Percentage of Sales Method - Financial Forecasting

This method includes expressing various balance sheet items such are directly concerned to sales as a percentage of sales.  It includes the following steps like:

1. Recognize various balance sheet items such are directly via sales this items comprises with:

a) Net fixed asset - If the current production capacity of the firm is full an increase gradually in sales will necessitate acquisition of new assets as machinery to raise production.

b) Current Asset - An increase in sales because of increased production will lead to increase in stock of raw materials, work and finished goods in progress. Increased credit sales will increase debtors whereas more cash will be necessary to buy more raw materials in cash.

c) Current liabilities - Increased sales will show to purchase of more raw materials

d) Retained earnings - This will increase along with sales whether and only whether, the firm is operating profitability and all net profits are not paid out like dividend.

Note

The increase in sales does not need an increase in ordinary share capital, preference share capital and debentures because long term capital is used to finance long term project.