The constant ratio method of forecasting refers to a forecasting approach using the percent-of-sales method in which expense items on a firm’s income statement are expected to grow at the same rate as sales.
If a business ascertains that it can utilize the percent-of-sales method and it follows this procedure, then the next outcome will be that every item of expense on its income statement will rise at the identical rate as sales. This constant ratio method of forecasting will be used in making the pro forma financial statements.
The constant ratio method of forecasting is applied for forecasting the general and administrative expenses, and the cost of sales. It means that these items are forecasted or estimated to remain at the identical percentage of sales in the coming period as they were in the previous period or in the past.
Use of the term in Sentence:
- The company is using the constant ratio method of forecasting to forecast the general and administrative expenses and the cost of sales.