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2 - WSP - FPA - Is Forecasing

The document outlines the process of building an integrated Income Statement model for an Online Travel Agency, detailing its components such as Revenue, Expenses, and Net Income. It emphasizes the importance of the Income Statement in assessing company performance and guiding financial planning and forecasting. Additionally, it covers the classification of expenses, forecasting fundamentals, and the iterative nature of the forecasting process involving collaboration with various business functions.
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0% found this document useful (0 votes)
17 views116 pages

2 - WSP - FPA - Is Forecasing

The document outlines the process of building an integrated Income Statement model for an Online Travel Agency, detailing its components such as Revenue, Expenses, and Net Income. It emphasizes the importance of the Income Statement in assessing company performance and guiding financial planning and forecasting. Additionally, it covers the classification of expenses, forecasting fundamentals, and the iterative nature of the forecasting process involving collaboration with various business functions.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CFPAM™ 2: Building

the Operating Model;


The Income Statement

wallstreetprep.com
The Case Study

• In this module, we will build an integrated


Income Statement
operating model for a company in the Online
Travel Agency (OTA) business

• Model will consist of detailed Revenue and


Expense schedules summarized in an Income Balance Sheet

Statement, a linked Balance Sheet, and a


resultant Cash Flow Statement

• Each chapter builds on the previous, both in Cash Flow


terms of lessons as well as the Excel model

• We will walk through examples together, and


then you’ll build your own model Full Operating Model

Licensed to Ftaou Sidibe. Email address: [email protected]


What is the Income Statement?

XYZ Income Statement for FY2021


• Tracks the change in financial position of the
FY2021
company over a period of time, typically a year Revenues 100.0
Cost of Revenues 20.0
Total Gross Profit 80.0
• Cumulative revenues earned, and expenses
Gross Profit Margin 80.0%
incurred, throughout the course of the year
Rental Expenses 1.3
Amortization 4.0
• Starts with revenue, then: Salaries & Personnel 25.0
Marketing Expenses 35.0
• direct product/service expenses; Depreciation 4.0
Total Operating Expenses 69.3

• other operating and financial expenses Operating Income (EBIT) 10.8


EBIT Margin 10.8%

• non-operating income and expenses Interest (Income) Expenses 2.8


Pre-tax Income 8.0

Tax Expense 1.6


Net Income 6.4
Net Margin 6.4%

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Why is it Important?

• Primary method of assessing company


performance for investors and managers

• Matches revenues earned and expenses Income Statement


incurred, regardless of when cash is answers the
received/paid questions, how
• Evens out lumpy expenses from large, much did we earn,
periodic investments in fixed assets, what did we spend $
acquisitions, etc. on, and how much
• Net Income drives Earnings Per Share do we keep?
(EPS), which in turn drives company’s
stock price or private valuation
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FP&A spends a lot of time focusing
on the I/S, from forecasting and
long-term planning, to tracking
performance and supporting
monthly close.

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Income Statement – Main Sections

• Revenue (Sales): All earned, operating revenues


FY2021
of the business during the period Revenues 100.0
Cost of Revenues 20.0
• Excludes non-operating revenues like Total Gross Profit 80.0
interest income, gains on sale of fixed assets Gross Profit Margin 80.0%
(reported on separate line of the I/S)

• Cost of Goods Sold (COGS): All costs and


expenses directly related to producing the The higher the gross
product or service (aka, Cost of Revenues (COR)) margin %, the more
income the company has
• Gross Profit = Revenue – COGS: What remains
to pay its operating and
after taking direct product costs into account
fixed expenses
• Gross Margin: Gross profit expressed as a % of
Revenue.
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Income Statement – Main Sections

• Operating expenses subtracted from Gross Profit to Rental Expenses 1.3


arrive at Operating Income Amortization 4.0
Salaries & Personnel 25.0
• Rent Marketing Expenses 35.0
Depreciation 4.0
• Depreciation & Amortization Total Operating Expenses 69.3

• Salary expenses Operating Income (EBIT) 10.8


EBIT Margin 10.8%
• Marketing

• Earnings Before Interest & Taxes (EBIT): All


earnings before non-operating earnings of the firm
(e.g., interest income or expenses, and taxes). Also
known as Operating Income.

• EBIT margin is expressed as a % of Revenues


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Income Statement – Main Sections

• Subtract all non-operating expenses and Interest (Income) Expenses 2.8


Pre-tax Income 8.0
financing fees from Operating Income (EBIT) to
arrive at Pre-Tax Income Tax Expense 1.6
Net Income 6.4
• Subtract taxes to arrive at Net Income Net Margin 6.4%

• Net Margin is Net Income as a % of Revenue

• How much Income is left after paying ALL


expenses associated with operating the
business

• Available to shareholders for dividends,


share repurchases, or reinvestment into
the business

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While this represents a standard
Income Statement structure, there
will always be additional line items
specific to your own industry

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Income Statement – Learning Plan

• Forecasting Fundamentals

• Expenses (Fixed, Semi-Fixed, and Variable)


• Headcount
• Revenue

• Key Takeaways & Key Ratios

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Why Expenses -> Headcount -> Revenue?

• Reflects the most typical career pathway in Finance / FP&A


Expenses
• FP&A professionals typically start their career forecasting
and managing expenses

• Headcount is a common next step in developing the FP&A


skillset
Headcount

• Partner with business managers to develop and


monitor headcount planning, assumptions around
related expenses
Revenue
• Revenue managed by more experienced FP&A professionals
since it is the most difficult to forecast

Licensed to Ftaou Sidibe. Email address: [email protected]


Why Expenses -> Headcount -> Revenue?

• Increasing importance and difficulty around proper


identification of driver variables Expenses

• Reduced consistency in driver variables and ratios over time

• Increased variability in results as we move along this


progression
Headcount

• Leads to….

• increased need for business judgement

• detailed partner input Revenue

• iteration into building defendable assumptions and


reasonable forecasts

Licensed to Ftaou Sidibe. Email address: [email protected]


Forecasting Topics covered:
Fundamentals
• Frequency

• Process

• Involved Parties

• Driver Identification & Forecasting

• Interrelations & Impact on the Forecast

Licensed to Ftaou Sidibe. Email address: [email protected]


Forecast Frequency

• Generally completed on a quarterly basis Frequency Best Practices


• Forecast period may vary: • Create an annual calendar to track timing of Plan and
Forecast updates
• Remainder of the fiscal year
• Update the forecast at least quarterly
• 12-18 months
• Forecast a rolling 12-18 month period, not just until
• Several years (long-term or strategic the end of the current fiscal year
plan) • Forecast a Long-term or Strategic Plan at least
annually
• One more in-depth dive into projections
(i.e., the “Plan” à basis for the budget)

• Additional forecasts based on operating


performance (i.e., updates to the plan and
budget)

Licensed to Ftaou Sidibe. Email address: [email protected]


It is becoming more common for
FP&A teams to forecast a rolling 12-
18 months to identify trends early
and reduce burden of annual
planning

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Forecast Process

• Starts with a top-down forecast (either Process Best Practices


momentum or market-based) to generate
• Create a forecast calendar to
baseline revenues, without reviewing
fundamental operating drivers • track touch points with business leaders
• develop and review forecast assumptions
• Drives assumptions around
• bake-in time to iterate on feedback
headcount and expense levels

• Bottoms-up process begins with the


• Models should sensitize key variables, or include
individual operating drivers and works up scenarios to handle what-if questions
to revenues, digging deep into assumptions
with business owners
• ALWAYS tie back to how the business will operate to
• New assumptions embedded into achieve the intended financial results
forecast or sensitized, and a new
forecast is created
Licensed to Ftaou Sidibe. Email address: [email protected]
Developing the business forecast is
a business priority, not a siloed
FP&A exercise

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The value of any forecast lies in
forcing the business to identify
critical value drivers and to develop
initiatives to impact them

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Forecast Partners

• Sales & Marketing – Derive revenue and Partner Best Practices


related expense projections
• Highly underrated aspect of FP&A responsibility
• Product, Technology, or Manufacturing – • Challenge is balancing competing demands or
Estimate product or service costs & conflicting statements across departments
headcount needs • Important to be helpful and supportive, but remain
skeptical
• Human Resources – Headcount &
personnel expenses • This is where high EQ comes into play

• Other Business-Specific Teams – Ex.


Hotel Supply Team for a Travel company

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While FP&A professionals are
widely seen as “numbers” people,
they require strong interpersonal
skills to partner with and challenge
business leaders to make accurate
decisions

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Forecast Drivers

• Unit sales and price/unit drive Revenue Drivers Best Practices

• Headcount and average salary drive Salary • Focus on Pareto-efficient analysis (i.e., 20% of
Expense variables drive the 80% of performance))

• Forecasted revenues drive production


• The more variable or sensitive the driver, the more
requirements and, thus, Capital
time and focus should be spent predicting it
Expenditure

• Key is identifying the right drivers and then


• Minimize time forecasting variables with little
forecasting at this level of granularity impact on financial or operational performance

• Attend to the variability of drivers as well


as the sensitivity of financial results to
fluctuations in those drivers

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Forecast Drivers

• Ratios of a desired output to a known or Drivers Best Practices


predictable input
• Incorporate partner feedback on variable
• Analyzed by looking at: assumptions

• Historical results
• For historical patterns, may be necessary to
• Trends over time normalize the data for irregular or non-recurring
items
• Averages of past or expected
performance
• May also need to adjust for seasonality
• Competitor or industry benchmarks

• May use internal or external data (i.e,.


