Need for profit planning and its derivation - Marketing Management

Profits need to be planned on the premise that in a well run organization, they should grow. Actions within the company that can bring about such profit growth include: better working practices, provision of incentive schemes to bring about increased productivity, better computerization with resultant efficiency in the performance of clerical tasks, automation in the workplace, better stock control of raw materials, components and finished goods with resultant savings in working capital,standardization and variety reduction exercises to bring about a reduction in inventories, less obsolescence and better quality control, and many other cost saving exercises.

Sales forecasting must precede profit planning exercises, and it is emphasized that such forecasts should be as accurate as possible, for such efforts as those just described are time-consuming and costly in their implementation. To be meaningful, they should take place in the light of anticipated production and resultant sales, which is based on the forecast.

Sales budgetary procedure

Sales budgetary procedure

Companies need to plan in order to make provision for fixed and working capital expenditure. Such fixed capital expenditure plans are necessary because old assets deteriorate, new additional plant and buildings may be needed to accommodate increased production, and new production methods may become available, rendering the old plant and machinery obsolete. Similarly, working capital needs to be planned, and this means forecasting stock investment because sales can fluctuate on a cyclical basis or for economic or other reasons. As a result, raw materials, components and finished stock levels will fluctuate in accordance with demand. Working capital in terms of liquid cash assets must be planned to accommodate the value of stocks to be held plus the costs of holding such stock.

The sales forecast precedes all planning, and the need for fixed and working capital expenditure forecasts has just been outlined. Once this has been done, it is necessary to translate all of these statements showing how they will affect the finances of the business. This is called the cash forecast, which encapsulates the sales forecast and resulting business plans in terms of money. Preparation of the cash forecast is a specialized cost accounting activity, but it starts with the basic premise that profits should increase the amount of cash in the business. Therefore, a net profit figure is forecast, and from this is taken away corporation tax, increases in stock and work in progress, loans and overdrafts repaid, dividends and interest, increases in debtors, decreases in creditors, and expenditure on capital equipment. To the end figure must be added sales of assets, receipts from share or loan issues, decreases in stock and work-in-progress, depreciation, increases in creditors and decreases in debtors. The amount left at the end is profit, and how it is distributed is a decision for the board of directors. The fact is that a plan is needed in order that business management can organize its activities in a responsible manner and such planning, of necessity, stems from the sales forecast.

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