Question

What is the percentage of sales approach? How do you adjust the model when operating at less than full capacity?

Answer 1

Percentage of sales approach

The percent of sales method is a financial forecasting model in which all of a business's accounts — financial line items like costs of goods sold, inventory, and cash — are calculated as a percentage of sales. Those percentages are then applied to future sales estimates to project each line item's future value. It is one of the quickest ways to develop a financial forecast for your business — specifically for items closely correlated with sales. That's its major advantage. 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.

How do you adjust the model when operating at less than full capacity?

When operating at less than full capacity, you adjust the model by finding full capacity sales in order to see how much sales could increase by before you would need new fixed assets. If you are at less than full capacity, you do not need new fixed assets.