Percentage of Sales Method

A) Express the various balance sheet items varying along with sales as percentage of sales as assume for year 2002 stock and net fixed assets amount for Sh.12M and 18M respectively sales amount to Sh.40M.  Consequently stock as percentage of sales"

Stock = (12m/40m) * 100 = 30%                   

Fixed assets = (18m/ 40m) = 45%

B) Determine the increase in net asset as results of increase in sales like suppose sales increases from Sh.40 M to Sh.60 M in year 2003. The additional total fixed asset and stock required would be determined as follows:

Increase in stock = % of sales x increase in sales

                            = 30% (60 - 40) = Sh.6M

Increase in fixed asset = % of sales x increase in sales

                                     = 45%(60 - 40) = Sh.9 M

C) Determine the net increase in assets that will be financed via:

a)  Spontaneous source of finance i.e increase in current liabilities

     Where Increase = % of sales x increase in sales

b)  Retained earnings for the forecasting period

     Retained earnings = Net profit - Dividend paid

      Net profit margin =     Net profit/Sales

Thus: Net profit = Net profit margin (%) x sales

Note

Usually Net profit margin is called after tax return on sales.

• Out of the net assets that are necessary as a result of increase in sales, the financing will come from the two (2) sources recognized. Any type of amount such cannot be met from the two sources will be borrowed externally at short term basis that will be a current liability.