Advantages of Profit Planning: A business must earn enough to pay for all cost and still keep itself in an adequate state of liquidity.
Profit is an essential cost of any business activity. It must be planned and managed just like other cost of doing business. Peter Drutcher(2003) has rightly said profit is a condition of survival. It is the cost of the future the cost of staying in business.
What is Profit Planning
There are server common uses for profit planning, with many of them focusing on the wise use of available resources. Profit planning requires preparation of a master budget and various analysis for risk. It is the process of developing a plan of operation that makes it possible to determine the level of profit needed by the organisation. Simply put, it is the development of your operating plan for the coming period.
Profit planning is setting a profit target for the coming period. It starts with a forecast of expected sales and desired percentage for gross profit, keeping in view the market condition.
Process of Profit Planning
The actual process of profit planning involves looking at a several key factors relevant to operational expenses. Putting together effective profit plans, budget require looking closely at such expenses as labour, raw material, facilities maintenance and upkeep, and the cost of sales and marketing efforts.
By looking closely at each of these areas, it is possible to determine what is required to perform the task efficiently, generate the most units for sales, and thus increase the chance of earning decent profits during the period under consideration.
Understanding the cost related to production and sales generation also makes it possible to asses current market condition and design a price model that allows the products to be competitive in the market place but still earn an equitable amount of profit on each unit sold.
How Profit is Manged
Managing is ensuring that eventual profits are at least equal to the estimated level. In oder to do so, steps are tsjen to compare actual result with estimates on daily, weekly or monthly basis. All deviations are examined and reported to the top management to seek instruction for a corrective action if necessary. The management remain focused on the objective set down at the planning stage and expect their achievement by all parts of the organisation.
Advantages of Profit Planning
Profit planning offers many advantages to your business. The modest investment in time required to develop and implement the plan will pay liberal dividends later. So below are seven advantages of Profit Planning.
1. Performance Evaluation
The profit plan provides a continuing standard against which sales performance and cost control can quickly be evaluated.
2. Awareness of Responsibilities
With profit plan, personnel are readily aware of their responsibilities for meeting sales objectives controlling cost and the like.
3. Cost Consciousness
Since cost excess can quickly be identified and planned, expenditure can be compared with budgets even before reducing unnecessary costs and overspending.
4. Disciplined approach to problem solving
The profit plan permits early detection of potential problems so that their nature and extent are known. With this information, alternative corrective actions can be more easily and accurately evaluated.
5. Thinking About the Future
Too often, small business neglect to plan ahead. Thinking about where they will be today, where they will be tomorrow, where they will be be next year, or the year after. As a resulting, opportunities are overlooked and crises occur that could have been avoided. Development of the profit plan requires thinking about the future so that many problems can be avoided before they arises.
6. Financing Planning
The profit plan serves as a basis for financial planning. With the information developed from the profit plan you can anticipate the need for increased investment in receivables, inventory, or facilities as well as any need for additional capital.
7. Confidence of Lenders and Investors
A realistic profit plan, supported by a description of specific steps proposed to achieve sales and project objectives,will inspire the confidence of potential lenders and investors.
This confidence will not only influence their judgment of you as a business manager, but also the prospects of your business success and its worthiness for a loan or and investment
Uses of Profit Planning
There are several advantages to engaging in profit planning, the most obvious include;
1. Evaluating the overall operation for effiency. If profits for the most recently completed periods fall short of projections, this prompts an investigation into what led to the lower returns. Changes can then be made to the operation in order to increase the chances fir) for higher profits in the next period.
Necessary changes that may be uncovered as part of the profit planning process include increasing or decreasing the employees force changing vendors of raw materials or upgrading equipment and machinery that are key to the production of goods and services.
In like manner, the need to restructure marketing campaigns so that more resources are directed toward strategies that are providing the greatest return. While same time minimizing or even eliminating allocation to strategies that are not producing significant result of this type of planning.
2. Determine the need for additional resources such as facilities or personnel. For example, the profit plan may show up that sharp increase in expected sales will overload the company billings personnel. A decision can then be made to add additional invoicing personnel, to pursue sine other alternatives.
3. Planning purchasing requirements. The volume of expected sales may be more than the business usual suppliers can handle or expected sales may be sufficient to permit taking advantages of quantity discounts. In either case advance knowledge of purchasing requirementss will permit taking advantage of cost saving and ensures that purchased goods are readily available when needed.
4. Anticipating any additional financing needs. With planning, the search for needed funds can bring as early as possible. In this way, financial crisis are avoided and financing can be arranged on more favorable terms.
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