After seeing trends across the last few quarters, Frank is confident he can get a 10% revenue increase next quarter, coming to $110,000. To see how this will affect his contributing assets and expenses, he multiplies the percentages he calculated for each by the new revenue amount. He estimates the following amounts for the coming quarter:
of sales for his expenses specifically so he goes back to his initial amounts and sees that expenses totaled $20,000, or 20% of revenue.
For most consumer companies (B2C), the expense-to-sales ratio should be in the range of 25% to 30% of net sales. Frank’s small company is doing exceptionally well, with only 20% of his sales revenue going towards sales-related expenses. (For business-to-business companies (B2B), the target should range from 15% to 20% of net sales.)
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Advantages of the percentage of sales method
One of the most obvious advantages of the percentage of sales america phone number list method is that it’s straightforward and doesn’t require a lot of complicated calculations. Other advantages include:
Quick estimates. You can use historical data to quickly compare the percentage of sales revenue applied to assets and expenses over time.
Insights. If you’ve kept your data up to date, you can see where to adjust your expenses according to dips or increases in sales. You can also experiment with different scenarios and make projections based on changes in the marketplace.
Trend tracking. The longer you track data to determine future revenue trends, the easier it is to break these trends down into ups and downs in asset value and expense amounts.
Limitations of the percentage of sales method
While the percentage of sales method is great for forecasting on the fly, it does have a few disadvantages:
Variable expenses and assets. Because it is such a simple formula, a percentage of sales may offer projections that aren’t quite accurate. For example, some fixed expenses, such as rent, are consistent over time. Other expenses, such as advertising, can vary. This can affect the accuracy of your projection, as it’s easy to overestimate or underestimate factors affecting your revenue
Dated data. The percentage of sales method also relies on past data, which may not reflect current market conditions. Also, if your data isn’t clean or up to date, it may give you false insights.