How to Use the Percentage of Sales Method

by Alan Kirk - Updated September 26, 2017

The percentage of sales method is a system a company can use to anticipate changes in its balance sheet and income statement during the next time period it would like to review. Significant accounts used in this calculation are converted to a percentage of sales. That percentage is then used to multiply the forecasted sales volume for the next time period for each account to estimate its future total.

Convert the accounts used on the balance sheet for the percent of sales method for forecasting sales to a percentage of the current year's sales. The accounts that need to be converted include cash, accounts receivable, inventory, retained earnings and fixed assets on the asset side of the balance sheet. Accounts payable should be converted on the liability side of the balance sheet. To do this conversion, divide the total in each account by the total sales for the current year. This will result in each account now showing a percentage based on this year's sales.

Convert the costs category on the income statement. Divide the total of income earned this year by the sales total for this year.

Estimate your growth in sales. This should be done based on the market research conducted by your own company or by an outside source you hire to provide this estimate for you.

Calculate the estimated sales volume for your company by dividing the growth percentage provided by 100 to convert it to decimal form, add one to that decimal, and then multiple it by the sales volume you used to divide the accounts by in Steps 1 and two.

Forecast the amounts for each of the accounts you converted to percentages in Step one. Multiply the percentages for each account from Step 1 times the projected sales volume you calculated in Step four. Do this for each account. It will give you your forecasted totals for the upcoming time period. These totals can then be used to complete projected Pro-Forma Balance Sheets and for calculations on your projected Pro-Forma financial statements.

Tips

  • The percentage of sales method is commonly used to project changes from one year to the next based on anticipated sales. It can also be used for quarterly projections as well.

About the Author

Alan Kirk has been writing for online publications since 2006. He has more than 15 years' experience in catering, management and government relations. Kirk has a bachelor's degree in business management from the University of Maryland.

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