Price/Unit (internal) vs Price/Industry
average room charge)
Licensed to Ftaou Sidibe. Email address: [email protected]
The 4 Step Forecasting Process

P Pick the driver to use

A Analyze & research the driver

C Calculate the driver and note the source

R Check that the resulting forecast value is Reasonable

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Not all forecast variables are
created equal. Forecasting the best
estimates of critical drivers is the
key to an effective FP&A function
and good business planning

Licensed to Ftaou Sidibe. Email address: [email protected]


Forecast Interrelationships

Forecasting is highly iterative,


and can get very messy
Drivers
• Involves interpersonal communication,
effort, and conflict
Investment Revenue
• FP&A professionals should …
Reality

• … be skeptical

• … tie arguments & disagreements back


Expenses Headcount
to the numbers and business impact

• .. avoid biases

Licensed to Ftaou Sidibe. Email address: [email protected]


A big threat to a robust forecast is a
lack of discussion, debate, and
coordination between business and
functional leaders

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Income Statement – Learning Plan

• Forecasting Fundamentals

• Expenses (Fixed, Semi-Fixed, and Variable)


• Headcount
• Revenue

• Key Takeaways & Key Ratios

Licensed to Ftaou Sidibe. Email address: [email protected] 27


Forecasting Topics covered:
Expenses
• Nature & Classification

• Expense drivers

• Walk-through Example

• Get to modeling!

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Nature of Expenses

Fixed Semi-Fixed Variable

• Do not change with • Include both fixed and • Vary based on the level of
varying levels of variable components production, sales, or
production, sales, or • Also covers fixed expenses processing
processing that have step-change • Includes personnel
• Includes rental expense, levels based on production expenses, credit card
and potentially • Example - server hosting processing fees, and
depreciation expenses marketing expenses

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Expense Classifications

Cost of Sales / Revenues Sales & Marketing


1 32
Direct costs associated with Directly involved in selling,
producing a good or providing a transporting for final sale, or
service marketing the product or service

General & Administrative Research & Development


3 44
All administrative and support Directly related to researching and
expenses, and all expenses that developing new product or service
cannot be directly attributed to the offerings
other classifications

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Expense Drivers

Revenue-Driven Headcount-Driven Expense-Driven

• Includes most Cost of Goods • Includes Salary, Travel & • Some expenses are based
Sold / Cost of Revenue Entertainment, and Stock on other expenses, or on
items Based Compensation the amount of assets or

• Includes credit card expenses liabilities

processing fees, or salary • Often forecasted as some • Includes:


expenses billed to a client ratio to Headcount • Payroll taxes à as a %
for services provided of salary expenses

• Depreciation à based
on the balance of PP&E

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Expense Ratios

Historical Trends Internal Estimates External Estimates

• Often the best indicator of • Estimates by internal • Market salary rates or


expense ratios experts estimated increases in

• May use point estimates • Includes server expense healthcare expenses

(i.e., past monthly values) estimates from Engineering • Relevant Competitor or


or averages (i.e., trailing 6- or customer acquisition Industry ratios may be
month averages) costs from Marketing useful as estimates

• Normalize historical data • Can be targeted levels • Validate and cite the source
before using based on strategic plans or used
business initiatives

Licensed to Ftaou Sidibe. Email address: [email protected]


With that as our background, let’s
hop into Excel and run a few
examples!

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Forecasting Fixed Expenses Exercise

• First, we’ll forecast Rental Expenses


1. Open the source file & navigate to the
• Source: Accounting has provided us with monthly ‘Expense’ tab, and the section titled
rental expense for each office location from our ‘Fixed Expenses’
Financial Reporting system
2. Set the Historical month data to the
• Look at the rental agreements between the ‘input’ cell format

company and the building lessor 3. For the forecasted period, we will
simply forecast rent using the same
• Contract specifies rent will increase for the
value as the prior month, with a planned
Seattle and San Francisco offices in January increase in January 22
2022.
4. Provided by Accounting, Legal (contract
owner), or Facilities, or it could be
expected that FP&A track this

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Forecasting Fixed Expenses Exercise

Fixed Expenses 1
Rental Expenses Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F Jan-22F Feb-22F Mar-22F Apr-22F May-22F Jun-22F
Seattle Office 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.8 1.8 1.8 1.8 1.8 1.8
San Francisco Office 2 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.8 2.8 2.8 2.8 2.8 2.8
New York Office 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5
Chicago Office 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Total Rent Expense 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 5.3 5.3 5.3 5.3 5.3 5.3

Total Fixed Expenses 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 5.3 5.3 5.3 5.3 5.3 5.3

1 • Month and Year noted across the top, and cell


formatting indicates whether the month is
Actual (A), or Forecasted (F).

2 • Jan-21 – Jun-21 represent actual rental


expenses, and so are formatted as input data

1. Open Operating_Model.xlsx and


navigate to tab ‘Expenses’ to ‘Fixed
Expenses’ and work through the problem

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Check
Forecasting Fixed Expenses Your Work

Fixed Expenses 3 4
Rental Expenses Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F Jan-22F Feb-22F Mar-22F Apr-22F May-22F Jun-22F
Seattle Office 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.8 1.8 1.8 1.8 1.8 1.8
San Francisco Office 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.8 2.8 2.8 2.8 2.8 2.8
New York Office 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5
Chicago Office 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Total Rent Expense 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 5.3 5.3 5.3 5.3 5.3 5.3

Total Fixed Expenses 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 5.3 5.3 5.3 5.3 5.3 5.3

3• Jul-21 to Jun-22 are forecasted as link to prior


monthly rent, and noted using the cell
formatting for formulas

4• In Jan-22, the “fixed” rental expense increases


for both Seattle and San Francisco offices
based on the rental agreement which specifies
the amount of any rent increases

Licensed to Ftaou Sidibe. Email address: [email protected]


Now let’s try something a little more
complicated. Time to forecast some
variable expenses in a multi-step
calculation!

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Forecasting Variable Expenses (Salaries) Exercise

• Always need to identify the underlying drivers


1. Open the source file & navigate to the
• Here we might identify # and type (employee, ‘Expense’ tab, and the section titled
contractor, or vendor) of Headcount as a driver ‘Variable Expenses’

• Annual salary & growth rate for each type are also 2. For Headcount data, we will refer to the
results of our separate Headcount
drivers
forecast
• Obtain historical data from our financial reporting
3. Note: We spoke with Human Resources
system and from Human Resources: about the planned raises for the
upcoming year and noted salaries are
• Headcount details
expected to increase 5% and 3% for
• Annual salary expenses Employees and Contractors,
respectively, both in March after
performance reviews are completed

Licensed to Ftaou Sidibe. Email address: [email protected]


Forecasting Variable Expenses Exercise

Variable Expenses

Salary Expenses Summary Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F Jan-22F Feb-22F Mar-22F Apr-22F May-22F Jun-22F
Headcount (FTE)
Employees 1 22,400 22,400 22,400 22,400 22,400 22,400 22,960 23,520 24,808 24,640 24,640 24,640 24,640 24,640 24,640 24,640 24,640 24,640
Contractors 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100
Vendors 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Total Headcount (FTE) 25,400 25,400 25,400 25,400 25,400 25,400 25,960 26,620 27,908 27,740 27,740 27,740 27,740 27,740 27,740 27,740 27,740 27,740

Average Salary (USD)


Employees 2 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $152,250 $152,250 $152,250 $152,250
Contractors $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $77,250 $77,250 $77,250 $77,250
Vendors $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000

Salary Growth Rates (monthly )


Employees 3 - - - - - - - - - - - - - - 5.00% - - -
Contractors - - - - - - - - - - - - - - 3.00% - - -
Vendors - - - - - - - - - - - - - - - - - -

Salary Expense (millions )


Employees 270.7 270.7 270.7 270.7 270.7 270.7 277.4 284.2 299.8 297.7 297.7 297.7 297.7 297.7 312.6 312.6 312.6 312.6
4
Contractors 12.5 12.5 12.5 12.5 12.5 12.5 12.5 13.1 13.1 13.1 13.1 13.1 13.1 13.1 13.5 13.5 13.5 13.5
Vendors 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1
Total Salary Expense 290.3 290.3 290.3 290.3 290.3 290.3 297.0 304.4 320.0 317.9 317.9 317.9 317.9 317.9 333.2 333.2 333.2 333.2

1• Actual Headcount #’s are linked from the 3• Actual Salary Growth Rates are calculated as the
Headcount tab, and so are cell formatted green for month over month change in Average Salary
links (we’ll get to Headcount later)
4• Actual Salary Expense data is from the accounting
2• For Actual data, Average Salary is calculated using or financial reporting system, formatted as an input
historical Salary Expense and Headcount data
Licensed to Ftaou Sidibe. Email address: [email protected]
Check
Forecasting Variable Expenses Your Work

Variable Expenses

Salary Expenses Summary Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F Jan-22F Feb-22F Mar-22F Apr-22F May-22F Jun-22F
Headcount (FTE)
Employees 22,400 22,400 22,400 22,400 22,400 1
22,400 22,960 23,520 24,808 24,640 24,640 24,640 24,640 24,640 24,640 24,640 24,640 24,640
Contractors 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100
Vendors 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Total Headcount (FTE) 25,400 25,400 25,400 25,400 25,400 25,400 25,960 26,620 27,908 27,740 27,740 27,740 27,740 27,740 27,740 27,740 27,740 27,740

