How to Build a Top-Down Financial Model

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

In general, you should use a bottoms-up approach for preparing the financial projections, which will be more detailed.

To build a top-down financial model, consider the following:

Start with the size of the market.

Estimate the market share of the company in a sector or region.

Use the price of the product to calculate the revenue.

Increase the revenue based on the growth rate of the market and increasing market share.

Input the expenses as a percentage of revenue based on historical data.

The top-down approach is relatively simple as it uses market sizes and market share estimates.

Use this approach to check against the bottoms-up model as a comparison.

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