asked about the process and level of detail required for building a revenue model and business forecast for an existing business, a start-up and/or an investor. The following is a general summary of the steps involved:
· Gather information: The analyst works with management to collect information on the company’s products or services, target customers, and pricing and marketing strategies. They may also examine the company’s historical financial statements, if available.
· Identify revenue streams: The analyst identifies the sources of revenue for the company, such as product sales, subscriptions and licensing fees. They also consider the timing of revenue recognition, which may be different for each revenue stream.
· Estimate unit sales: The analyst estimates the number of units the company is likely to sell for each revenue stream.
· Determine pricing: The analyst determines the prices the company will charge for each revenue stream, taking into account the company’s sales and marketing strategies.
· Forecast revenue: The analyst projects the company’s revenue over a specific time period, typically three to five years.
· Evaluate sensitivity: The analyst evaluates the sensitivity of the revenue forecast to changes in key assumptions, such as pricing and unit sales. This is an iterative process with management and may lead to adjustments in the company’s strategies.
· Present findings: The analyst presents the results to company management, along with an explanation of the assumptions and methods used.
Building a revenue model and forecast requires an understanding of the company’s business and its objectives, as well as strong analytical skills and the ability to communicate financial concepts to non-financial stakeholders.
This process is detailed and requires research and skill. This work can be conducted either in person or remotely via video conferencing. If you have any questions about this process, please feel free to reach out to us here.