FINANCE DISCUSSION AND RESPONSE.
Predicting the Future
The percent of sales method is based on historical information. Giving consideration to the turbulent first decade of this century with wars and shortages of food and fuel, do you think that looking to the past is the best way to predict the future? Are there any alternatives or adjustments to the percent of sales method that you can suggest?
Whether percent of sales method is the best to predict the future
Considering the situation experienced in the first decade of this century, percent of sales method would not the best one to use in predicting the future. The first decade of the current century had led to a great recession of the economy. It is an error that was signified with wars and as a result led to the loss of lives, property and all that. The wars led to severe shortage of fuel and food. As a result, there was a high rate of inflation. Cost of production went high abnormally and thus the prices of commodities also went up. Thus, percent of sales method could not be the best to use as it is. The method applies only the historical information which could be distorted by the various occurrences that took place in a specific time. What happened in the past may not necessarily occur in the future. Thus, percent of sales method is not accurate in the determination of the future and could highly mislead.
Alternatives to percent of sales method
This is another method that uses the historical information to determine the future. However, the method takes into account various periods, as opposed to the percentage method. As such, this could be used to make more accurate predictions into the future.
Integration with probability method
Percent of sales method seems to so weak to conclusively make predictions on its own. As such, it is important that it gets adjusted to accommodate probability. Thus, it will have to consider what happened in the past with the inclusion of the probability of what happened being possible to recur. This would led to better, efficient and more accurate results in forecasting.
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Hope I am on the right track with this discussion thread.
Genuinely looking to the past is not the best way to predict the future since trends continuously change and it does not mean that what happened in the past will recur in the future. This makes a percentage of sales to have many limitations which are the use of forecasting only represent rough approximations and lack detail. Again, the forecasting method does not consider several types of assets, and it does not put into consideration of economic climate and demand changes or deterioration.
The alternatives to the percentage of sales method are:
a) Time series forecasting which analyses data over given time at a specific interval.
b) Scenario writing which is a forecasting method which brings forth the best outcome that may occur in the future.
which is a forecasting technique whereby experts come together and discuss the future and the outcomes that might occur.