RESPOND TO DISCUSSION POSTS AND GIVE A REFERENCE TO BACK UP YOUR STATEMENT

The percent of sales model uses historical information to develop certain ratios such as sales to inventory or finished products, sales to debtors/receivables, and sales to cash.Sales are then forecasted based on the ratios.The percent of sales model is a financial planning model that assumes that most income statement and balance sheet accounts vary proportionally with sales.This model has a weakness related to working capital.What is this weakness and how does it affect financial planning?

1. Rashonda Winston posted Sep 1, 2017 2:50 PM

Financial planning is a process in which helps a company or individual make decisions about money that can be beneficial for the rest of their lives. These money-making decisions provide an underlying concern for what money you will spend over time and how well to manage it. This technique is usually good for people who are rich, but I see more people doing it now to make sure they are secure in their finances for other items like to pay off debt.

The percent of sales method is to analyze and calculate the revenues & expenses to focus on a budget (Latham, n.d.). Working capital has this weakness because the forecasted sales predicts costs which somehow the method is not linear to that of the working capital and usually works against it. It affects financial planning by meaning higher costs regarding interests, but will result in low profits in other words you won't be making any money towards your working capital. It also makes it hard to predict any other potential events that are planned for the future.

REFERENCE

Latham, A. (n.d.). The Strenghs and Weaknesses of the Percentage of Sales Model. Retrieved from http://smallbusiness.chron.com/strengths-weaknesses-percentage- sales-model-14562.html

2. Angela Oakley posted Aug 31, 2017 12:50 PM

The percent of sales model is the a way a company predicts where the sales our heading in the future based on the past.

What is the weakness?

There are a few weaknesses when it comes to this model. If the company is new it has limited data of sales and would make it harder to determine a trend."In addition, sales forecasting uses some form of projection about future demand interpreted through consumer preferences, opinions and attitudes" (Saint-Leger, 2017). This type of sales forecasting may not be accurate due to changes that happen over time.

How does this affect financial planning?

This can affect financial planning because the percent of sales model is solely base on sales, it does not account for future impact. "By having forecasts, accurate or inaccurate, the actions of businesses are influenced by a factor that can't be included as a variable" (Beatte,2017). This makes it harder to financial plan for future endeavors that could take place.

References:

Leger-Saint, R. (2017). AZ Central. Strength and Weaknesses of Sales Forecasting. Retrieved fromhttp://yourbusiness.azcentral.com/strength-weaknesses-sales-forecasting-2459.html

Beatte, A. (2017). Investopedia. The Basics of Business Forecasting.Retrieved fromhttp://www.investopedia.com/articles/financial-theory/11/basics-business-forcasting.asp