Profit planning aims to set a profit objective for a budgeting period. Also, it seeks to establish the main policy decisions regarding how to achieve the objectives. The profit objective will normally be related to the return required on the investment in the business. In profit planning, alternatives are evaluated to select the most likely option that will yield the required profit objective. Managers can plan their budgets on this basis. There are several purposes of profit planning, namely: The profit objectives reflect the expected return on capital employed. This depends on: The main factors to specify in profit planning guidelines are: After the capital employed has been determined, it is then necessary to specify the required rate of return. Criteria to consider include: The end result of this process is a statement of the profit objective and how it is to be achieved. This statement is the starting point for budgeting. The following chart clearly demonstrates the techniques of profit planning.Definition of Profit Planning
Purpose of Profit Planning
Profit Planning Guidelines
Return Required on Capital Employed
Profit Planning Techniques
Profit Planning FAQs
Profit planning is the process of setting a profit objective for a budgeting period and establishing the main policy decisions on how to achieve that objective.
There are several reasons why a company might need to engage in profit planning. The most common are to set profit objectives for the budget period, specify policy decisions and course of action to be followed during the period, give planning directives for the preparation of detailed operating plans, and assessing whether there is enough money available for investment.
Profit planning guidelines are sets of rules or recommendations that indicate how planners should determine the profit objective and how it should be achieved.
When evaluating past records, a company must look at such things as the commercial environment during the budget period, projected sales of the company, past profits, maintenance of liquidity, and changes needed in volume, price and cost.
In profit planning, managers evaluate alternatives to select the most likely option that will yield their required profit objective. It is also a way for management to set out the main policy decisions regarding how to achieve its objectives during a budgeting period or other period of time.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
