Percentage of Sales Method in Estimation of Working Capital

Percentage of sales method is the traditional method to find out working capital. This method is based on historical relationship between sales and working capital. Each of historical value is converted to percentage of net sales and those values are used to forecast.

Steps involved in this method are −

  • Determine historical relationship between sales and working capital.
  • Forecast sales for future date.
  • Apply percentage sales of method to get forecasted value.

Formula

Percentage of sales method = WCc*100/S
Here WCc = components of working capital, S = yearly sales

Advantages of this method are −

  • Easy to understand.
  • Calculations are simple.

Disadvantages of this method are −

  • Relationship between sales and working capital should be linear.
  • Calculations depends on sales forecast.

Example

  • Sales for 20XX are $900 and forecasted sales are $ 1200. Below is the balance sheet for the year 20XX.

Assets Amount ($) Liabilities Amount ($)
Owners fund
Debentures
Accounts payable
 300
130
50
 Fixed capital
Inventories
Accounts receivable
Cash
 200
60
90
30

480
440

Solution

The solution is given below −

Particulars 20XX figures % of sales Estimated
Sales 900 100 1200
Inventories 60 6.67 80
Accounts receivables 90 10.00 120
Cash 30 3.33 40
Current assets (X) 180 20 240
Accounts payable 50 5.56 66.67
Current liabilities (Y) 50 5.56 66.67
Working capital (X-Y) 130 14.44 173.33
Updated on: 2020-09-29T13:57:48+05:30

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