Bottom-Up Estimation Strategies

Many FP&A teams forecast compensation using top-down assumptions like "salaries grow 3% year-over-year and benefits are 25% of pay." But this usually fails. Bottoms-up cost builds allow FP&A professionals to build accurate compensation models like this one. Instead of starting with high-level assumptions and averages, it begins with inputs that can then drive the averages used in the financial model. This is an example I sometimes use to illustrate how FP&A teams can build more accurate payroll forecasts: • Separate senior professionals from junior professionals • Build salary growth rates at the category level • Add fringe and statutory costs line by line • Calculate each cost as a % or salaries or per person • Include benefits % of salary to capture non-cash comp The result of this technique is you get a transparent, auditable model with inputs that can be easily flexed. You get immediate sensitivities that you can run on headcount, pay mix, or changes to benefits. And you can easily integrate these assumptions with workforce planning. You can also break down leadership, management, and staff by job category and assign salary bands. If the CFO asks why personnel costs went up 8%, you can show exactly where that increase is coming from. A bottoms-up cost build like this doesn't just make your forecast more detailed. It makes it more defensible for FP&A business partners serving human resources.

Most revenue models are built backwards. Finance picks a number. Sales divides by average quota. You end up with something like: “We need $40M, our quota is $1M per rep, so let’s hire 40 reps.” It looks tidy in a spreadsheet...and it almost never works in the real world. :) Why? Well, because this model assumes every rep: - Ramps on time - Hits 100% - Stays the full year Which is like assuming every Uber driver wins the Indy 500. Here’s a better way to build a revenue model: First off, stop treating quota as a fixed assumption, and start building around ramped capacity, rep variability, and reality. 1. Plan using RRE, not headcount. RRE = Ramp-Weighted Ramped Equivalents Forget how many reps you have. Focus on how many fully productive equivalents you’ll actually have in a given quarter. This accounts for: - Ramp time. - Attrition. - Variance in performance bands. That new rep you just hired? They're not a "1" in your model. They're a 0.2, then 0.4, then maybe 0.7 if you're lucky. Ten reps with half still ramping = 6.5 RREs. Not 10. 2. Build top down and bottom up...then reconcile. Top down: What makes the VCs happy? Bottom up: What's actually possible given productivity curves? When these numbers don't match (spoiler: they won't), you've found your strategic tension point. 3. Layer in performance bands. Not all reps hit quota. And that’s not failure. That’s just math. Try modeling based on realistic performance distribution: - Top 20% hit 120-150% - Middle 60% hit 70-90% - Bottom 20% hit 0-50% If your plan assumes everyone hits 100%, you’re either new here… ...or about to be. 😬 4. Bake in operational drag. Every revenue model looks clean...until enablement stalls, marketing underdelivers, or a region goes sideways. So you should build in a drag factor: - Deal slippage. - Hiring delays. - Funnel softness. - Internal execution risk. Don’t present worst case scenarios, but do plan for them. Some revenue leaders treat quota like a scoreboard, whereas you should treat it like an operating system. Don’t ask: “How many reps do we need to hit $40M?” Instead, ask: “How do we engineer the system to consistently produce $40M - with margin for error?” That’s the difference between running a sales org and running a revenue machine.

CAPEX estimation for low maturity technology projects is challenging, particularly when we talk about new equipment. Yet, we still need to be able to get fairly accurate figures to justify the viability of the technology and secure funding for its development. How to do it? Here is what we usually do for hydrogen and carbon capture projects. 1. Define the Project Scope Start by clearly outlining all project boundary, objectives and deliverables. Identify every cost elements required for full scale implementation, from engineering and design to construction and commissioning, while distinguishing between one-off investments and those that can be standardised. 2. Develop the first-of-a-kind CAPEX Estimate • Detailed Bottom-Up Analysis: Break down the project into its individual components, accounting for bespoke engineering, pilot testing, specialized installations, and comprehensive project management. • Risk and Contingency: Due to the innovative nature and inherent uncertainties of FOAK projects, incorporate generous contingencies to cover design modifications, unforeseen challenges, and regulatory uncertainties. • Documentation: Maintain thorough records of assumptions and decisions made during this phase, as these will inform future projects. 3. Estimate to the nth-of-a-kind estimate with learning curves Leverage the insights from the FOAK phase to isolate repeatable cost elements. With each subsequent build, learning curves drive efficiencies: • Standardize Processes: As you replicate the project, streamline designs and processes. • Realize Efficiency Gains: Experience leads to better vendor relationships and operational refinements, translating into significant cost reductions for repeatable components. • Adjust Estimates: Update your cost models to reflect these improvements, using your own or reported learning curves, ensuring more accurate and lower capital expenditure projections for future projects. 4. Implement Continuous Improvement Regularly revisit and refine both FOAK and NOAK estimates. As more operational data becomes available, adjust your assumptions and conduct sensitivity analyses to maintain a robust, realistic capex projection. How do you estimate CAPEX for your technology? #Innovation #research #hydrogen #carboncapture #science #scientist #chemicalengineering

