When forecasting your company’s financial future, the right calculations can make the difference between on-target projections and missed opportunities. You might think you know when your sales are up or down (and how that affects the bottom line), but are you using the right formula?
If you’re unsure, look no further: The percentage of sales method is one of the most easiest ways to calculate forecasts, according to Harvard Business Review. If you utilize this approach, you’ll be able to confidently make adjustments to your strategies to stay on course and hit those big numbers.
How to calculate the percentage of sales
Real-world example of the percentage of sales method
Advantages of the percentage of sales method
Limitations of the percentage of sales method
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What is the percentage of sales method?
This forecasting method uses estimated overarching sales growth to america phone number list determine changes to any financial line items that directly correlate to sales. This is commonly done by percentage — if you know the percent amount your sales will increase, you can apply that to all line items as well, both assets and expenses. This includes things like accounts payable, accounts receivable, cash, cost of goods sold (COGS), fixed assets, and net income.
Here’s a simple example: Let’s say a business made $100,000 in the previous year. Their cash on hand represented 20% of that amount (equaling $20,000). After some research and analysis, the owner determined that company revenue would grow by about 20% in the coming year. That means revenue would be $120,000 and the forecasted cash on hand would be 20% of $120,000, or $24,000.
How the percentage of sales method is used in financial forecasting
With the percentage of sales method, you can quickly forecast financial changes to your business — including both assets and expenses — based on previous sales history. This allows you to adjust budgets, strategies, and resourcing to ensure you hit desired targets.
How to calculate the percentage of sales formula
Applying the formula takes a few steps — but don’t worry, they’re simple.