The percentage of sales method as an accounting tool helps companies to make forecasts concerning their further budget planning. The main idea behind the technique is to convert the historical expenses into percentage indicators and then shift this number to further company budgeting. Such a method is of great convenience for companies with considerable historical expenses data.
Explanation:
Once a company needs to establish approximate sales levels in order to plan the budget for a particular period, they often address the historical data concerning previous average sales indicators. As it is ineffective to transfer such data to the next budget in actual number, economists have invented the percentage of sales method.
According to their idea, the sales level obtained for a particular time interval should be converted into a percentage it takes considering the overall financial flow of a company.
Such an approach can be extremely beneficial for the companies that exist on the market for a convincing period, and their net sales are relatively stable. For such entities, the benefits would be the swiftness and the high probability of accurate forecasts. On the contrary, companies that do not have a historical correlation of sales level risk to be misguided by the percentage given.
Although the percentage of sales method is highly popular among the companies due to its convenience, it should always be reconsidered in terms of its preciseness when it comes to fixed components such as rent. To gain the maximum advantage of the method, companies should develop an explicit balance sheet with a forecast based on both historical expenses data and elements that should be treated on a synchronic level.