Topic 1 - Financial Planning
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?