Average Salary (USD)


Employees $145,000 $145,000 $145,000 $145,000 $145,000 2
$145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $152,250 $152,250 $152,250 $152,250
Contractors $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $77,250 $77,250 $77,250 $77,250
Vendors $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000 $85,000

Salary Growth Rates (monthly )


Employees - - - - - 3- - - - - - - - - 5.00% - - -
Contractors - - - - - - - - - - - - - - 3.00% - - -
Vendors - - - - - - - - - - - - - - - - - -

Salary Expense (millions )


Employees 270.7 270.7 270.7 270.7 270.7 270.7 277.4 284.2 299.8 297.7 297.7 297.7 297.7 297.7 312.6 312.6 312.6 312.6
Contractors 12.5 12.5 12.5 12.5 12.5
4
12.5 12.5 13.1 13.1 13.1 13.1 13.1 13.1 13.1 13.5 13.5 13.5 13.5
Vendors 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1
Total Salary Expense 290.3 290.3 290.3 290.3 290.3 290.3 297.0 304.4 320.0 317.9 317.9 317.9 317.9 317.9 333.2 333.2 333.2 333.2

1• Forecasted Headcount #’s are also linked from the 3• Include the planned raise in Average Salary for
Headcount tab, and formatted green for links Employees and Contractors per Human Resource’s
guidance to us
2• Forecast Average Salary the same as historical
rates, adjusted for any anticipated raises in #3 4• Forecasted Salary Expense is calculated as
Forecasted Headcount * Forecasted Average Salary
Licensed to Ftaou Sidibe. Email address: [email protected]
Income Statement – Learning Plan

• Forecasting Fundamentals

• Expenses (Fixed, Semi-Fixed, and Variable)


• Headcount
• Revenue

• Key Takeaways & Key Ratios

Licensed to Ftaou Sidibe. Email address: [email protected] 41


Forecasting Topics covered:
Headcount
• Organizational Structure

• Departments, Locations, & Cost Centers

• Forecasting Process

• Key Takeaways

Licensed to Ftaou Sidibe. Email address: [email protected]


Organizational structure impacts the approach to Headcount

• The organization’s structure and functions Org Structure Notes


will change how Headcount is forecasted
• Typically forecasted in stages
• Forecasted at an overall company level, and
• High level analysis focuses on business ability
then allocated to department, location, and
to support personnel expenses at given
cost center based on need
headcount levels
• Allows HR and Finance to estimate • Bottoms up allocation of headcount focuses on
reasonable salaries for each role department need and driven by department-
level initiatives
• Hiring trends are highly dependent on
stage of organization

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Typical Tech Organization Structure

CEO

VP of Sales CTO CFO CPO CLO

Sales Marketing FP&A Accounting Tax Legal

Technology Engineering Biz Ops Product Design UX

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Department / Location / Cost Center

Department Location Cost Center

• Aligns with function or • Employee location • Often further broken


product impacts both market down into cost centers
• May have individual salary rates as well as • Aligns with subdivisions in
departments, or several currency the department, or based
can roll up into a on assigned manager
centralized manager (ex.
CTO)

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The Headcount “Process”

High-level Guidance Detailed Guidance

1 2 3 4 5

Typically starts top- Use Average Salary to Collect headcount Bottoms-up is usually Process continues
down based on high- estimate how many requests from too high, so iterate. until targeted
level revenue employees can be department heads, Use initiatives headcount and salary
assumptions. How supported. Highlights usually by initiative or information to assess levels match the
many employees can potential for new hires to support higher and trim requests bottoms-up allocation
we afford? or need for layoffs activity levels to department /
location/ cost center

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While this process may seem
relatively straightforward, it can
quickly become one of the most
contentious processes in FP&A
Forecasting

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“Headcount is 75% partnership and
25% modeling. Learning to
challenge while supporting
business partners is key here.”

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Headcount Drivers

Revenue-Driven Headcount-Driven Activity-Driven

• Starts top-down using some • Some headcount are derived • Most derived from activity
estimate such as sales per from other headcount items levels, such as customers
employee, salary expense as a served, invoices processed,
• Ex. 4 Customer Account Reps
% of revenues divided by anticipated legal proceedings
per Sales Manager
average salary • Ex. Marketing headcount is
• Human Resources often scales
• Certain functions such as Sales with the change in headcount, driven by # of customers
& Marketing, may be directly as large increases in hiring acquired or channels served
tied to revenues
drive need for more HR • Ex. Accounting might be driven
• Ex. ratios such as Sales/Sales by # transactions processed or
employee or accounts per # of journal entries, etc.
person

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Headcount Ratios

Historical Trends Internal Estimates External Estimates

• Best indicator comes from • Provided by specialists or • Competitor benchmarks or


actual historical trends experts within the organization Industry standard ratios

• Look at current ratios or long- • Ex. Head of R&D is likely to • Ex. Industry average retail
term averages (i.e., trailing 1-2 have better insight into employees per bank branch
year averages) researcher headcount needed • Validate and cite the source,
• Important to understand how per project ensure it is relevant to your
& why trends may change • Should still be justifiable organization
moving forward compared to historical trends • If assumes an increase in
or external estimates employee efficiency, support
how the org will realize that

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Forecasting Headcount - Ratio Exercise

• Our first exercise is to look at the Product 1. Open the source file & navigate to the
Department within Research & Development ‘Headcount’ tab, and the section titled
Headcount ‘Bottoms-Up Forecast’. Then find the
‘Research & Development Headcount’
• From our Financial Reporting system we pulled below and look for ‘Product Headcount’
Headcount by department and title/role detail beginning at line 96

• Discussed with head of Product team what drives 2. Set the Historical month data to the
headcount requirements, and the only internal ‘input’ cell format, & calculate the
relationship they use is 3 Engineering Support and Engineering Support & Product
Analytics ratios
3 Product Analytics for each Product Manager
3. For the forecasted period, set the
• Product Team has no current plans to change
monthly value equal to the prior month.
headcount levels Set the Forecast ratios the same as
historical ratios, at 3 each

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Forecasting Headcount – Product Department Exercise

Product Department Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F Jan-22F Feb-22F Mar-22F Apr-22F May-22F Jun-22F
Product Managers 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200
Product Design 1 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150
User Experience 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300
Product Development 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300

Engineering Support / Product Manager 2 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Engineering Support 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600

Product Analytics / Product Manager 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Product Analytics 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600
Total Product Headcount 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150

1 • Jan-21 – Jun-21 are actual Headcount data

2 • Identify Product Managers as the main driver


of Engineering Support HC through
discussions with the Product team. Mentioned
they typically staff 3 Engineering Support
with each Product Manager, as demonstrated 1. Open Operating_Model.xlsx and
in historical trends navigate to tab ‘Headcount’ to ‘Product
Department’ and work through the
problem
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Check
Forecasting Headcount – Product Department Your Work

Product Department Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F Jan-22F Feb-22F Mar-22F Apr-22F May-22F Jun-22F
Product Managers 200 200 200 200 200 200
3 200 200 200 200 200 200 200 200 200 200 200 200
Product Design 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150
User Experience 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300
Product Development 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300 300

Engineering Support / Product Manager 3.0 3.0 3.0 3.0 3.0 3.0 4 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Engineering Support 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600

Product Analytics / Product Manager 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Product Analytics 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600
Total Product Headcount 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150 2,150

• Jul-21 to Jun-22are forecasted headcount


3

values. Based on Product team discussions, no


current plans to hire incremental Product
Managers

• We estimate how many Engineering Support


4

per Product Manager. We expected it to


remain 3, but team feedback could have
changed that
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Headcount forecasts can get
complicated quickly. For simplicity
we’ve kept the bottoms-up at the
Department and Employee Type
levels, but excluded location from
our analysis

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That was an example of a forecast
with internal headcount ratios. Let’s
look at an example with ratios to
Operating metrics next

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Forecasting Headcount – Customer Support Exercise

• Identify drivers
1. Open the source file & navigate to the
• For Customer Support, we identify Total # of ‘Headcount’ tab to ‘Bottoms-Up
Transactions, % Support Calls, and calls each Rep Forecast’. Then find ‘General &
handle on a monthly basis as the main drivers Administrative Headcount’ and
‘Customer Support Department under
• Total # of Transactions comes from our Revenue that
forecast, while the remaining metrics come from
2. Set the Historical month data to the
Financial Reporting System or directly from ‘input’ cell format, & calculate the ‘% of
Customer Support Support Calls’ and ‘Monthly Calls /
Customer Support Rep’

3. For Monthly Calls, keep in mind that


Support calls are in thousands so you’ll
need to adjust for that.

