Budgeting Basics and Beyond

5.2. Profit Targets

Profit planning sets a target profit that takes into account expected sales and costs for next year and for longer periods. The manager should track, on a regular basis, the progress in meeting the profit plan so any needed adjustments may be made in selling effort or cost containment. For example, if the yearly target is an increase in sales of 20 percent and in the first quarter sales have actually decreased by 2 percent, a problem is indicated. Yet if the plan calls for a reduction in yearly costs of 10 percent and at the end of the second quarter costs have been trimmed by 12 percent, the situation is quite favorable.

A profit target can apply to the individual components of that profit. For example, a company that now derives 80 percent of its earnings from one product may have as its profit goal in three years to derive 40 percent of its profit from this product and 60 percent of its profit from other products. This goal may be achieved through developing new products, enhancing existing products, change in advertising and sales promotion, and R&D efforts.