Percentage of sales method is a working capital forecasting method which is based on past relationship between sales and working capital. Just like technical analysis in the stock market, it assumes that the history will repeat itself and thus the ratio of working capital to sales will remain constant. In other words, it assumes that the whole business will move in tandem with sales.
How to Calculate Working Capital Using Percentage of Sales Method?
Percentage of sales method is the simplest and easiest way of finding future working capital. First, each component of working capital as a percentage of sales is calculated. Like, accounts payable are 20 million, and sales are 100 million, accounts payable as a percentage of sales would be 20%. Secondly, the coming year sales forecast is taken as a base and the component is calculated as per the percentage. In our instant example, if forecasted sales are 150 million, accounts payable should be 30 million. This is as simple as that. Let us see a practical example with formula and example.
Percentage of Sales Method Formula = Component of Working Capital * 100 / Sales of the Year
Percentage of Sales Method Example
Consider following balance sheet for the year 2014 as an example. The sales for 2014 are $400. The forecasted sales figure for the year 2015 is $600.
Assets  Amt. ($)  Liabilities  Amt. ($) 
Owner’s Capital 
200 
Fixed Assets 
170 
Debentures 
110 
Inventories 
40 
Accounts Payable 
40 
Accounts Receivables 
110 
Cash and Bank 
20 

350 
290 
Percentage of sales method will calculate the working capital and its components as illustrated in the below table. We can see that in the last column, estimates for 2015 are calculated and the working capital requirement for 2015 comes out to be $195 for the forecasted sales figure of $600.
Particulars 

Actual Figures of 2014 
% of Sales 
Estimate for 2015 
Sales 
400 
100 
600 

Current Assets  (x) 
170 
42.5 
255 
Inventories 
40 
10 
60 

Accounts Receivables 
110 
27.5 
165 

Cash and Bank 
20 
5 
20 

Current Liabilities  (y) 
40 
10 
60 
Accounts Payable 
40 
10 
60 

Working Capital  (xy) 
130 
32.5 
195 
Advantages and Disadvantages of Percentage of Sales Method
Advantages of this method are that it is easy to understand and simple to calculate. There is not rocket science in calculating the working capital based on this method.