A New Percentage of Sales Method for Forecasting Additional Funds Needed

Abstract

A popular financial forecasting approach for forecasting Additional Funds Needed (AFN) is the percentage of sales method (PSM). This method is based on the premise that most pro forma financial statement accounts vary with sales. A company's future sales level and its AFN are derived based on the sales growth rate of the company's product portfolio. However, there is a lack of collective evaluation method for forecasting subjective and fuzzy sales growth rates and AFN. Thus this study proposes a new PSM to forecast sales growth rate of company's product portfolio and further calculating sales revenue and AFN. An illustrative case study was also performed to demonstrate the contributions of the new PSM: (1) providing the financial forecasting team a collective evaluation method for forecasting company's pro-forma financial statement, (2) deriving company's individual product sales growth rate, (3) deriving compound sales growth rate of company's product portfolio, and (4) calculating sales revenue and other amounts in the pro-forma financial statement accounts.