What Is a Good Percentage for Purchases Agains Sales

Say you want to rapidly estimate the corporeality of cash your business volition take on hand at the end of next year. Y'all have a picture of how your sales figures are expected to abound and your remainder sheet nearby. How would you lot get about doing that?

Well, ane of the more popular, efficient ways to approach the situation would be to employ something known as the percent of sales method.

Let'south accept a closer look at what the method is, how to utilize it, and some of its benefits and shortcomings.

What is the per centum of sales method?

The percent of sales method is a fiscal forecasting model in which all of a business organization'due south accounts — financial line items similar costs of goods sold, inventory, and cash — are calculated as a per centum of sales. Those percentages are then practical to hereafter sales estimates to projection each line particular'due south future value.

The percent of sales method is one of the quickest means to develop a financial forecast for your business — specifically for items closely correlated with sales. That's its major reward. If your business needs a very rough movie of its financial future immediately, the percent of sales method is probably one of your better bets.

Even and then, yous have to conduct in mind that the method just applies to line items that correlate with sales. Any fixed expenses — like stock-still assets and debt — can't be projected with the pct of sales method.

The method too doesn't business relationship for stride costing — when the price of a product changes after a client buys a quantity of that product over a discrete volume betoken. For instance, if a customer buys a production from a business that has a step cost at 5,000 units, then every unit of measurement beyond those first five,000 comes at a discounted price.

Nevertheless, despite its shortcomings, it'due south a useful method worth agreement and being able to apply.

Steps of the Percent of Sales Method

1. Determine your estimated growth and virtually recent annual sales figures.
2. Make up one's mind if a correlation between sales and specific line items yous want to forecast exists.
3. Decide the line item balances and their percentages relative to sales.
4. Summate forecasted sales.
5. Apply line items' relative percentages to your forecasted sales figure.

For the sake of instance, let's imagine a hypothetical businessperson, Barbara Bunsen. She operates a specialty cake, army bed, cinnamon curl shop called "Bunsen's Bundt, Bunk Bed, Bun Bunker" or "B6" for short. Nosotros'll use her business as a reference point for applying the percentage of sales method.

i. Determine your estimated growth and near recent annual sales figures.

When Barbara started her shop, her friends and family told her to pump the brakes a footling. They said, "Barbara, maybe reign information technology in a chip? People don't want to buy bundt cakes at a store that also sells armed services surplus bunk beds." Little did they know that the pastry-loving veteran niche is incredibly lucrative. And she was able to do $l,000 in sales her first year and anticipates sales will increase forty% in the coming year.

She decides she wants to put together a crude financial forecast for the future, and then she opts to leverage the percent of sales method. At present that she has the relevant initial figures, she can movement on to the next pace.

two. Determine if a correlation between sales and specific line items you want to forecast exists.

Earlier she can put her forecast together, Barbara has to see which financial line items are correlated with her sales figures. These are the accounts the percent of sales method applies to. Those accounts oft include:

• Inventory
• Accounts receivable
• Accounts payable
• Cash
• Costs of appurtenances sold
• Net income.

In one case she has the specific accounts she wants to go along tabs on, she has to find how they stack up to her overall sales figures.

3. Make up one's mind the line item balances and their percentages relative to sales.

Let's say Barbara's accounts have these balances:

• Inventory — $20,000
• Accounts receivable — $x,000
• Accounts payable — $vii,000
• Cash — $15,000
• Costs of appurtenances sold — $15,000
• Net income — $35,000

When divided by Barbara'south $l,000 in acquirement, those figures amount to these percentages:

• Inventory — forty%
• Accounts receivable — 20%
• Accounts payable — fourteen%
• Cash — 30%
• Costs of appurtenances sold — 30%
• Net Income — 70%

Next, Barbara needs to calculate her estimated sales for the upcoming yr.

4. Calculate forecasted sales.

Every bit previously mentioned, she expects to meet a 40% increment. To determine her forecasted sales, she would use the following equation.

Barbara Bunsen's Bundt, Bunk Bed, Bun Bunker is expected to see a 40% increase in sales side by side yr. And then calculating her forecasted sales would look like this:

fifty,000 (i+40/100) = 50,000 (1.4) = $70,000

From there, she would determine the forecasted value of the previously referenced accounts.

5. Apply line items' relative percentages to your forecasted sales effigy.

Barbara's figures would wait like this:

• Forecasted inventory — $28,000
• Forecasted accounts receivable — $14,000
• Forecasted accounts payable — $nine,800
• Forecasted cash — $21,000
• Forecasted costs of appurtenances sold — $21,000
• Forecasted net income — $49,000

Ultimately, the percent of sales method is a user-friendly but flawed process of financial forecasting. Information technology's useful in that it can provide a solid moving-picture show of what certain balance sheet items will await like going frontward, and should only be applied to specific line items that y'all tin can prove have a correlation with your sales figures.

By no ways is meant to be hailed every bit a definitive document of every attribute of your company'south financial future. If you desire a clearer, more authentic film of where your company is headed financially, you're improve off advisedly detailed, line-past-line forecast that considers other aspects beyond your sales level.

Originally published May 5, 2020 eight:00:00 AM, updated May 05 2020

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Source: https://blog.hubspot.com/sales/percent-of-sales-method

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