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Managerial Accounting - Profit Planning

Updated on September 19, 2009

A business must earn enough to pay for all costs and still keep itself in an adequate state of liquidity. Besides, it must make additional investment to grow and prosper. A sound and developing organization is favored by financial institutions in the capital market.

Profit is an essential cost of any business activity. It must be planned and managed just like other costs of doing business

Peter Drucker has rightly said, "Profit is a condition of survival. It is the cost of the future, the cost of staying in business”.

How profit is planned?

Profit planning is setting a profit target for the coming period. It is like a summarized version of estimated income statement. It starts with a forecast of expected sales and desired percentage for gross profit keeping in view the market conditions.

Profit planning requires preparation of a master budget and various analyses for risk and what-if scenarios. Tools for profit planning include the CVP analysis and budgeting.

In a nutshell, profit planning is a set of steps taken to achieve a desired level of profit. To accomplished this, a number of budgets are prepared. which taken together make a business plan.

How profit is managed?

Managing is ensuring that eventual profits are at least equal to the estimated level. In order to do so, steps are taken to compare actual results with estimates on daily or weekly or monthly basis. All deviations are examined and reported to the top management to seek instructions for a corrective action, 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. A sound system of rewards and penalties ensures full compliance as far as possible. This has been explained in details in a hub entitled “Managerial Accounting – Variance Analysis.

Managing profit is a continuous process where by:

  • Operations are monitored and evaluated to see if they as per plans.
  • Need for additional resources is determined which may be assets or personnel to ensure un-interuppted operations.
  • Likewise, requisite finances are worked out and a financial plan chalked out which states debt requirements, if any, and internally available funds.

 

MASTER BUDGET

 Master budget is a comprehensive profit plan that integrates all operations of an organization. It comprises many seprate budget or schedules which are interdependent. 

TYPES OF BUDGETS

Main types of budgets are list below:

  1. Activity Based Budget vis-a-vis Traditional Budget.
  2. Flexible Budget
  3. Rolling Budget
  4. Zero Based Budget

These are discussed as under:

TRADITIONAL AND ABC BUDGET
TRADITIONAL AND ABC BUDGET

Conclusion

Profit Plan serves as a bench mark or target or objectives in quantitative terms. By constently comparing actual performance with the bench mark, the management can readily detect which phases or units or process or departments are in out-of-line conditions. Usually, small variations are ignored but systematic variations, howsoevr small, are investigated and a corrective action taken promptly, reducing the chances for a continuous loss. The profit plan also serves as a road map for employees who are responsible for sales or costs. This would enable the management to evaluate their performance and reward them accordingly.

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    • profile image

      kem phalkun 

      7 months ago

      I am a lecturer of Managerial accounting, I like Managerial Accounting - Profit Planning,thanks

    • hafeezrm profile imageAUTHOR

      hafeezrm 

      6 years ago from Pakistan

      Thanks Deborah Odukoya for your comments.

    • profile image

      Deborah odukoya 

      6 years ago

      I have been looking for a good explanation on this topic i could not find but now i find! Sir am very grateful you added a distinction to my course thank you so much.

    • profile image

      Thevoong 

      8 years ago

      thanx

    • hafeezrm profile imageAUTHOR

      hafeezrm 

      8 years ago from Pakistan

      Thanks accounting firm for your comments.

    • profile image

      Accounting firm 

      8 years ago

      More good informations thanks for helping me out. Always a pleasure to see information that is useful, thanks again

      http://www.kpmgaccountingfirm.info

    • profile image

      Tahir sabir Abbasi 

      8 years ago

      This article, includes all about budget...very informative and learning material...that helped me enhancing my knowledge on this topic.

      Thanks a bunch Sir!

    • TEERATHMAHESHWARI profile image

      TEERATHMAHESHWARI 

      9 years ago from karachi

      dear sir ,

      i have never seen seen explaining of budget in abover with more easily and understandingable way which help in understanding the concept.

      thankyou for making things more undestandable.

    • hafeezrm profile imageAUTHOR

      hafeezrm 

      9 years ago from Pakistan

      Thanks for your comments.

    • Rufi Shahzada profile image

      Rufi Shahzada 

      9 years ago from Karachi

      Dear Sir,

      Things are explained so well.

      Thanks a Million!

      Rufi Shahzada

    • hafeezrm profile imageAUTHOR

      hafeezrm 

      9 years ago from Pakistan

      Thank you Shahnawaz for your continued interest in my articles.

    • shahnawaz sheikh profile image

      shahnawaz sheikh 

      9 years ago from karachi

      Interesting article sir,

      specially the Managing profit part and of course i still remember the budget part from our sessions.

      Thank you again sir

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