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Forecasting Headcount – Customer Support Exercise

Customer Support Department Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F Jan-22F Feb-22F Mar-22F Apr-22F May-22F Jun-22F
Total Transactions (thousands)
1 28,892 24,896 22,652 32,528 30,734 33,483 29,932 27,473 25,291 27,263 27,650 32,486 30,229 26,046 23,698 34,033 32,151 35,031
% of Support Calls 10.19% 10.43% 10.47% 9.82% 10.46% 9.83% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20%
Support Calls (thousands)
2 2,944 2,597 2,372 3,194 3,213 3,290 3,053 2,802 2,580 2,781 2,820 3,313 3,083 2,656 2,417 3,471 3,279 3,573
Monthly Calls / Customer Support Rep 654 577 527 710 714 731 611 549 506 545 553 650 605 521 474 681 643 701
Customer Support Representatives 3 4,500 4,500 4,500 4,500 4,500 4,500 5,000 5,100 5,100 5,100 5,100 5,100 5,100 5,100 5,100 5,100 5,100 5,100

CS FTE 1,500 1,500 1,500 1,500 1,500 1,500 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
CS Contractor 4 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100
CS Vendor 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

Customer Support Rep / Manager 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3
CS Managers 400 400 400 400 400 400 444 453 453 453 453 453 453 453 453 453 453 453
Total Customer Support Headcount 4,900 4,900 4,900 4,900 4,900 4,900 5,444 5,553 5,553 5,553 5,553 5,553 5,553 5,553 5,553 5,553 5,553 5,553

•1 Total Transactions are linked to our Revenue •3 Monthly Calls / Customer Service
schedule with green formatting to indicate Representative = Support Calls * 1,000 /
link Customer Support Representatives as you
move from Support Calls (thousands) to
•2 # of Support Calls calc’d using Support Calls /
Customer Support Reps (single units)
Total Transactions
•4 Here Customer Service Reps are broken out by
1. Open Operating_Model.xlsx and Full-time Employee (FTE), Contractor, and
navigate to tab ‘Expenses’ to ‘Variable
Expenses’ and work through the problem Vendor

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Check
Forecasting Headcount – Customer Support Your Work

Customer Support Department Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F Jan-22F Feb-22F Mar-22F Apr-22F May-22F Jun-22F
Total Transactions (thousands) 28,892 24,896 22,652 32,528 30,734 33,483 29,932 27,473 25,291 27,263 27,650 32,486 30,229 26,046 23,698 34,033 32,151 35,031
% of Support Calls 10.19% 10.43% 10.47% 9.82% 10.46% 1
9.83% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20%
Support Calls (thousands) 2,944 2,597 2,372 3,194 3,213 3,290 3,053 2,802 2,580 2,781 2,820 3,313 3,083 2,656 2,417 3,471 3,279 3,573
Monthly Calls / Customer Support Rep 654 577 527 710 714 2731 611 549 506 545 553 650 605 521 474 681 643 701
Customer Support Representatives 4,500 4,500 4,500 4,500 4,500 4,500 5,000 5,100 5,100 5,100 5,100 5,100 5,100 5,100 5,100 5,100 5,100 5,100

CS FTE 1,500 1,500 1,500 1,500 1,500 1,500 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
CS Contractor 2,000 2,000 2,000 2,000 2,000 3
2,000 2,000 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100
CS Vendor 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

Customer Support Rep / Manager 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3 11.3
CS Managers 400 400 400 400 400
4
400 444 453 453 453 453 453 453 453 453 453 453 453
Total Customer Support Headcount 4,900 4,900 4,900 4,900 4,900 4,900 5,444 5,553 5,553 5,553 5,553 5,553 5,553 5,553 5,553 5,553 5,553 5,553

1• No seasonally-repeating patterns in the timing of 3• Forecast FTE, Contractors, and Vendors separately.
Support Calls, so we minimize the noise in our Notice these are not directly driven by Monthly Calls
forecast with a lagging 6-month average / CS Rep, though that is used to tweak our
headcount forecasts here
2• Notice we keep Monthly Calls / CS Rep as a
calculation. While a driver of CS headcount, it is a 4• Forecast a ratio of CS Reps to CS Managers using a 6-
guide to check reasonableness of the service month historical average
burden / CS Rep rather than a direct driver

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Now that we’ve tackled a few
headcount examples, let’s hop into
the model and finish off the rest of
the Headcount forecasts together

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Income Statement – Learning Plan

• Forecasting Fundamentals

• Expenses (Fixed, Semi-Fixed, and Variable)


• Headcount
• Revenue

• Key Takeaways & Key Ratios

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Forecasting Topics covered:
Revenues
• Business Model & Revenue Recognition

• Drivers

• Process

• Level vs Trend

• Seasonality & Normalization

• Top Down Approach

• Bottoms Up Deep Dive

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Revenue models are nearly as
diversified as business itself, so key
to forecasting revenue is
understanding how your
organization makes money

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Types of Revenue Models

Subscription Transactional
1 Customers pay monthly or annually for
32 Customers pay a one-time fee for
continued access to a product or service, delivery of a product or provision of a
often noted as XaaS (“anything as a service. Examples such as Samsung TV’s
service”), such as Salesforce or Netflix or GM/Ford/Tesla

Licensing Advertising
3 Holders of patents or copyrights charge 44 Creating and selling ads to marketers
ongoing fees for the use of their looking to target potential customers
intellectual property, such as movie and (e.g., Google and Facebook)
music content creators or biotech
research firms

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Types of Revenue Models

Affiliate Web Sales


5 Revenue from other businesses for
36 Company develops a website to host
promoting links to relevant products and their own products for sale. Common
collecting commission on subsequent examples include Shopify stores and
sales, such as with personal blogs company-hosted product pages

Direct Sales Commission


7 Company employs a sales force to 48 Company earns revenues by matching
develop customer relations to sell a buyers and sellers of a product or service
product or service. Utilized more for a contractual % of the transaction
enterprise purchase cycles such as price, such as with Online Travel agents
Oracle or SAP and Brokerages

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Types of Revenue Models

Channel or Indirect Retail Sales


9 Agents or resellers sell the company’s
3
10 Company sells through department
product or service to be delivered by the stores or sets up their own retail stores
reseller or the company itself, such as to offer physical goods to customers,
Coca Cola or Frito Lays selling through such as Apparel companies or Apple
distributors to end retailers stores.

Pay-per-use Freemium & Derivatives


11 Instead of charging a flat fee for service, 12
4 When the basic product or service is
companies will charge the customer free, but premium services must be paid
based on the usage of the product or for, such as Evernote & Spotify. Can also
service, such as with Amazon AWS include companies which give away
product but charge for related services.

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Types of Revenue Models

Construction Donations
13 Company earns revenue for constructing
3
14 Organization receives donations through
a building, factory, or other asset on fundraising efforts, pledges from
behalf of the customer. Examples include individuals or other organizations, or
Engineering & Consulting firms such as through grants. Common in Non-profit
Bechtel & Fluor sector

This list is STILL not collectively exhaustive. Businesses can use


one or a combination of these revenue models, so it’s important
to understand YOURS

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Typical Drivers by Revenue Model

Revenue Model Sample Drivers

Customer Acquisition Costs (CAC), contract length, Annual Contract Value (ACV), Annual Recurring
Subscription
Revenue (ARR), Churn Rates, Customer Lifetime Value (LTV)

Transactional Customer Acquisition Costs (CAC), Sales Leads, Sales Conversion Rates, Discount %

Licensing # of Licensees, Charge per Licensee, Licensee geography, Royalty %

Advertising Visitors, Clicks, Cost per Click (CPC), Click Through Rate (CTR), Cost per Impression (CPM)

Affiliate Click Through Rate (CTR), Conversion %, Sales Price, Commission % or Revenue Share %

Web Sales Visitors, Search Rates, Conversion %, Price / Transaction, Product Margin

Direct Sales Sales Pipeline, Sales Leads, Sales Closing %, Contract Value, Probability & Timing of Closing

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Typical Drivers by Revenue (cont’d)

Revenue Model Sample Drivers

Commission Conversion Rates, # of Transactions, Price or Spread per Transaction, Commission rates, Volume Bonuses

# of Channel Partners, Channel Throughput, Channel Markup, Channel Discounts, Distribution Fees,
Channel or Indirect
Volume bonuses, Trade Credits

Retail Sales per sq.ft, Retail Square Footage, Same Store Sales Growth, # of Stores, Sales/Store, Average
Retail
Order Size, Visitor Frequency

# of Customers, Customer Size/Tier, Average or Tiered Usage, Charge per Use, Customer Acquisition Costs
Pay-per-use
(CAC), User Retention

Free Users, Acquisition Rate, Churn Rate (both unpaid and paid), User conversion rates, subscription fee
Freemium
(per month or year)

Construction Sales Backlog, Sales Pipeline, Contract Value, Project Timeline, Revenue Recognition Method

# of Grants, Listeners/Members, Average Donation per Member, # of Fundraising Events, Average Funds
Donations
Raised per Event

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Tying business model to our example

• Our example company runs an online The “funnel” is coming


website that sells travel and transportation
services at an established margin or • Refers to any sales process that consists of
commission rate, essentially combining the gathering leads and converting them to paying
‘Web Sales’ and ‘Commissions’ Revenue customers
models

• Focus is on generating web traffic, • At each step of the process, potential leads will
converting these visitors to customers, drop out of the process making the remaining
assessing transaction value, and pool smaller, thus resembling a funnel
determining the expected margin or
commissions rate we earn

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Once we understand our business
model, how do we generate
assumptions around each driver
variable? The answer is… pretty
much the same way we do for every
other forecasted item!

