Limitations of the Percent of Sales Forecasting Method(2)

Limitations of the Percent of Sales Forecasting Method(2)...

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Limitations of the Percent of Sales Forecasting Method: 1. Works only when asset requirements and spontaneous financing sources can be accurately forecast as a CONSTANT percentage of sales. Not all assets can be accurately forecasted as a percentage of sales. Not all spontaneous liabilities can be accurately forecasted as a percentage of sales. 2. What about the economies of scale when a company purchases inventory? The firm requires a fixed amount of inventory to do business;
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Unformatted text preview: however, as sales grow, the inventory needs do not grow as fast. 3. Assets are purchased in discrete quantities (known as “lumpy assets”). Assets must be purchased in large, nondivisable components. These large purchases can create excess capacity that can meet additional sales without increasing the investment in more assets at some time in the future. 4. Projections (estimates) become less accurate past a one year time horizon....
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This note was uploaded on 08/22/2009 for the course FIN 3310 taught by Professor Potts during the Spring '08 term at Baylor.

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