The Great Debate, Candidate 2: Bottom-Up

A demand-driven revenue model (top-down) may not be for you. Today we delve into bottom-up so you can stay on the track of gaining competitive advantage and becoming more profitable for 2017. Let’s check out a supply based revenue model & our second candidate:

bottom-up approach.image-axd

This is driven on resource supply. It answers questions like “how many hours of work can I bill?,” “how many widgets can I get produced?” and “how much crop will my fields yield?” Estimate potential sales revenue of a product in order to establish the total sales figure.

“Known as an operating expense plan, bottom-up forecasts examine factors such as production capacity, department-specific expenses, and addressable market in order to create a more accurate sales projection. Many experts believe this approach is more realistic than top-down because bottom-up forecasting employs actual sales data, the resulting forecast may be more accurate, which enables you to make better strategic decisions moving forward. (quickbooks)”

Calculate revenue by individual employee based on hours, cost rates, multiplier and utilization rates. 9DOTS provides the functionality to calculate and aggregate these figures to a fiscal year revenue model. St0re values for each individual’s hours, expected revenue, direct and indirect labor costs by fiscal period and then calculate and aggregates those values and deliver them to the budget reports. This entire process simplifies and automates previously labor-intensive activities.

Budgeting season is beginning for professional services organizations. Sales are rolling in & each month you have to prepare for the next–increasing your sales, generating profit. New projects are starting, old projects are continuing on. Making sure your organization’s headcount is in balance with your backlog and projected pipeline is a constant challenge. You need the right tool to help you see far enough into the future to understand your organizations staffing needs.

The Great Debate, Candidate 1: Top Down

top-down-bottom-upLast week was a quick review of the Top Down, Bottom Up, & 9DOTS’ Gap Analysis approaches to financial planning. Now, let’s dig a little deeper into each aspect for a quick understanding during this budgeting season. You may be able to make a huge change for next year to gain competitive advantage.

You want to stay a top professional services organization. Making sure you aren’t spending too much (or too little) on staffing is imperative in making sure you are not wasting time, resources, or money. Lets focus on the first candidate:

Top Down.

“Top-down forecasting works well when the market forces on various product items or sales areas are similar. For example, if the markets for baseballs and baseball bats move together, it makes sense to predict their sales together. Many times, individual products will not generate sufficient data for forecasters to make meaningful predictions.The larger amount of data on more items will make patterns easier to see and provide a more accurate forecast. Top-down forecasting works well for budget and strategy planning because it successfully predicts the big picture of overall sales.”

“One of the benefits of top-down financial forecasting is that it avoids statistical outliers—the data-swings—common to lower-level facts and figures. Because of this, a top-down approach offers companies a broader picture of revenue potential and can help them identify sales patterns.” (quickbooks)

A top-down approach is driven on market demand. Keeping track of historical trending data and/or the sales pipeline to gauge expected revenue is necessary. Then, align your organization’s expenses. The challenge is whether or not the business is structured to capitalize on market demand–a high market demand means you may be losing opportunity if you don’t have the necessary resources aligned internally. Combine employee planned hours, billing rates, and planned revenue data with potential revenue. The result is a revenue model driven directly from planned and unplanned data.

To get into the nitty-gritty of top-down, check here. and in a few days we will give the run down on bottom-up!

Bottoms up! or Top Down? Let’s Review.

Budgeting season is beginning for professional services organizations. Sales are rolling in & each month you have to prepare for the next–increasing your sales, generating profit. New projects are starting, old projects are continuing on. Making sure your organization’s headcount is in balance with your backlog and projected pipeline is a constant challenge.  To over or under staff your organization affects profitability with poor utilizations or project delays.  You need the right tool to help you see far enough into the future to understand your organizations staffing needs.

If you are a professional services organization, how do you make sure you’re not spending too little on project staffing or too much? Are you wasting time, resources, your hard earned cash by frantically assigning projects? 

A top-down approach is driven on market demand. An understanding of the market through historical trending data and/or the sales pipeline to gauge expected revenue is necessary. Then, align your organization’s expenses. The challenge is whether or not the business is structured to capitalize on market demand–a high market demand means you may be losing opportunity if you don’t have the necessary resources aligned internally.

bottom-up approach is driven on resource supply. It answers questions like “how many hours of work can I bill?,” “how many widgets can I get produced?” and “how much crop will my fields yield?” Estimate potential sales revenue of a product in order to establish the total sales figure.

Your organization’s need is unique based on its industry & market conditions. Having the ability to compare both models with ease will give you a competitive advantage. That extra component, the gap analysis, is just what you need to maximize utilization & profitability. With only the top-down or bottom-up, there is no comparison and it can be misleading with revenue or supply. Gap analysis allows for a more holistic view of the business. Viewing the difference between a Top-down and bottom-up can give you actionable intelligence. For example, more market demand means you can safely hire more people, or a constraint on resource supply could determine the possibility of raising prices to increase margins.

You can check this out to gain competitive advantage for 2017!