One of John’s memos includes the percentage-of-sales formula to calculate the additional funds needed (AFN) to support the projected increased level of sales. John explains that AFN is calculated by subtracting spontaneous liability increase and increase in retained earnings from the required asset increase. This formula is shown below:
AFN = …show more content…
The third step in the percent-of-sales method of forecasting is to forecast the values of certain appropriate financial statement items using the sales forecast from the previous step in combination with the historical relation between the financial statement item and the sales figure.
Other types of methods that could be used besides the percentage of sales method are Sales Forecasts, The Additional Funds Needed Formula, and Forecasting Financial Requirements when the Balance Sheet ratios are subject to change. Conducting sales forecasts gives valuable information for better planning and management for businesses of any size, and in any industry. The practice makes records available to evaluate levels of past and current sales, to evaluate growth of the business and to compare performance with others operating in the same industry. Forecasting allows a business to set and implement policies that lets a business control profits by monitoring prices and operating costs. In addition, using past data, a business may be able to identify a minor problem and rectify it before the problem exacerbates, having a significant effect on sales. For accurate forecasting, a business must know the dollar amount of sales volume over the last several years. These pieces of information are already organized into useful data in the company's accounting records