How to Build a Bottoms-up Financial Model

There are two approaches to building a financial model: top-down and bottoms-up.

The bottoms-up approach uses specific data from your financials, such as historical revenue, specific expenses, working capital, etc.

You apply assumptions to the historical numbers to build out the projections.

To build a bottoms-up financial model, consider the following:

Sales and marketing expenses drive the revenue.

Review the historical relationship between sales and marketing expenses and revenue. 

Project expenses and revenue based on the monetization model you have, such as recurring revenue, transaction fee, contract work, etc.

Calculate your cost of goods sold which is the cost to build and deliver the product.

Project the operating expenses which are those that do not directly drive the revenue, such as office leases and utilities.

Fixed expenses remain the same.

Variable expenses rise and fall with the activity of the business.

Calculate your working capital, also called cash runway.

Add key metrics into the model such as customer acquisition cost, lifetime value of customer, and growth rate.

Adjust the model for any other business conditions or events such as a fundraise.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.