Forecasting/Budgeting for Procurement: When forecasting and budgeting procurement costs - especially direct material costs - several factors need to be taken into account. The starting point is an understanding of the underlying cost structure. The first step is to identify the key cost drivers such as raw materials (commodities) and other blocks such as wage or process costs. The entire procurement portfolio should be segmented into categories based on comparable cost drivers. Only through this structuring is a targeted and reliable budget planning possible. The application of the identified cost drivers then forms the input for the procurement budget. To validate these approaches, it is advisable to analyze historical cost trends. The analytical forecast method is used to estimate the price development of central cost blocks. It starts at the macro level with economic and political framework conditions. These overarching assumptions must be agreed with management, as they serve as the basis for all further derivations. They are then refined in a multi-stage process - starting with global commodity markets and industry-specific developments through to product-specific factors such as specifications, batch sizes and delivery times. This results in a well-founded, comprehensible forecast that provides a solid basis for the procurement budget. Another key aspect is the choice of planning approach: top-down or bottom-up. In the top-down model, management defines financial targets that are cascaded downwards. With the bottom-up approach, planning takes place at operational level, based on specific requirements and detailed knowledge. In practice, a hybrid approach is often recommended in order to combine both strategic control and operational realism in the planning of direct material costs. Finally, basic principles for budget and forecast planning in procurement must be observed. These range from avoiding unrealistic expectations and focusing on relevant cost drivers to clearly assigning process responsibility. It is particularly important to emphasize that budget cuts should never be made purely top-down without defining responsibilities for individual material costs and savings projects. Only methodically sound and organizationally embedded planning can sustainably strengthen the role of procurement and lay the foundation for efficient decisions and strategic development. Dr. Mario Büsch, PURCHNET.de

Most startup annual planning processes get the order wrong. They start with "How many people can we afford to hire?" instead of "What do we need to achieve?" Here's the framework I use with my clients to align revenue targets, commercial goals, and headcount planning: Start with clarity on what success looks like. Begin with your revenue or growth target, then map the commercial goals needed to hit it (entering a new market, launching a product line, monetizing new features). For VC-backed companies, ask yourself: What needs to be true to raise our next round given the current market? How long do we have to get there based on our cash runway? Remember — at a startup, you're building 3 products simultaneously: - A customer-facing product - An investment vehicle - A workplace for employees Your annual plan needs to account for all three. Then, build your headcount two ways: top-down AND bottom-up. Top-down: Build a zero-based org chart with strategic constraints. Let's say your revenue target is $20M and you want $200K ARR per FTE. That's a max of 100 people. Start with a blank org chart. Don't consider your current people or structure — build from scratch based on what you need to achieve your goals. Use industry ratios as a starting point (e.g., Sales & Marketing gets 35% of headcount), then adjust for your context. A B2B enterprise company struggling with retention needs different ratios than a PLG company hungry for more inbound leads. I call this "industry-informed, context-driven." Work with leadership to map out your ideal org chart within these constraints. What roles do you need? What does the reporting structure look like? Bottom-up: Ask each team to build their plan to meet their goals. Have your Sales leader calculate the reps needed to hit pipeline targets based on realistic quota attainment. Have your Engineering leader estimate the team size required to ship the product roadmap on time. They're working within the top-down parameters you've set, but with the operational detail only they have. Aggregate the departmental plans and map them onto an org chart too. The magic happens when you reconcile both org charts. Put your top-down zero-based org chart next to your bottom-up aggregated org chart. Where do they differ? Then, compare both views against your current org chart. This three-way comparison forces the strategic conversations you need to have. This is where you determine exactly where you need to: ✓ Hire new talent for gaps in your ideal org chart ✓ Upskill existing team members to grow into new roles ✓ Make difficult exits where current roles don't exist in either future view ✓ Adjust timelines or scope based on resource reality The best annual plans aren't spreadsheet exercises. They're strategic documents that connect your growth ambitions to the people and resources needed to achieve them. What's your biggest challenge with annual planning?

