Profit Planning And Control

Profit Planning “…a series of prescribed steps to be taken to ensure that a desired profit will be made.” Profit planning must precede other activities.

McGraw-Hill/Irwin

© 2006 The McGraw-Hill Companies, Inc. All rights reserved

Revenue Cash Accounts Receivable

Types of Expenses Fixed Variable

Expenses Materials Salaries Utilities Depreciation Rent Building Services Insurance Interest

Office & Supplies Sales Promotion Taxes & Licenses Maintenance Delivery Miscellaneous

Profit (Income) “…the difference between revenue earned and expenses incurred.”

Initial Steps In Profit Planning 1) Establish Goal 2) Determine Expected Sales Volume 4) Estimate Expenses 5) Determine Estimated Profit 6) Compare Estimate With Goal

Action Steps In Profit Planning 1) 2)

3) 4)

List alternatives to improve profits Determine how expenses & profits vary with volume Analyze alternatives vis-à-vis profit Select an alternative & implement

Action Steps In Profit Plan 1.



4. 5.

a. b. c. a. b. c.

How Do Expenses Vary With Volume Sales Expenses $364,000 $530,000 $700,000

Volume

$364,000 $530,000 $700,000

$364,000 $490,000 $618,700

Profit

$ -0$ 40,000 $ 81,300

Analyze Alternatives Select/Implement Plan

Planning For Profit Establish Profit Goal Determine Sales Volume Estimate Expenses Determine Profit Estimate Compare Profit To Goal List Alternatives

      a. b. c. d.

Change Sales Volume Decrease Expenses Add Products/Services Subcontract

$ 52,000 530,000 490,000 40,000 -$12,000

Breakeven Chart

Control “…the process of ensuring that organizational goals are achieved.”

McGraw-Hill/Irwin

© 2006 The McGraw-Hill Companies, Inc. All rights reserved

Control Process 1. Setup Standards 2. Measure Performance 3. Actual vs. Planned 4. Deviations Excessive? 5. Take Corrective Action

Set Standards • Units Consumer/Produced – Standard Hours Per Unit – Miles Per Gallon

• Price Paid/Charged- Price

• Requires

Per Unit

– Intuition – Past Performance – Measurement – Comparison – Communication Keith Brofsky/Getty Images

Effective Controls Timely Cost Effective Accurate Measurable Indicate Cause/Effect Responsibility of one Acceptable

PhotoDisc Imaging/Getty Images