Revenue Build
AdvancedA revenue build is the part of a financial model that forecasts revenue from its underlying drivers, such as the number of customers, units sold, prices, stores or contracts, rather than simply applying a growth rate to past revenue.
Forecasting revenue by assuming it grows at a set percentage is quick but hides the assumptions behind it. A revenue build breaks revenue into its components, making the forecast more transparent and easier to test.
The drivers depend on the business. A subscription company might forecast the number of subscribers, adding new ones and removing those who cancel, multiplied by average revenue per subscriber. A retailer might forecast the number of stores, sales per store and like-for-like growth. A manufacturer might forecast units by product multiplied by price.
For example, a software company with 10,000 customers paying an average of 120 a year has revenue of 1,200,000. The model might then forecast 25% customer growth and 3% annual price increases to project future revenue.
Revenue builds allow analysts to check whether assumptions are realistic, compare them with industry data and run scenarios on specific drivers, such as customer churn or pricing.
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