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Revenue Ratios come from three sources

Historical Trends Internal Estimates External Estimates

• Oftentimes the best and most • Estimates provided by internal • GDP Growth Rates, New Home
supportable metrics specialists or experts Sales, Target Market Size, or
Price per Barrel of Oil
• May use point estimates (i.e., • Ex. Sales teams provide
monthly historical figures) or probability of closing a deal, • Competitor or Industry ratios
averages (i.e., trailing 6 or 12 while Product team estimates or levels may be collated and
month averages) customer conversion rates used as estimates

• Always normalize historical • These can also be targeted • Be sure to validate and cite the
data before using, especially for levels based on strategic plans source used, and ensure it is
Revenues or business initiatives relevant to your organization

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Each Forecast process is going to be
a little different depending on the
stage and industry of the company,
as well as the revenue model
selected

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The Revenue Forecast “Process”

High-level Guidance Detailed Guidance

1 2 3 4 5

Start top-down based FP&A builds out FP&A meets with FP&A reruns the Forecast iterates
on high-level revenue revenue assumptions functions and revenue forecast with based on other
assumptions. May from the bottoms-up. departments that own updated assumptions. forecasted inputs
project revenues Includes estimates of the revenue Compare to the high- (headcount, expense,
based on revenue customers, charge assumptions to level forecast and etc.), until settled and
growth trends without rates, and margins discuss trends, and investigate differences the resulting forecast
driver variables, or planned initiatives to is reasonable and
market size and share affect forecasted represents the
data to project assumptions planned operating
initiatives and impacts

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Top-down Forecast

Two approaches to a top-down Words of Caution


forecast:
• Approaches should always be combined with a
• Time Series – time as the major causal bottoms-up analysis to:
variable and estimate revenue levels • Sanity check forecast for reasonableness
based on historical trends • Ensure there is an operating plan to
execute
• Market-Based – Start with estimates
of the size and growth rate of the • In practice, provide only initial predictions of
size, and are rarely relied upon
company’s target market, % market
share, and target or expected margin % • Time Series and Market-Based approaches are
more often used to forecast inputs to a
bottoms-up forecast

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A time series is any data set where
the x-axis represents time and the y-
axis represents some variable of
interest (e.g., Revenues)

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Time Series Forecasts

Time series consist of two Note on Applications


components
• Time Series methods of forecasting require a
• Systematic – the portion of a time certain minimum amount of historical data
series that has consistency and • For new enterprises, this can be a problem
recurrence and which can be modeled • If so, move to a market-driven approach
(the signal)
• Alternatively, can use related or correlated
• Non-Systematic – the portion that historical data if available, though this is not
very common
cannot be modeled (the noise)

• In FP&A we focus on identifying and


forecasting the systematic portion of a
time series
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Time Series Forecasts

The Systematic portion can be further Time Series Notes


broken down into four components:
• In practice, Level & Trend are often combined
• Level –the average value in the series (“level+trend” to indicate this)

• Trend – increasing or decreasing value


• Be able to separate repeating patterns in the
in the series
data (e.g., seasonality) from the level+trend
• Seasonality – repeated short-term
cycles in the series
• Then forecast the level+trend, and add
• Noise – random variation seasonality back to get to a reasonable forecast

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Time Series Forecasts

• The way each of the three components work together can be additive or multiplicative

Forecast(t) = (𝐿𝑒𝑣𝑒𝑙 + 𝑇𝑟𝑒𝑛𝑑) + 𝑆𝑒𝑎𝑠𝑜𝑛𝑎𝑙𝑖𝑡𝑦 + 𝑁𝑜𝑖𝑠𝑒 Forecast(t) = (Level * Trend )* Seasonality * Noise

Additive Formula Multiplicative Formula

• This results in a linear relationship between • This results in a quadratic or exponential


time t and the forecasted variable model, i.e. a curved line

• Linear seasonality has the same frequency • Non-linear seasonality has increasing or
and amplitude of cycles decreasing frequency or amplitude over time

• Ex. A company offers the first 500 customers • Ex. The same company instead offers the first
on their anniversary date a free product 10% of their customers a free product

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Additive Time Series Forecasts

Impact of seasonality is constant over time Chart Title

Chart Title Chart Title

Chart Title

Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00Feb-00

Chart Title

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Estimating Seasonality - Additive

• If seasonal fluctuation does not vary with Note on Seasonality


the level of the time series (i.e., summer
months get a flat 500-unit sales boost no • Seasonality adjustments are most common
matter if we sell 500 or 5,000 per month) where the unit of time has a large impact on
customer behavior
• Estimate the level+trend in units
• Examples include:
• Subtract that estimate from our • Travel in summer months
observed data
• Retail shopping around the holiday season
• What is left is the seasonal lift in the (Q4 and December in particular)
data • Online shopping patterns during the week
(highest sales on Mondays!)

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Additive Time Series Forecasts

Impact of seasonality changes with Chart Title


changing level of the data

Chart Title Chart Title

Chart Title

Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00Jan-00 Feb- Feb-


00 00

Chart Title

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Estimate Seasonality - Multiplicative

• Used when seasonality varies Seasonality Note 2


proportionately to the level of the time
series (i.e., December sales increase by • For Forecasting, most seasonality is either
50% over the prior month level, not by 500 monthly or quarterly (though weekly is
units) possible if we look at daily data)
• Although we may forecast an annual 5% sales
• Estimated as a ratio to the average value in
increase, dividing that value by 12 and
the series, which is then divided into our
allocating evenly to each month would not
observed data
provide a useful monthly forecast
• What is left is the underlying level+trend in • Instead, allocate the total annual revenue to
the data each month, using the expected seasonality

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Most seasonality we come across is
multiplicative, and most commonly
represents in our results as daily,
monthly, or quarterly seasonality.

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In the appendix we’ll look at an
example of identifying and
adjusting seasonality, but for now
let’s look at a typical top-down
revenue forecast

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Top Down Forecast (AKA Market-Based Approach)

• Start with macro or industry historical and Process Best Practices


forecasted data such as industry sales
volume or growth rates • Especially useful for young companies, or
when launching new products
• Identify company’s relationship to these
• Beware of overly optimistic assumptions
metrics
which can drastically overstate revenues
• What % of total transactional volume can • Provides a reference point for our bottoms-up
be captured as revenue? forecast by checking what market share are
implying?
• How this works will be based on the
specific industry drivers and what data is
publicly available

Licensed to Ftaou Sidibe. Email address: [email protected]


For our company, let’s start with a
quick example of a market-based
tops-down approach!

Licensed to Ftaou Sidibe. Email address: [email protected]


Market-based (Top-Down) Forecast Exercise Exercise

• Research what macro or industry data is relevant


and available for both historical and forecasted 1. Open the source file & navigate to the
‘Revenue’ tab, and the section titled
periods
‘Top-Down (High Level) Forecast’
• Here we find a market research report that
2. Pull in annual Gross Bookings and
provides estimates of the total Online Travel Agent Revenue data, and calculate Revenue
market size worldwide Margin

• Compare to our historical Gross Booking and 3. Pull in annual Online Travel Agent
Revenue levels to determine estimated market Market Size by year from the report for
share and revenue margin all years provided

• Apply to market size forecasts to develop an 4. For the forecasted period, enter in
assumptions for Market Share and
estimate of future Gross Bookings and Revenues
Revenue Margin

Licensed to Ftaou Sidibe. Email address: [email protected]


Forecasting Top-Down Revenues Exercise

Tops-Down (High-Level) Forecast


(All $'s in millions unless otherwise stated)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Online Travel Agent Market Size Worldwide 1 509.2 549.4 592.8 639.7 690.2 744.7 778.2 813.3 849.9
Market Share 11.95% 11.07% 13.23% 13.82% 14.45% 14.48% 14.48% 14.48% 14.48%
Gross Bookings 26.0 29.2 34.0 39.4 50.5 60.8 60.8 78.4 88.4 99.7 107.9 112.7 117.8 123.1

Revenue Margin 11.7% 11.8% 11.9% 12.1% 11.4%


2 11.0% 11.0% 11.2% 11.4% 11.3% 11.2% 11.19% 10.94% 10.69%
Revenue 3.0 3.5 4.0 4.8 5.8 6.7 6.7 8.8 10.1 11.2 12.1 12.6 12.9 13.2

1 • Market level data is available on an annual


basis. Pull in total market size data as an
input, as well as our total Gross Bookings to
estimate Market Share

2 • Compare our historical Revenues and Gross


1. Open Operating_Model.xlsx and
Bookings to provide a basis for forecasting navigate to tab ‘Revenue’ to ‘Tops-down
Revenue Margin Forecast’ and work through the problem

Licensed to Ftaou Sidibe. Email address: [email protected]


Check
Forecasting Top-Down Revenues Your Work

Tops-Down (High-Level) Forecast


(All $'s in millions unless otherwise stated)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Online Travel Agent Market Size Worldwide 509.2 549.4 592.8 639.7 690.2 3
744.7 778.2 813.3 849.9
Market Share 11.95% 11.07% 13.23% 13.82% 14.45% 14.48% 14.48% 14.48% 14.48%
Gross Bookings 26.0 29.2 34.0 39.4 50.5 60.8 60.8 78.4 88.4 99.7 107.9 112.7 117.8 123.1
4
Revenue Margin 11.7% 11.8% 11.9% 12.1% 11.4% 11.0% 11.0% 11.2% 11.4% 11.3% 11.2% 11.19% 10.94% 10.69%
Revenue 3.0 3.5 4.0 4.8 5.8 6.7 6.7 8.8 10.1 11.2 12.1 12.6 12.9 13.2

• 2021 to 2023 represent Industry forecasts for


3

market size. Adding our assumption for


market share we can estimate total Gross
Bookings

• Use historical context, as well as internal


4

estimates or industry research to develop an


assumption on future Revenue Margins
Licensed to Ftaou Sidibe. Email address: [email protected]
Next let’s look at our bottoms-up
forecast, starting with an overview
before working down the Revenue
funnel, from website visitors down
to Revenue

Licensed to Ftaou Sidibe. Email address: [email protected]


Our Operating Model’s Revenue Funnel

Visitors # of visitors to the website


Search Rate % of visitors who search for a hotel
Quoters # of visitors who searched for hotel
Conversion % of quoters who purchase a hotel stay
Transactions # of hotel orders
Length of Stay # of nights stayed per order
Room Nights Total # of room nights
Average Daily Rate Average daily rate
Gross Booking Value Total transaction value
Margin % Commission %
Revenue The total amount we keep

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Forecasting the Top of the Funnel – Visitors & Shoppers

Driver/Metric Actual Forecast Notes

Visitors to the website landing page, who have


Visitors A A
not yet searched for a product

A visitor will search for one of the products, or


Search Rate C/A B
“bounce” meaning not search at all

Quoters C AxB=C # of visitors who searched for hotel

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Getting to the Purchase – Conversion Rates & Transactions

Driver/Metric Actual Forecast Notes

Quoters C C # of visitors who searched for hotel

What is the probability that a quoter will


Conversion E/C D
ultimately purchase a hotel stay?