THE BOARD SABOTAGED SALES. A CEO just declared: “We’re gonna hit $20M in revenue this year… because the board decided so.” No bottom-up reality check. No clear conversion math. No forecasting framework. Meanwhile, 69% of sales reps miss their quota in B2B Tech. The harsh truth? If your revenue goal isn’t tied to pipeline, win rates, and deal velocity, it’s not a goal. It’s a shot in the dark. We live in a data-fueled GTM era, and you just can’t cheat anymore. HERE’S 3 WAYS TO TEST TOP-DOWN TARGETS AGAINST BOTTOM-UP REALITY. 1. Full-Year Predictive Sales Forecast A real forecast isn’t just about projecting short-term revenue from your existing pipeline and hoping the rest falls into place. It’s about understanding how your sales engine actually works - tracking pipeline generation, win rates, and sales cycle length - to calculate a realistic full-year projection. And it’s not about averages. Start with each country, product line, and team individually, then sum them up to get a forecast that truly reflects how revenue is generated across the business. 2. Reverse-Engineered Growth Plan Start with your revenue goal, then apply your target growth percentages to last year’s conversion funnel broken down by country, product line, and team. How many new opportunities, proposals, and closed deals does that require? What level of activity needs to happen to support it? The numbers need to match both market reality and operational capacity. 3. Sales Velocity Lever Check Revenue growth comes down to four levers: deal size, win rate, sales cycle length, and pipeline volume. The key is knowing which of these actually drive growth and how they interact. Look at your 12-month trend for each by country, product line, and team. Where are improvements happening? Where are things stalling? Which shifts will have the biggest impact on hitting your goal? If your growth plan relies on improving performance this year, the trends should already be moving in the right direction. TAKEAWAY Win rates have dropped by 20 percentage points over the past years, sales cycles keep getting longer, and deal sizes are shrinking. Hoping for a sudden turnaround without real evidence won’t cut it. You can’t expect your board to be sales target experts, but you can give them the data to keep goals grounded in reality. No more BS targets just to please the board. No more CRO shoulder shrugs when it’s time to hit them. How do you balance ambition with reality in goal setting?

Top Down revenue planning is how a lot of CROs/VP Sales end up building a plan that looks great in a board deck and falls apart in execution. It usually starts like this. “We need 5x ARR growth.” Not because the market says it is realistic. Because it sounds best in class. Let’s run through a simple example (all fictional numbers). 1) Revenue plan Grow 5x from £5m to £25m ARR Because that is what the board expects. 2) Capacity plan AE quota is £150k per quarter So you need 33 AEs That assumes zero underperformance, zero ramp time, and no attrition. 3) Pipeline creation plan Win rate is 15% ACV is £40k So each AE needs 25 deals per quarter That is where the cracks start showing. The problems with this approach First, market size. Do you even have enough good fit accounts to support that target? Second, pipeline creation. Is that deal volume anywhere near what your team can generate today? Third, hiring becomes the whole strategy. The plan only works if you hire fast and every new rep ramps quickly and hits quota. Top down planning is useful for one thing. It tells you what needs to be true. But it cannot be the only plan. The fix: build a bottom up plan alongside it Start with what is real and measurable. How many accounts are actually in your TAM? How many of those are likely to buy (your real serviceable market)? How much pipeline have you created in the last two quarters? Where did it come from and what was the quality? What is the current win rate? What is the current ACV? Now you can calculate the gap between current reality and the target. And more importantly, you can decide what to do about it: Assess if the target is genuinely achievable Spot the funnel bottlenecks you can improve to close the gap Align the business on what is achievable vs what is simply desirable If your revenue plan depends on perfect hiring and perfect execution, it is not a plan. It is hope with a spreadsheet.

