What is Profit Planning in Business Management?
“Profit is a condition of survival. It is the cost of the future, the cost of staying in business”. Peter Drucker
What is profit planning? Profit planning is a process that focuses on steps taken by a business organization to achieve their planned levels of profits. Profit planning is designed and formulated by preparing a number of budgets that together form an integrated business plan known as the master budget. Profit planning also takes into consideration various analysis for risks and what-if scenarios.
Master Budget as the Index of Profit planning
The master budget appears to be a pre-condition of any business profit planning systems. The master budget is a composition of several budgets integrated together into a master budget. The composite budgets which form together the master budget are categorized as follows:
- Sales budget
- The Production budget
- Direct Material Budget
- Direct Labour Budget
- Manufacturing Overhead Budget
- Administrative and Expenses Budget
- Cash Budget
- Income Statement
- Balance Sheet
The preparation of sales budget is the first step in the budgeting process. The sales budget is based on the sales forecast of the company.. The sales budget indicates the number of units needs to be produced. The production budget follows the sales budget. The production budget is used to determine the budgets for manufacturing costs including the direct materials budget, the direct labor budget, and the manufacturing overhead budget. These budgets are then combined with data from the sales budget and the administrative and expense budget to determine the cash budget. A cash budget is a detailed plan to show the cash resources to be acquired and used. The budgeted income statement and then the budgeted balance sheet are prepared after the preparation of cash budget. This comprehensive Master Budget serves as the prime management tool for managerial decision making.
Please click the link below to view how profit planning guides management to follow productivity and profitability of business organization.