Transactions E CxD=E # of hotel purchases, or “orders” completed

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From Orders to Room Nights – how large are our orders?

Driver/Metric Actual Forecast Notes

Transactions E E # of Hotel purchases

The average # of days for a hotel stay. If a guest


Length of Stay G/E F purchases a 3 night stay, the Length of Stay for
that transactions would be 3

Room Nights G ExF=G The total number of Room Nights purchases

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RoomNights to total transaction value – Daily Rates & Bookings

Driver/Metric Actual Forecast Notes

Room Nights G G Total # of Room Nights purchased

The average daily rate charged by the hotel. If the


Average Daily
I/G H customer books 3 nights, and the total charge is
Rate
$450, the average daily rate = $450/3 = $150

Total $ of the Hotel Order. It is important to note


Gross Booking
I GxH=I this is the total transaction value including BOTH
Value
the Hotel’s Revenue as well as the OTA’s Revenue

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What’s our cut? Margin % & Total Revenues

Driver/Metric Actual Forecast Notes

Gross Booking Total value of the order, to be split between the


I I
Value Hotelier and the OTA

This is the portion of the total order value that


Margin % K/I J the OTA keeps. If the order value is $100 and the
OTA keeps $15, the Margin is 15.0%

Revenue K IxJ=K The Total OTA Revenue

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Forecasting Visitors & Shoppers Exercise

• Forecast total website visitors using year over year 1. Open the source file & navigate to the
(y/y or YoY) growth for each Marketing channel, ‘Revenue’ tab, and the section titled
including: ‘Bottoms-Up (Detailed) Forecast’

• Direct Search 2. Set the Historical month data to the


‘input’ cell format
• Search – Organic
3. For the forecasted period, we will
• Search – Paid forecast Visitor growth by source using
a given y/y growth rate
• Partner Referral
4. We will use 1-year prior (for July’21, use
• Determine how many visitors will search, and July‘20) search rates to project out
which product they search for shoppers for all products

5. We will calculate Shoppers for all


products in this step
Licensed to Ftaou Sidibe. Email address: [email protected]
Forecasting Visitors & Shoppers Exercise

Bottoms-Up (Detailed) Forecast


(All $'s in millions unless otherwise stated)

Visitors (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Direct Search 176,654 164,502 144,443 167,013 153,863 168,280 176,824 173,280 148,662 191,926 164,754 188,269 185,487 172,727 151,665 175,364 161,556 176,694
y/y growth % 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Search - Organic 69,290 64,754 57,737 61,149 55,422 63,725 71,326 60,855 55,380 67,402 68,157 69,967 74,487 69,610 62,068 65,735 59,578 68,505
y/y growth % 1 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%
Search - Paid 260,240 230,510 198,327 206,512 183,376 217,600 250,940 216,826 198,340 232,562 241,296 251,714 270,650 239,730 206,260 214,772 190,711 226,304
y/y growth % 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Partner Referral 55,971 50,254 45,313 47,725 43,667 50,320 53,676 50,217 44,544 55,541 53,955 54,496 57,370 51,510 46,445 48,918 44,759 51,578
y/y growth % 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Total Visitors 562,156 510,019 445,820 482,399 436,327 499,924 552,766 501,178 446,926 547,431 528,162 564,446 587,995 533,578 466,438 504,789 456,604 523,080

Search Rates Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Air 56.87% 57.46% 53.78% 55.23% 48.85% 48.77% 55.43% 58.47% 56.63% 48.67% 47.92% 47.20% 56.87% 57.46% 53.78% 55.23% 48.85% 48.77%
Hotel 15.39% 15.27% 16.50% 16.14% 18.84% 18.30% 15.65% 14.67% 15.49% 18.97% 18.84% 19.16% 15.39% 15.27% 16.50% 16.14% 18.84% 18.30%
Car 3 19.41% 19.25% 20.80% 20.36% 23.75% 23.85% 19.74% 18.50% 19.53% 23.92% 23.76% 24.16% 19.41% 19.25% 20.80% 20.36% 23.75% 23.85%
Local Experience 2.71% 2.69% 2.90% 2.84% 3.31% 3.50% 2.75% 2.58% 2.73% 3.34% 3.31% 3.37% 2.71% 2.69% 2.90% 2.84% 3.31% 3.50%
Bounce 5.62% 5.33% 6.02% 5.43% 5.25% 5.58% 6.43% 5.77% 5.63% 5.11% 6.17% 6.11% 5.62% 5.33% 6.02% 5.43% 5.25% 5.58%
Check

Shoppers (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Air 319,700 293,058 239,775 266,416 213,133 243,790 306,379 293,058 253,096 266,416 253,096 266,416 334,394 306,595 250,864 278,782 223,038 255,082
Hotel 2 86,522 77,870 73,544 77,870 82,196 91,479 86,522 73,544 69,218 103,826 99,500 108,152 90,499 81,467 76,945 81,484 86,016 95,716
Car 109,104 98,194 92,738 98,194 103,649 119,240 109,104 92,738 87,283 130,925 125,469 136,380 114,119 102,729 97,027 102,751 108,465 124,763
Local Experience 15,224 13,701 12,940 13,701 14,463 17,507 15,224 12,940 12,179 18,269 17,507 19,030 15,924 14,334 13,539 14,337 15,135 18,318
Total Shoppers 530,549 482,823 418,997 456,181 413,440 472,016 517,229 472,280 421,775 519,436 495,573 529,979 554,935 505,125 438,375 477,355 432,653 493,879

1• Actual Visitors by month are given for historical period 3• Utilize historical data to calculate monthly search rates
based on Product shoppers / Total Visitors
2• Actual Shoppers (Quoters) by month are provided as well,
here by product searched
Licensed to Ftaou Sidibe. Email address: [email protected]
Forecasting Visitors & Shoppers Exercise

Bottoms-Up (Detailed) Forecast


(All $'s in millions unless otherwise stated)

Visitors (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Direct Search 176,654 164,502 144,443 167,013 153,863 168,280 176,824 173,280 148,662 191,926 164,754 188,269 185,487 172,727 151,665 175,364 161,556 176,694
y/y growth % 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Search - Organic 69,290 64,754 57,737 61,149 55,422 63,725 71,326 60,855 55,380 67,402 68,157 69,967 74,487 69,610 62,068 65,735 59,578 68,505
y/y growth % 1 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%
Search - Paid 260,240 230,510 198,327 206,512 183,376 217,600 250,940 216,826 198,340 232,562 241,296 251,714 270,650 239,730 206,260 214,772 190,711 226,304
y/y growth % 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Partner Referral 55,971 50,254 45,313 47,725 43,667 50,320 53,676 50,217 44,544 55,541 53,955 54,496 57,370 51,510 46,445 48,918 44,759 51,578
y/y growth % 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Total Visitors 562,156 510,019 445,820 482,399 436,327 499,924 552,766 501,178 446,926 547,431 528,162 564,446 2 587,995 533,578 466,438 504,789 456,604 523,080

Search Rates Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Air 56.87% 57.46% 53.78% 55.23% 48.85% 48.77% 55.43% 58.47% 56.63% 48.67% 47.92% 47.20% 56.87% 57.46% 53.78% 55.23% 48.85% 48.77%
Hotel 15.39% 15.27% 16.50% 16.14% 18.84% 18.30% 15.65% 14.67% 15.49% 18.97% 18.84% 19.16% 15.39% 15.27% 16.50% 16.14% 18.84% 18.30%
Car 19.41% 19.25% 20.80% 20.36% 23.75% 23.85% 19.74% 18.50% 19.53% 23.92% 23.76% 24.16% 3 19.41% 19.25% 20.80% 20.36% 23.75% 23.85%
Local Experience 2.71% 2.69% 2.90% 2.84% 3.31% 3.50% 2.75% 2.58% 2.73% 3.34% 3.31% 3.37% 2.71% 2.69% 2.90% 2.84% 3.31% 3.50%
Bounce 5.62% 5.33% 6.02% 5.43% 5.25% 5.58% 6.43% 5.77% 5.63% 5.11% 6.17% 6.11% 5.62% 5.33% 6.02% 5.43% 5.25% 5.58%
Check

