Budgeting Based on Percentage of Previous Year Sales
Sales forecasting is a key component of business budgeting. Companies use forecasts to evaluate and adjust budget allocations in anticipation of future growth or decline. One of the most commonly used methods for estimating future sales is the percentage of previous year sales (PYPS) method. By estimating the current years sales at a certain percentage of the previous years sales figure, budgeting can be made easier, more accurate, and more up-to-date.
The PYPS method is a simple and straightforward technique. It is based on the idea that a companys sales tend to remain relatively stable from year-to-year, so the best predictor of a companys future sales performance is the past years performance. To use the PYPS method, all a company has to do is identify its sales figure for the previous year and then calculate the current years estimated sales figure based on a percentage of that figure.
For example, if a company had sales of $10 million in the previous year, the PYPS method would use that figure as a base from which to estimate future sales. If the company is expecting modest sales growth, it might budget for a 5% increase over the previous years sales figure. This means the company would set its estimated sales figure for the current year at $10.5 million.
The PYPS method is attractive because it can be used quickly and without complex calculations. In addition, it is relatively painless to update and revise, since revised forecasts can be easily converted into revised budget figures. On the other hand, the PYPS method is limited in that it does not take into account external factors such as changes in the market, the economy, or customer demand.
The PYPS method is most suitable for businesses whose sales figures remain relatively stable from year to year. It is a good option for businesses that are reasonably certain about the stability of their customer base and their pricing. Companies with a longer sales cycle or businesses that operate in a volatile or highly competitive market are likely to experience greater uncertainty in their sales estimates and require more sophisticated forecasting methodologies.
Overall, the PYPS method is a useful and practical approach to budgeting. It is an easy way to create an initial budget based on past performance and can provide a reasonable reference point for future planning. Nevertheless, depending on the circumstances, the use of more sophisticated forecasting tools and approaches may be necessary. Knowing the limitations of PYPS and choosing the right forecasting approach can help companies set budgets that are more accurate and better suited to their needs.
