Budgeting Basics and Beyond

2.7. Profit Plan

A profit plan is the premise on which management charts an action course for the upcoming year. It is good for planning and control. Alternatives must be evaluated, and the profit plan should be flexible to adjust for contingencies. Profit planning includes a study of appraising profits relative to investment. A profit budget may be used to supplement a cost budget. Profit budgets may be by customer, territory, or product.

The profit plan must set forth selling price, sales volume, sales mix, per-unit cost, competition, advertising, research, market potential, and economic conditions. Profit may be improved through a closer correlation of manufacturing, selling, and administrative expense budgeting to sales and earnings objectives.

Cost reduction programs will lower expenses. Continuous profit planning is used when planning should be for short time periods and where frequent planning is needed. The yearly or quarterly plan may be revised each month.