Shoppers (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Air 319,700 293,058 239,775 266,416 213,133 243,790 306,379 293,058 253,096 266,416 253,096 266,416 334,394 306,595 250,864 278,782 223,038 255,082
Hotel 86,522 77,870 73,544 77,870 82,196 91,479 86,522 73,544 69,218 103,826 99,500 108,152 4 90,499 81,467 76,945 81,484 86,016 95,716
Car 109,104 98,194 92,738 98,194 103,649 119,240 109,104 92,738 87,283 130,925 125,469 136,380 114,119 102,729 97,027 102,751 108,465 124,763
Local Experience 15,224 13,701 12,940 13,701 14,463 17,507 15,224 12,940 12,179 18,269 17,507 19,030 15,924 14,334 13,539 14,337 15,135 18,318
Total Shoppers 530,549 482,823 418,997 456,181 413,440 472,016 517,229 472,280 421,775 519,436 495,573 529,979 554,935 505,125 438,375 477,355 432,653 493,879

1• Calculate Visitors as (PY month visitor) * 3• Assume the variations we see in Search Rates by product are due to
(1+y/y growth %) seasonality. Use the PY same month Search Rate as our assumption

2• Sum Total Visitors – this will be the multiplier 4• Calculate Shoppers by product as Total Visitors * Search Rate
used to calculate Shoppers by product
Licensed to Ftaou Sidibe. Email address: [email protected]
Check
Forecasting Visitors & Shoppers Your Work

Bottoms-Up (Detailed) Forecast


(All $'s in millions unless otherwise stated)

Visitors (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Direct Search 176,654 164,502 144,443 167,013 153,863 168,280 176,824 173,280 148,662 191,926 164,754 188,269 185,487 172,727 151,665 175,364 161,556 176,694
y/y growth % 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Search - Organic 69,290 64,754 57,737 61,149 55,422 63,725 71,326 60,855 55,380 67,402 68,157 69,967 74,487 69,610 62,068 65,735 59,578 68,505
y/y growth % 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%
Search - Paid 260,240 230,510 198,327 206,512 183,376 217,600 250,940 216,826 198,340 232,562 241,296 251,714 270,650 239,730 206,260 214,772 190,711 226,304
y/y growth % 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Partner Referral 55,971 50,254 45,313 47,725 43,667 50,320 53,676 50,217 44,544 55,541 53,955 54,496 57,370 51,510 46,445 48,918 44,759 51,578
y/y growth % 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Total Visitors 562,156 510,019 445,820 482,399 436,327 499,924 552,766 501,178 446,926 547,431 528,162 564,446 587,995 533,578 466,438 504,789 456,604 523,080

Search Rates Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Air 56.87% 57.46% 53.78% 55.23% 48.85% 48.77% 55.43% 58.47% 56.63% 48.67% 47.92% 47.20% 56.87% 57.46% 53.78% 55.23% 48.85% 48.77%
Hotel 15.39% 15.27% 16.50% 16.14% 18.84% 18.30% 15.65% 14.67% 15.49% 18.97% 18.84% 19.16% 15.39% 15.27% 16.50% 16.14% 18.84% 18.30%
Car 19.41% 19.25% 20.80% 20.36% 23.75% 23.85% 19.74% 18.50% 19.53% 23.92% 23.76% 24.16%1 19.41% 19.25% 20.80% 20.36% 23.75% 23.85%
Local Experience 2.71% 2.69% 2.90% 2.84% 3.31% 3.50% 2.75% 2.58% 2.73% 3.34% 3.31% 3.37% 2.71% 2.69% 2.90% 2.84% 3.31% 3.50%
Bounce 5.62% 5.33% 6.02% 5.43% 5.25% 5.58% 6.43% 5.77% 5.63% 5.11% 6.17% 6.11% 5.62% 5.33% 6.02% 5.43% 5.25% 5.58%
Check

Shoppers (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Air 319,700 293,058 239,775 266,416 213,133 243,790 306,379 293,058 253,096 266,416 253,096 266,416 334,394 306,595 250,864 278,782 223,038 255,082
Hotel 86,522 77,870 73,544 77,870 82,196 91,479 86,522 73,544 69,218 103,826 99,500 108,152 90,499 81,467 76,945 81,484 86,016 95,716
Car 109,104 98,194 92,738 98,194 103,649 119,240 109,104 92,738 87,283 130,925 125,469 136,380 114,119 102,729 97,027 102,751 108,465 124,763
Local Experience 15,224 13,701 12,940 13,701 14,463 17,507 15,224 12,940 12,179 18,269 17,507 19,030 15,924 14,334 13,539 14,337 15,135 18,318
Total Shoppers 530,549 482,823 418,997 456,181 413,440 472,016 517,229 472,280 421,775 519,436 495,573 529,979 554,935 505,125 438,375 477,355 432,653 493,879

1• Notice that total Search Rates only total to 100% if we include a dummy product called ‘bounce’
which is the % of individuals who come to our site but leave without ever searching for a product

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Forecasting Conversion & Transactions Exercise

• Next we forecast Hotel Transactions using the Hotel


Shoppers we calculated in the last step 1. Open the source file & navigate to the
‘Revenue’ tab, and the section titled
• Utilize historical monthly conversion rates as ‘Bottoms-Up (Detailed) Forecast’
forecast, though we also could have used:
2. For the historical period, we calculate
• Last month’s rate (point estimate) the conversion rate as Hotel
Transactions / Hotel Shoppers
• Last 6 or 12-month average (average)
3. For our forecast, use 1-year prior (for
• Product’s 9% target conversion rate (internal July’21, use July‘20) conversion rates to
project Hotel Conversion Rate
estimate)
4. Calculate Forecasted Hotel Transactions
• Separate Forecast assumptions allow us to see
as Hotel Shoppers * Hotel Conversion
what happens if shoppers increase but conversion Rate
falls, or vice versa
Licensed to Ftaou Sidibe. Email address: [email protected]
Forecasting Conversion & Transactions Exercise

Shoppers (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Air 319,700 293,058 239,775 266,416 213,133 243,790 306,379 293,058 253,096 266,416 253,096 266,416 334,394 306,595 250,864 278,782 223,038 255,082
Hotel 86,522 77,870 73,544 77,870 82,196 91,479 86,522 73,544 69,218 103,826 99,500 108,152 90,499 81,467 76,945 81,484 86,016 95,716
Car
1 109,104 98,194 92,738 98,194 103,649 119,240 109,104 92,738 87,283 130,925 125,469 136,380 114,119 102,729 97,027 102,751 108,465 124,763
Local Experience 15,224 13,701 12,940 13,701 14,463 17,507 15,224 12,940 12,179 18,269 17,507 19,030 15,924 14,334 13,539 14,337 15,135 18,318
Total Shoppers 530,549 482,823 418,997 456,181 413,440 472,016 517,229 472,280 421,775 519,436 495,573 529,979 554,935 505,125 438,375 477,355 432,653 493,879

Conversion Rate Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 3 8.90% 8.88% 9.14% 8.87% 8.80% 9.71% 8.87% 8.49% 8.41% 8.53% 8.15% 4
8.72% 8.90% 8.88% 9.14% 8.87% 8.80% 9.71%

Transactions (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 2 7,697 6,913 6,723 6,909 7,234 8,881 7,678 6,241 5,821 8,852 8,112 9,433
5 8,051 7,232 7,034 7,230 7,570 9,292

1• Shoppers (Quoters) by month from the first step of the 4• Conversion seems steady, but there is likely some
exercise seasonality here as well. Let’s stick with PY month’s
Conversion Rate for our forecast
2• Hotel Transactions are given
5• Calculation Transactions as Shoppers * Conversion Rate
3• Calculate historical Conversion rate as Transactions /
Hotel Shoppers by month

Licensed to Ftaou Sidibe. Email address: [email protected]


Check
Forecasting Conversion & Transactions Your Work

Shoppers (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Air 319,700 293,058 239,775 266,416 213,133 243,790 306,379 293,058 253,096 266,416 253,096 266,416 334,394 306,595 250,864 278,782 223,038 255,082
Hotel 86,522 77,870 73,544 77,870 82,196 91,479 86,522 73,544 69,218 103,826 99,500 108,152 90,499 81,467 76,945 81,484 86,016 95,716
Car 109,104 98,194 92,738 98,194 103,649 119,240 109,104 92,738 87,283 130,925 125,469 136,380 114,119 102,729 97,027 102,751 108,465 124,763
Local Experience 15,224 13,701 12,940 13,701 14,463 17,507 15,224 12,940 12,179 18,269 17,507 19,030 15,924 14,334 13,539 14,337 15,135 18,318
Total Shoppers 530,549 482,823 418,997 456,181 413,440 472,016 517,229 472,280 421,775 519,436 495,573 529,979 554,935 505,125 438,375 477,355 432,653 493,879

Conversion Rate Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 8.90% 8.88% 9.14% 8.87% 8.80% 9.71% 8.87% 8.49% 8.41% 8.53% 8.15% 8.72% 8.90% 8.88% 9.14% 8.87% 8.80% 9.71%

Transactions (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 7,697 6,913 6,723 6,909 7,234 8,881 7,678 6,241 5,821 8,852 8,112 9,433 8,051 7,232 7,034 7,230 7,570 9,292

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With transaction volumes
forecasted, let’s focus on forecasting
Revenue per transaction.

