The Basics of Profit Planning


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The concept of profit planning stems from competent managerial decision-making that ensures long-term growth in small to medium enterprises. A business organization must create and master the process of profit planning because it will determine its financial performance. To be successful in devising a system, the management can start with establishing realistic objectives after assessing the company’s capacities and resources. Here’s a list of the basics in managing your business income statement effectively and efficiently.

IDENTIFY YOUR EXPENSES

You should be able to select which expenses are worth for investment and which should be eliminated. There are two types of expenses: fixed and variable. A fixed expense is the same incurring amount you need to pay regardless of the changes. This includes company bills, loans, rents, salaries, and other factors. Variable costs are those that fluctuate in proportion to changes in production output and other activity such as hourly wages, sales commission, raw materials, and the like. Now, with a clear understanding of your company needs, draw a budget from where your company spends the most. Fixed costs are easier to project. Thus, begin canvassing for variable costs.

FORECAST SALES AND REVENUE

Sales forecast is the backbone of your business planning. This can be a bit more challenging than calculating your expenses, but it plays a vital role in profit planning. Begin with an estimation of your target with a realistic outlook, connecting all factors somewhere in the middle. Some recommend looking at two perspectives: the optimistic revenue forecasting and the conservative forecast. The first one projects higher sales and revenue while the latter takes a more measured account of the cash flow in the next years. You may also review the company’s cash flow in the previous years. When opening a new business or a new product lane, research the trends instead to guide you with the revenue forecast.

DETERMINE YOUR PRODUCT PRICING

The first thing you want to keep in mind is that your prices should cover all production expenses. Pricing decisions require thorough research in market demand and competition, especially for a new product line. There are four pricing methods you can use: cost-plus pricing (all overhead and required percentage profit), markup pricing (product cost plus your selling price or the markup), demand pricing (flexible pricing; depends on customer’s demand), and competitive pricing (based on competitor’s charge).

These are some basics of profit planning that you can apply in setting up your business goals. With proper research and time investment, succeeding in your business endeavor is already within your reach. Focus on financial stability and watch your business grow.

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