Profit Planning - A Key to Performance Improvement
Ongoing review of budgets impacts profitability.
One
important usage of financial ratios is for profit planning or “budgeting for
profits.” Ideally, budgets that are
prepared annually should undergo regular review throughout the budget year to
determine that the company remains on course.
Good budgeting involves a “profit objective” - a bottom-up approach whereby the company
determines the desired profitability level and budgets expenses accordingly -
and if reviews are planned regularly, any significant variances can result in
rapid modifications for the remainder of the period in order to maximize
profits.