What is the importance of Profit Planning? How profit planning works? Profit Planning is a management tool for any business organization.It is a reference document or guideline for the management to track the movement of productivity and profitability of business organization overtime. How the Profit Planning shows ways to the management are described below:

How Profit Planning guides management?

Profit plan is a Road Map

What is the plan to increase cash flow and profits?  Is there any instrument pointing to the right direction? The Master budget is the answer. The Master budget serves as a “Road Map” for the management to follow overtime. The master budget is an essential management tool that communicative management’s plans throughout the organization, allocate resources, and coordinates activities.

Profit plan is a Strategic document

The company Profit Plan deals with both short-term and long-term results.  Profit plan functions as master business strategic and tactical document.  It is used by any company to help achieve performance goals.  The master budget should be considered as an alive document.   It is revisited and modified as the business conditions change.

Profit plan is a Reference Document for  Evaluating operation

Managing profit is a continuous process. The manager is required to take necessary steps to monitor and evaluate to see that the operations are as per plan. The manager takes steps to compare the actual results with the planned budgetary estimates. All deviations are examined and reported to the top management to seek instructions for corrective actions, if necessary. The management remains focused on the objectives set down at the planning stage and expects their achievements by all parts of the organization.

Profit plan determines additional resources

Based on the performance monitoring and evaluation of planned master budget, the management can identify the need for additional resources to stabilize production as well as un interrupted operations. Moreover, additional financial resources  if required could be explored and managed by the management.

Profit planning is a Bench Mark document

Profit Plan serves as a bench mark or target or objectives in quantitative terms. That is the role of budgets and forecasts.  Their purpose is to set realistic targets on achieving various benchmarks for business operations.  The specific action items and assumptions are outlined to achieve the benchmarks. By constantly comparing actual performance with that of benchmark, the management can readily detect which phases or units or process or departments are in out-of-line conditions. The systematic variations  are investigated and a corrective action taken promptly, reducing the chances for a continuous loss.

Profit plan as a guideline  for Employees

The  profit plan serves as a guideline  for employees who are responsible for sales or costs. This would enable the management to evaluate their performance and reward them accordingly.

Revision of Profit plan

The management can take decision to revise the master budget vis-à-vis profit planning document based on the periodical performance evaluation.

Ownership of Profit Plan by Employees

The employees are able to participate in profit planning process. The profit plan permits the management  to agree upon specific responsibilities with all employees who are in a position to influence sales or costs. Their performance can be evaluated and any deficiencies brought to their attention so that they can participate in the development of corrective action plans.

Profit helps disciplined thinking

Profit planning helps in disciplined thinking overtime. The disciplined thinking about the future will promote to foresee many problems before they occur and assist in anticipating opportunities in the market. This will help the management build business for greater sales and profit.

Advantages of Profit planning:

Please click the link below  to see  at a glance Advantage Diagram of profit planning  . The diagram is self-explanatory:

Advantage Diagram of Profit Planning

Lessons learned

The principal disadvantage of profit plan is that it must be changed from time to time to meet changing conditions. There is no point in trying to operate a business following a plan that is no longer realistic.

Nevertheless, keeping in view the importance, needs, usefulness and dynamic characteristics, the profit planning through master budget appears to be a vital management tool to effectively follow the productivity and profitability of any business organization. Therefore, profit planning is a management tool must be formulated and prepared by professionally skilled persons to reap maximum benefit out of optimum utilization of limited resources.

Compiled by: Afroza Binte Maleque Bithi, MBA