Under the percentage of sales basis, the company calculates bad debt expense by estimating how much sales revenue during the year will be uncollectible. Then you apply these percentages to the current sales figures to create a financial forecast, which includes the income and spending accounts. The accounts receivable to sales ratio measures a company’s liquidity by determining how many sales are happening on credit. The business could run into short-term cash flow problems if the ratio is too high. For this reason, it’s an important additional ratio to consider when running a percentage of the sales forecast. Because the percentage-of-sales method works closely with data from sales items, it’s not the best forecasting method for things like fixed assets or expenses.

If you want a more accurate view of the company’s financial health, then the percentage-of-sales method can form part of a more detailed financial outlook statement. Because the percentage-of-sales method uses common financial ratios and percentages, it’s a good tool for quickly comparing how a company is doing compared to its competitors or the wider market. Next, Liz needs to calculate the percentage of each account in reference to her revenue by dividing by the total sales. Now, suppose net credit sales for the coming year/ next year is Rs. 30,00,000. Percentages are one of the most important types of mathematical operations in our lives.

Percentage of sales method example

If you want a clearer, more accurate picture of where your company is headed financially, you’re better off carefully detailed, line-by-line forecast that considers other aspects beyond your sales level. To determine her forecasted sales, she would use the following equation. Well, one of the more popular, efficient ways to approach the situation would be to employ something known as the percent of sales method. Learn how to use the sales revenue formula so you can gauge your company’s continued viability and forecast more accurately. Usually, the longer a receivable is past due, the more likely that it will be uncollectible. That is why the estimated percentage of losses increases as the number of days past due increases.

Bad debt expense is the loss that incurs from the uncollectible accounts, in which the company made the sale on credit but the customers didn’t pay the overdue debt. The company usually calculate bad debt expense by using the allowance method. Reviewing historical data of uncollectible accounts and the industry benchmark for bad debt expenses can work out the percentage needed for the forecast. The percent of sales method is one of the quickest ways to develop a financial forecast for your business — specifically for items closely correlated with sales. If your business needs a very rough picture of its financial future immediately, the percent of sales method is probably one of your better bets.

The benefits of percentage forecasting

Once she has the specific accounts she wants to keep tabs on, she has to find how they stack up to her overall sales figures. The method also doesn’t account for step costing — when the cost of a product changes after a customer buys a quantity of that product over a discrete volume point. For instance, if a customer buys a product from a business percentage of sales method formula that has a step cost at 5,000 units, then every unit beyond those first 5,000 comes at a discounted price. This method is seen as more reliable because it breaks down the probability of BDE by the length of time past-due. There is a lower chance that recent purchases won’t be settled by the credit card companies than purchases over a month out.