What Is Profit Planning : Concept and Fundamentals

What is Profit Planning?

Profit planning is the process of determining a profit target for a given budgeting period. Even, to determine the major policy decisions that will be made in order to achieve the goals, it weighs the pros and cons of various options to determine which is more likely to meet the desired profit goal. Managers may use this information to prepare their budgets.

Profit planning does not have to be difficult, but it must be written down and implemented correctly. Profit planning aids in the establishment of company objectives as well as the creation of a strategy for achieving those objectives. A small business profit plan will be easy at first, but will become more complicated as the company expands.

How does profit planning help?

Profit planning will help you meet both short- and long-term goals. For instance, suppose you start a company in January 2022 with a modest profit target of $40,000 in your first year. However, you expect your profit to double to $80,000 in 2023 as your brand grows in popularity and your sales techniques develop.

Although these are attainable targets, profit planning gives you the information you need to give yourself the best chance of achieving them by factoring in factors like higher materials and labour costs. It enables you to set a goal and plan out a path to achieve it. The most critical aspect of profit planning is that it enables you to set a profit goal and then develop a comprehensive strategy to achieve it.

It benefits the company as a whole. A profit plan is meant to be used in conjunction with other financial forecasts like a business plan, financial outlook, or organisational budget. When you build a comprehensive profit plan, you can measure success over time and see how near or far you are from your original profit goal, and, more importantly, take corrective steps to get back on track.

Profit planning should always be included in every business plan or forecast you make for your company, not just the amount left over after expenses have been deducted from sales, as it is an important part of the planning phase. You’re more likely to build profit levels per year if you prepare for profit purposefully rather than by chance.

It establishes specific goals for owners, administrators, and workers. It’s only right that all of the main staff are on the same page when it comes to the company’s strategic objectives. If an employee has no knowledge of or insight into the profit-planning process, it’s difficult to keep them accountable for underselling.

A profit plan is often part of a larger plan, such as a master budget or a strategic plan, and it should include the following details:

– Target market
– Product or service pricing
– Staffing
– Marketing and advertising
– Collection processes
– Business investment
– Operating expenses

The basic objective of running any business organization is to earn profits. Profits determine the financial position, liquidity and solvency of the company. They serve as a yardstick for judging the competence and efficiency of the management. profit planning is therefore a fundamental part of the management function and is a vital part of the total budgeting process.

The management determines the profit goals and prepares budgets that will lead them to the realization of these goals. However, profit planning can be done only when management is aware about the various factors which affect profits. Some of the important factors affecting profits are as follows:

Selling Price– Variation in the selling price causes variation in the amount of profit also. An increase in the selling price increases the profits and vice versa.
Cost:- The term ‘cost’ means ‘ the amount of expenditure (actual or notional) incurred on or attributable to a specified thing or activity’. A variation in the cost also affects the amount of profit.
Volume:- The term ‘volume’ refers to the level of activity. This may be expressed in any of the following manner:
- – Sales capacity as a percentage of maximum sale;
- – Value of sales;
- – Quantity of sales;
- – Production capacity as a percentage of maximum production;
- – Value of production;
- – Quantity of production
- – Direct labour cost;
- – Direct labour hours; and
- – Machine hours.

Units for a desired profit = (Fixed Cost + Desired Profit) / Contribution per unit

Sales for a desired profit = (Fixed Cost + Desired Profit) / P-V Ratio

Profit planning would help even the smallest company. Any organisation is far more likely to generate the business benefit you’ve prepared for if you set financial targets and put them into effect. Profit planning should always be included in any master budget you make for your business. Taking the time to properly prepare for profit will provide you with a simple road map to follow on the way to success.

Takshila Learning helps you in understanding the benefits of profit planning for the successful running of businesses. The mentors at Takshila Learning helps you see the advantages of profit planning and put it into practice in real for the future companies.

Takshila learning and profit planning go hand in hand for the creation of blooming organisations in the future.

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