Benefits of Profit Planning
September 26, 2017 by Scott O'Rourke, CPA, M.S.T.
In our last blog, we defined profit planning and spelled out its function for businesses of any size. The object of a profit plan, of course, is to make sure that you are always looking ahead, positioning your business for the next move.
Profit planning will enhance your ability to become “pro-active” instead of “reactive.” By engaging in the planning process, you will create a forward-thinking mentality. You will decide where your company will be and when. You will attempt to anticipate or predict the events of the future that affect how your company will get to where you want it to be.
Based on your analysis, you will create a “road map” to get you from Point A (where you are today) to Point B (where you want to be). Obviously, the best way to get from Point A to Point B is a straight line. While the planning process doesn’t guarantee that you will get there in a straight line, it reduces the possibility of taking all the side roads. In general, the profit plan provides a logical direction for your company. Beyond this overriding purpose, a profit plan can have several different objectives that closely relate to its intended uses. A plan can have uses such as:
- Helping owners and managers achieve their financial goals and objectives by laying them out explicitly;
- Improving and measuring performance against pre-determined goals;
- Establishing a framework for making key decisions; and
- Educating and motivating key employees.
An annual profit plan will also provide a roadmap detailing a variety of financial goals and targets. The complete plan includes in-depth action plans that can be used to monitor the progress of financial and other operating improvements.
Financial Goals or Targets
The financial goals or targets that are contained in the Profit Plan may include:
- Pricing markups or targets for products or services.
- Individual product profitability.
- Total workload hours expected during the coming year.
- Revenue and expense budgets.
- Days of revenue in receivables.
- Dollars available for purchasing new equipment.
- Average age of accounts payable or overhead reduction.
The detailed action plans with specific steps that would be necessary to achieve a financial or operational goal are listed below. Properly designed action plans always include the assignment of the person(s) responsible for performing the tasks and a completion date for each step. Download our Owner’s Profit Planning Guide for an illustrative action plan template and more comprehensive details on profit planning that will empower you to design and execute an intelligent profit plan for your business.