Read this article to learn about Profit Planning in an Enterprise. After reading this article you will learn about: 1. Concept of Profit Planning 2. Fundamentals of Profit Planning.
Concept of Profit Planning:
Managerial efficiency in a profit seeking organization is generally gauzed in terms of probability. The management, therefore, aims at maximizing profitability of the enterprise. In furtherance of this objective profit planning technique is very frequently employed.
Profit Planning is a systematic and formalized approach of determining the effect of management’s plans upon the company’s profitability. In order to undertake planning for profits finance manager makes projections of outflows and inflows of the enterprise. The main inflows of an enterprise are people, capital and materials and they are generally cost incurring factors.
On the other hand, the planned outflows are products, services and social contributions that the enterprise generates. After projecting inflows and outflows, the management manipulates combinations of inflows and planned outflows so that the ultimate goal of the enterprise is achieved.
Profit planning as a decisional tool involves establishment of specific goods for the enterprise, development of long range plans and short range annual profile plans which are prepared after integrating sales plan, production plan, administration expense budget, distribution expense budget, etc.
Profit planning, thus resembles comprehensive managerial budgeting. It focuses directly an a rational approach to comprehensive planning that emphasizes management by objectives. In profit planning exercises, prudent management follows systems approach where all the functional and operational aspects of the enterprises are integrated.
It is important to note that profit planning is an accounting technique as it is not only related to accounting function but also to other functions of business which can be thought and operated independently of the total management process.
Rather it is an integral aspect of the management process and is basically management activity with critical behavioural implications emerging out of the major decision-making role of the total management team.
Fundamentals of Profit Planning:
With a view to laying down strong foundation of profit planning in a business enterprise, the following fundamental principles must be kept in view:
1. Profit Planning is a decision making process entailing streams of managerial decisions. Development of inflows and outflows and manipulation of these flows implies a stream of well-conceived decisions. Fundamentally, management decision making involves the task of manipulating the controlling variables and taking advantage of the non-controlling variables that may influence revenues, costs and investment.
2. Key to success of profit planning lies in the competence of the management to plan activities of the enterprise. The management must have absolute confidence in its ability to establish realistic objectives and to devise effective means to attain these objectives for the enterprise.
3. Comprehensive profit planning programme calls for involvement of all levels of management. With a view to competently engaging in profit planning, management of all cadres, especially top management must have proper understanding of the nature and characteristics of profit planning, be convinced that this particular technique of management is preferable for their situation, be willing to devote intense and concerted managerial efforts required to make it operative and support the programme by all means. It must also have support of each member of management.
The management must recognize that individuals having managerial responsibilities will have to strive seriously and aggressively to carry out the tasks assigned to them in every respect which include participation in developing sub-unit plans and implementing these plans. Profit plans, if developed through full participation and in harmony with assigned responsibilities, assure a degree of understanding not otherwise possible.
4. Sound organizational structure and clear cut delineation of authorities and responsibilities are pre-requisites to successful profile planning programme. This implies that planned performance must be tailored to and be in harmony with organizational responsibilities assigned to the various individual managers of the enterprise. Profit plans should be classified on the basis of organizational sub-divisions of the enter-price.
5. The management should refrain from being influenced by undue conservation and irrational optimism. Profit plan should be based on realistic expectations so that the management may feel motivated to achieve them.
It is, therefore, advisable that inflows and outflows of the enterprise be projected in the light of conditions prevailing in the enterprise, viz., scale of operation and its nature, characteristics of managers, leadership qualities, maturity of the enterprise, sophistication of management at all levels and various psychological forces.
6. Profit planning programme should be so prepared at to allow sufficient flexibility in the plans. Flexible profit planning will enable the management to size upon favourable opportunities even though they are not covered by the budget.