Licensed to Ftaou Sidibe. Email address: [email protected]


Forecasting Length of Stay, Average Daily Rates, and Margin Exercise

• Next we’ll follow a similar process to forecast Room


Nights, Gross Booking Value, and finally Revenues 1. Open the source file & navigate to the
‘Revenue’ tab, and the section titled
• Utilize historical monthly length of stay and ‘Bottoms-Up (Detailed) Forecast’
average daily rates for forecast
2. For the historical period, calculate the
• Utilize a lagging 6-month average for margin % length of stay, average daily rate, and
margin %
forecast
3. For our forecast, use 1-year prior length
• Calculate weighted average margin % instead
of stay and average daily rates, and
of averaging %’s which weights each month lagging 6-month average for margin %
equally. Instead, take the sum of revenues and
divide by the sum of gross booking values, 4. Calculate Room Nights, Gross Booking
Value, and finally Revenue using the
weighting busier months more heavily
forecasted metrics

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Forecasting Room Nights, Gross Sales Value, & Revenue Exercise

Transactions (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 1 7,697 6,913 6,723 6,909 7,234 8,881 7,678 6,241 5,821 8,852 8,112 9,433 8,051 7,232 7,034 7,230 7,570 9,292

Tickets/Nights/Days/Reservations per Transaction


Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 3 3.50 3.50 3.10 3.50 3.49 3.49 3.50 3.49 3.50 3.50 3.50 3.50 3.50 3.50 3.10 3.50 3.49 3.49

Total Tickets/ Hotel Nights/ Car Days/ Reservations


Jul-20A Aug-20A
(thousands)
Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 2 26,912 24,162 20,822 24,162 25,275 31,037 26,846 21,804 20,364 30,971 28,352 33,001 28,149 25,278 21,785 25,283 26,449 32,474

Rate per Unit Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 5 $193.43 $156.90 $179.85 $162.06 $156.80 $198.27 $156.74 $166.22 $186.14 $191.63 $196.62 $185.37 $193.43 $156.90 $179.85 $162.06 $156.80 $198.27

Gross Sales Value (millions) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 4 5,206 3,791 3,745 3,916 3,963 6,154 4,208 3,624 3,791 5,935 5,575 6,117 5,445 3,966 3,918 4,097 4,147 6,439

Margin/ Commission Rate Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 7 10.13% 10.01% 10.44% 10.49% 10.44% 10.78% 10.39% 10.30% 10.41% 10.04% 10.83% 10.27% 10.37% 10.37% 10.37% 10.37% 10.37% 10.37%

Revenue (millions) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel
6 528 379 391 411 414 663 437 373 395 596 604 628 565 411 406 425 430 668

1• Hotel Transactions from the previous step 5• Calculate Average Daily Rate Gross Sales Value / Total Room
Nights
2• Historical # of Room Nights is given
6• Historical Revenue is given
3• Calculate Average Length of Stay as Room Nights /
Transactions 7• Calculation Revenue Margin as Revenue / Gross Sales Value

4• Historical Gross Sales Value is given


Licensed to Ftaou Sidibe. Email address: [email protected]
Forecasting Room Nights, Gross Sales Value, & Revenue Exercise

Transactions (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 7,697 6,913 6,723 6,909 7,234 8,881 7,678 6,241 5,821 8,852 8,112 9,433 8,051 7,232 7,034 7,230 7,570 9,292

Tickets/Nights/Days/Reservations per Transaction


Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 3.50 3.50 3.10 3.50 3.49 3.49 3.50 3.49 3.50 3.50 3.50 3.50 1 3.50 3.50 3.10 3.50 3.49 3.49

Total Tickets/ Hotel Nights/ Car Days/ Reservations


Jul-20A Aug-20A
(thousands)
Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 26,912 24,162 20,822 24,162 25,275 31,037 26,846 21,804 20,364 30,971 28,352 33,001 2 28,149 25,278 21,785 25,283 26,449 32,474

Rate per Unit Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel $193.43 $156.90 $179.85 $162.06 $156.80 $198.27 $156.74 $166.22 $186.14 $191.63 $196.62 $185.37 3 $193.43 $156.90 $179.85 $162.06 $156.80 $198.27

Gross Sales Value (millions) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 5,206 3,791 3,745 3,916 3,963 6,154 4,208 3,624 3,791 5,935 5,575 6,117 4 5,445 3,966 3,918 4,097 4,147 6,439

Margin/ Commission Rate Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 10.13% 10.01% 10.44% 10.49% 10.44% 10.78% 10.39% 10.30% 10.41% 10.04% 10.83% 10.27%
5 10.37% 10.37% 10.37% 10.37% 10.37% 10.37%

Revenue (millions) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 528 379 391 411 414 663 437 373 395 596 604 628
6 565 411 406 425 430 668

1• Utilize PY month’s Average Length of Stay 4• Calculate Gross Sales Value as Room Nights * Average Daily
Rate
2• Total Room Nights are calculated as Transactions * Average
Length of Stay 5• Let’s use the last 6-month average Margin % as our forecast

3• Utilize PY month’s Average Daily Rate (Rate per Unit) 6• Hotel Revenues calculated as Gross Sales Value * Margin %

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Check
Forecasting Room Nights, Gross Sales Value, & Revenue Your Work

Transactions (thousands) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 7,697 6,913 6,723 6,909 7,234 8,881 7,678 6,241 5,821 8,852 8,112 9,433 8,051 7,232 7,034 7,230 7,570 9,292

Tickets/Nights/Days/Reservations per Transaction


Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 3.50 3.50 3.10 3.50 3.49 3.49 3.50 3.49 3.50 3.50 3.50 3.50 3.50 3.50 3.10 3.50 3.49 3.49

Total Tickets/ Hotel Nights/ Car Days/ Reservations


Jul-20A Aug-20A
(thousands)
Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 26,912 24,162 20,822 24,162 25,275 31,037 26,846 21,804 20,364 30,971 28,352 33,001 28,149 25,278 21,785 25,283 26,449 32,474

Rate per Unit Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel $193.43 $156.90 $179.85 $162.06 $156.80 $198.27 $156.74 $166.22 $186.14 $191.63 $196.62 $185.37 $193.43 $156.90 $179.85 $162.06 $156.80 $198.27

Gross Sales Value (millions) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 5,206 3,791 3,745 3,916 3,963 6,154 4,208 3,624 3,791 5,935 5,575 6,117 5,445 3,966 3,918 4,097 4,147 6,439

Margin/ Commission Rate Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 10.13% 10.01% 10.44% 10.49% 10.44% 10.78% 10.39% 10.30% 10.41% 10.04% 10.83% 1
10.27% 10.37% 10.37% 10.37% 10.37% 10.37% 10.37%

Revenue (millions) Jul-20A Aug-20A Sep-20A Oct-20A Nov-20A Dec-20A Jan-21A Feb-21A Mar-21A Apr-21A May-21A Jun-21A Jul-21F Aug-21F Sep-21F Oct-21F Nov-21F Dec-21F
Hotel 528 379 391 411 414 663 437 373 395 596 604 628 565 411 406 425 430 668

1• Take care to calculate Margin % as (sum of L6M Total Revenue) / (sum of L6M Total Gross Sales Value)

• Ensures that Margin % is properly weighted for each month’s size

Licensed to Ftaou Sidibe. Email address: [email protected]


Now that we’ve finished forecasting
Hotel all the way from Visitor to
Revenue, try filling in the remaining
products on your own

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Income Statement – Learning Plan

• Forecasting Fundamentals

• Expenses (Fixed, Semi-Fixed, and Variable)


• Headcount
• Revenue

• Key Takeaways & Key Ratios

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Key Takeaways & Topics covered:
Key Ratios
• Bringing It All Together

• Ratios

• Drivers & Tracking

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Bringing It All Together

• The detailed view makes the forecast Summary Notes


informative and actionable
• Always build summary views of the details of
• Always take a step back and build a the forecast to:
summary view of our forecasts
• Present the data to more senior executives
• What do our assumptions do to • Spot big-picture themes that may be
revenue growth? Is this reasonable? missed in the details

• How are Gross or Net Margins • Charts are an excellent way to spot trends and
changing and why? insights in both inputs AND outputs
• Keep your audience in mind when presenting
• What does our forecast imply about
the forecast summary. Your audience
our headcount efficiency?
determines the level of detail

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Summary outputs help keep your
audience in mind, stay focused on
the purpose of the forecast, and
prevent leaving important inputs
out of your model

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Important Income Statement Ratios

• Which metrics and ratios are most Common Views


important to highlight will be different for
each organization • These metrics are nearly always compared, at
a minimum, on a year over year basis
• In our example, visitor growth, conversion
• Comparing versus Plan, Budget, or prior
rates, and margins are particularly
Forecasts are important views to focus analysis
sensitive assumptions
and discussion on what has changed since the
• Tracking Gross, EBIT or EBITDA, and Net prior forecast
Margins are always helpful

• Annual or multi-year growth rates in


Revenues, Expenses, and Headcount items

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I know this has been a lot of
material, but there is a reason.
Performing forecasts, projections,
reviews, and on-going analysis
around Income Statement
performance is a heavy focus of
FP&A in most organizations

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Drivers & Tracking

• Critical to develop in-depth understanding Real-time Insights


of what operational metrics really drive
business performance • FP&A’s greatest value-add opportunities in any
organization
• Allows us to identify which drivers can be
• FP&A is often responsible for gathering and
captured and tracked in real-time to assess
reporting this information to guide real-time
performance between forecasts
business decisions
• Basis for building out pacing and • Informed by regular reporting of website
performance dashboards (covered in later conversion rates, transaction volumes, and
chapter) average transaction values

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