I joined my new company's offsite. The team threw out a revenue goal: 3x. Everyone could justify it. Then someone had to turn it into an actual plan. That someone was me. When I built the bottoms-up model across product, engineering, sales, marketing and people, the answer came back at 1.2x growth, not 3.0x. CEO: "We're doing 3x this year." Me: "I'm getting to 1.2x." There's a moment. Are you serious? Then: Prove me wrong. Instead of arguing about a single number, we moved the conversation to likelihood. Bottoms-up forces everyone to confront the inputs: Can we release that feature in time? Do we have engineering capacity? What's our actual sales conversion rate? The team gets educated. People discover constraints they didn't know existed. Then you assess: Could 3x happen? Sure. But it belongs in a lower-probability bucket, and we had to name what would need to be true. Most boards and management teams aim for ambitious goals in round numbers - 2x, 3x revenue, or "$20M" next year. But execution is bottoms-up and probabilistic. Top-down goals matter for direction. Bottoms-up is where alignment and cross-collaboration happen. Now you're dealing with INPUTS you can actually affect: engineering hires, time to hire, marketing budget, salespeople, conversion rates, pipeline per rep. Output is just math. A plan that ignores hiring capacity is a wish. If you can only onboard 3 quota-carrying reps a quarter, the ARR target assuming 12 ramped reps by Q2 is cosplay. Stop saying "downside vs. base vs stretch." Use probabilities. Every finance person knows this tension: You want to be accurate and credible. Yet, if you come to the board with 1.7x when they want 3x, someone may wonder if you're sandbagging. Probabilities let you be accurate, informative and ambitious simultaneously. 90% case: 2-minute mile. If you played this out 10 times, you'd hit this 9 times. 50% case: Several things need to go right. 10% case: 4-minute mile. Only 1 in 10 universes gets here. Requires breakthroughs. But you're telling me there's a chance!! Now the board sees the full picture. You're showing what's likely and what's a long shot, with the work required for each. Building credibility by showing mastery of the business range. If you forecast 3x with no probability attached and deliver 1.7x, the board loses trust. But when you say "3x is possible - it's a 10% chance," you can be credible and ambitious in the same breath. Once you connect goals to constraints, you get something useful: a sequence of actions the company can execute. That's the operator's job in one line. Convert ambition into a sequence of coordinated, aligned actions. When growth pressure rises, people reach for numbers that feel good. Your job is to ask what those numbers cost in headcount, time, and coordination. Then decide if you want to pay.

If your TAM slide says “$500B+ market” … investors already tuned out. Because they know 99% of founders butcher TAM / SAM / SOM. And instead of showing opportunity, you look like you don’t understand your own market. Here’s what works vs what doesn’t: ──── 1. TAM (Total Addressable Market) What doesn’t work: → Googling “size of [industry] market” and pasting the biggest number you find. → Picking a global market size that has nothing to do with your niche. → Using a 5-year projection report and assuming you’ll “capture 1% of it”. What does work: → Start top-down but sanity check with bottom-up. Example: “There are 12M small retailers in the US, each spends $200/month on payments → $28B TAM.” → Show why this market is actively expanding or underserved. ──── 2. SAM (Serviceable Available Market) What doesn’t work: → Calling SAM “the part of TAM we can target” without numbers that tie back to your product. → Shrinking TAM by random percentage cuts (“let’s say 10% of TAM is relevant”). What does work: → Define your customer segment precisely. Example: “Within those 12M retailers, 3M are in Tier 2-3 cities and underserved by Stripe/PayPal. That’s a $7.2B SAM.” → Connect SAM to today’s GTM reality: geography, language, regulations, distribution. ──── 3. SOM (Serviceable Obtainable Market) What doesn’t work: → A wishful “we’ll grab 1% of SAM in 3 years”. → Assuming linear growth with no GTM math. What does work: → Build bottoms-up. Example: “We can onboard 5K retailers in Year 1. With $150 ARR per user, that’s $750K. Scaling to 50K in 3 years → $7.5M SOM.” → Tie SOM directly to sales capacity, marketing budget, adoption cycles. ──── The simple rule: TAM tells a story of why this is a big space. SAM shows who you’re actually targeting. SOM proves you know how to get there. Most decks fail because they make TAM a fantasy, SAM a guess, and SOM a dream. The strongest decks make TAM → aspirational, SAM → credible, SOM → executional. If you can’t defend these numbers in a 5-min grilling, you’ll get written off instantly. ──── Want brutal clarity on your startup? Skip years of wasted effort and stop making expensive mistakes. Get direct advice on your deck, valuation, fundraising, GTM, or other challenges. Book a no-BS 1:1 call with me here: https://lnkd.in/gWV8DT56 💬 Drop your most burning question in the comments. ♻ Repost to save another founder from embarrassing TAM math. 🔔 Follow Anshuman Sinha for more Startup insights. #Startups #Entrepreneurship #VentureCapital #LeanStartups #AngelInvesting