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 −
Percentage of sales method = WCc*100/S Here WCc = components of working capital, S = yearly sales
Advantages of this method are −
Disadvantages of this method are −
Sales for 20XX are $900 and forecasted sales are $ 1200. Below is the balance sheet for the year 20XX.
|Assets||Amount ($)||Liabilities||Amount ($)|
The solution is given below −
|Particulars||20XX figures||% of sales||Estimated|
|Current assets (X)||180||20||240|
|Current liabilities (Y)||50||5.56||66.67|
|Working capital (X-Y)||130||14.44||173.33|