Any enterprise that fails to achieve this goal for too long will soon find itself downsized, re-engineered, sold, merged or even bankrupted. It will have failed in its primary mission and it will be punished by the objective calculations of the marketplace.

Success = Clear Profit Targets + Realistic Profit Plans

+ Effective Operations

+ Proper Controls

+ Teamwork

Managers are all too aware of the pressure upon them to operate a profitable enterprise. However, as every manager also knows, in today's highly competitive and rapidly changing business environment, profitability can be an elusive goal - difficult to achieve and even more difficult to sustain.

Success in this pursuit requires full commitment to sound management practices including: goal setting, organizing, coordinating, executing, controlling, communicating and planning.

In a nutshell, a profit plan is simply management's action plan for achieving its profit goals expressed in financial terms and summarized in the form of projected financial statements and supporting schedules.

This may come as bad news to those who have an aversion to math, but unfortunately, there is no way around it; planning for profits requires that you deal with financial statements and that means dealing with numbers and a certain amount of number crunching.

A profit plan consists of two components: a marketing plan and an operating plan. The marketing plan is concerned with forecasting and generating sales revenue; the operating plan is concerned with budgeting and controlling costs. Together, they provide the inputs needed to project future profits.

WHY "PLAN" FOR PROFITS?

Profits don't just happen. It should go without saying that every business should have a carefully formulated, and well-documented profit plan that guides it in every aspect of its operations, and further, that every business should have a systematic process for developing, reviewing and updating its profit plan on a regular basis. Regrettably, however, this is not the case.

Too many managers regard profit planning (and the related budgeting process) to be on a par with sticking needles in their eyes and they would do almost anything to avoid, postpone or sabotage the process.

Say the words "planning" or "budgeting" and they cringe. To them, this is code for an attempt either: (1) to embarrass them by handcuffing them to hopelessly unrealistic goals, or (2) to commit them to meaningless rounds of wishful thinking and wasteful meetings that take them away from the "more important" task of running day-to-day operations.

Yet a profit plan is the necessary connection that links management's profit goals to its operations. It is the means by which management can ensure that its profit goals are realistic and attainable and that its operations are moving in the right direction.

Without a sound profit plan, it is highly unlikely that any management team, however skilled, will consistently achieve its profit goals. As the old Chinese adage says: "If you don't know where you're going, you are likely to get where you are headed." And, we might add: that will probably not be where you want to be!

The irony is that profit planning need not be a distasteful experience. Like any other management tool, which may be challenging at first, once learned, it gives you a sense of mastery over your operations that can be acquired in no other way.

ADVANTAGES OF PROFIT PLANNING

Among the benefits that your business can enjoy from profit planning are:

• Proactive Management: Forewarned is forearmed. Profit planning compels you to prepare your best forecast of future events that affect your profits, and to act accordingly-to be proactive rather than reactive.
• Management By Objectives: Clear profit targets provide the foundation for organizing, delegating and controlling operations. When everyone knows what your profit targets are, and the steps they must take to achieve them, teamwork is improved at every level of the organization.
• Performance Evaluation: The profit plan provides a continuing standard against which sales performance and cost control can be evaluated, quickly.
• Cost Consciousness: Since actual costs can be compared easily with planned costs, potential cost overruns can be identified and curtailed before they get out of control.
• Problem-Solving Discipline: The profit plan permits early detection of potential problems so alternative corrective actions can be easily identified and evaluated.
• Capital Budgeting: With the information from the profit plan, you can anticipate the need for more working or permanent capital.
• Investor Confidence: A believable profit plan, supported by an action plan to achieve sales and profit objectives, will gain the confidence of potential investors and lenders.

LIMITATIONS OF PROFIT PLANNING

Like all management tools, profit plans are subject to certain limitations.

For one thing, profit plans are based upon estimates. Inevitably, many conditions you expected when the plan was prepared will change. Customers' economic fortunes may decline, suppliers' prices may increase, and so on.

In addition, the profit plan requires the support of all responsible parties. Without mutual agreement on objectives and budgets, they quickly will be ignored. Sales targets must be accepted by the marketing department and cost budgets must be accepted by the managers of various cost centres.

Finally, profit plans must be flexible; they must be changed from time to time to meet changing conditions. There is no point in trying to operate a business according to a plan that is no longer realistic because conditions have changed.

In spite of these limitations, the advantages far outweigh the disadvantages. A realistic profit plan, established yearly and reevaluated as conditions change will provide guidelines that will help you control every aspect of your business in an orderly manner.

1: Obtain top management commitment to profit planning

2: Assign people responsibility for the profit planning function

3: Establish profitability goals-both short-term and long-term

4: Assemble internal historical financial and operations data

5: Gather relevant external economic and market data

6: Identify profit drivers and develop a profit model of the business

7: Develop a sales forecast and related marketing plan

8: Develop cost budgets for all departments and account categories

9: Do a business process analysis to identify cost reduction options

10: Prepare projected financial statements and supporting schedules

11: Perform a sensitivity (or "What-If") analysis of profit model

12: Determine capital required to implement profit plan

13: Determine financing needed to fund capital requirements

14: Recycle from step 7 until an acceptable plan is formed