Understanding and Interpreting Percentage Statements: Graduate Tutoring for MBAs, CPAs and CFAs

The balance sheet provides relevant information about a company’s liquidity and financial strength. It should be noted that the process of analysis just like computation continues for every item value in the percentage income statement for each period to the base of 2017 (Indeed Editorial Team, 2021). The formula for the percentage income statement is simply the formula for  the statement in which each item is expressed in percentage form. You can see that calculating percentages of total revenue is a powerful analytical technique in the fundamental analysis of companies. In practice, analysts rarely perform the calculations themselves, as any data provider worth its salt will provide those percentages.

Conclusion: all about the percentage-of-sales method

• When you’re looking at your company’s income statements or balance sheets, you might want to know how each line item compares to the others.
• A similar decision may be based on market share, with $2 million being allocated for every share point a brand holds.
• Therefore, this statement tells us how the net sales amount is spent by the company.
• Some small businesses usually do not provide any transparency in the area of net sales.

Procedure used to set advertising budgets, based on a predetermined percentage of past sales or a forecast of future sales. This method of budget allocation is popular with advertisers because of its simplicity and its ability to relate advertising expenditures directly to sales. Management usually determines the budget’s percentage figure, which is based on the industry average or the company’s historical or previous year’s advertising spending. To calculate year-end accounts receivable, you don’t need to estimate your company’s ACP.

Since the irrelevant metrics are removed while calculating net sales, it is a better reflection of the company’s turnover and health. Hence, net sales are the metrics usually employed for decision-making purposes for the business. Tools like ERP.AI use artificial intelligence to automate revenue tracking and help small businesses gain real-time insights into their net sales, enabling faster and smarter decisions. Business owners must never ignore their financial operations, especially net sales. The bottom line is, just a minor mistake can make a business lose a considerable amount of money. It is one of the reasons why entrepreneurs are always trying to analyze their net sales operations and profitability from the moment they start up their small business.

However, it is important to note that the revenue booked does not necessarily mean the entire revenue from sales has been received in cash. A certain portion of this revenue may be paid in cash, while the remaining portion may be purchased on credit through terms such as accounts receivable. Decide which specific accounts you want to include in your company’s financial forecast and create a plan to include them.

Examples include such often referred to measures as return on investment (ROI), return on assets (ROA), and debt-to-equity, to name just three. In other words, they represent the earnings after dividends have been deducted. The standard figure used in the analysis of a common size income statement is total sales revenue. The common size percentages are calculated to show each line item as a percentage of the standard figure or revenue. The percentage-of-sales method is used to develop a budgeted set of financial statements.

• Thus, it is important for every business to concentrate on sales revenue maximisation.
• The income statement is also known as a profit and loss statement (P&L) statement as it reports the profits or losses made by a company within a particular accounting period.
• Vertical analysis consists of the study of a single financial statement in which each item is expressed as a percentage of a significant total.
• Let us assume that there is a mobile manufacturing company in which the monthly sales volume has increased from 1,500 to 6,500 during the 12 months ending in November 2018.
• The bottom line is, just a minor mistake can make a business lose a considerable amount of money.
• Ratios are calculated by dividing one number by another, total sales divided by number of employees, for example.

Calculate the percentages

For a budget or forecast, you could use the previous year’s credit sales numbers as a starting point and then factor in some growth to arrive at an estimate for the current or upcoming year forecast. The ability to come up with an estimate for year-end accounts receivable (A/R) helps companies assemble budgets or forecast financial statements. Accounts receivable represents the credit sales a company makes to its customers that have been billed but not yet paid by the customer. Getting a feel for how much customers could owe the company on credit at the end of the year helps a company project sales, expenses and cash flow needs, among other financial metrics. The analysis of common-size income statements can take the form of ratio analysis in which ratios can be calculated for certain items in the income statement such as raw materials, rent and utilities.

How to calculate percentages of total revenue

Therefore, this statement tells us how the net sales amount is spent by the company. From the statement above we can thus deduce that 50.9% of the net sales are used to finance the cost of goods sold, 49.1% remains as the gross profit. Of the 10.9% that remains, 3.7 is deducted for taxation purposes and the company’s net income is 7.3% (Lumen Learning, 2021).

Example: Sandras Loan Company

This is a little easier to understand than the larger numbers showing Synotech earned $762 million dollars. For Synotech, Inc., approximately 51 cents of every sales dollar is used by cost of goods sold and 49 cents of every sales dollar is left in gross profit to cover remaining expenses. For instance, if the historical cost of goods sold as a percentage of sales has been 42%, the forecasted sales level will also be 42%.

Percentage Statements

Many advertisers, however, shun this method because it is based on the theory that advertising results from sales, while the converse is true, that is, that sales result from advertising. In other words, advertisers feel that advertising communicates to prospeactive buyers the features and benefits of a product that are necessary to generate sales. In addition, the method does not recognize that as conditions change, advertising expenditures should change with them. From the Income Statement formula below we can deduce the same in terms of percentages. For example, 65% represents 65 out of 100, or 45 per cent of the total amount.

Comparing the same periods in different years, or your year-over-year growth, helps you measure your sales increase without the effects of seasonal fluctuations. The common size income statement, is the profit and loss statement of the company where each line item is shown as a percentage of the total sales. This is not a separate income statement, but just a process to display the line items that will help analysts understand and interpret the statement for various purpose. The percentage of sales approach connects sales data to a company’s income statements and balance sheets.

The accounts receivable to sales ratio measures a company’s liquidity by determining how many sales are happening on credit. The business could run into short-term cash flow problems if the ratio is too high. For this reason, it’s an important additional ratio to consider when running a how to calculate percentage of sales on income statement percentage of the sales forecast.