PRE-PLANNED PROFITS AND CONTROLLED EXPENSES is an all encompassing phrase involving budgetary Controls in business. The primary theory in any system of (pre-planned profit and controlled expense) is that profits should be deliberate and that expenses and sales should be planned and controlled in such a way as to yield the desired profit.
Pre-planned profit and controlled expense is a novel approach for most people in business. Normally , the amount of profits is a surprise at the end of any fiscal period. The profit is whatever amount is left after expenses and deductions from sales. This has to be considered a relatively loose way (but very common) way of running a business.
If stockholders expect some sort of return on their investment, (why they risked it all in the first place); if management expects to gain from any management (incentive compensation systems); or if a sole proprietor expect to earn living expenses or to build equity through retained earnings; then the primary objective of business has to be to generate yearly profits continuously.
To ensure that a profit is going to happen, the person in business has to set a profit goal and make certain that the goal is met. He must control events instead of being controlled by them.
Expenses are something that one must pay if one is to stay in business. If a person in business would considers profits just another expense item, he/she will know that it is also something the he/she must control if he/she is to stay in business.
Any type of business can pre-plan profits and any business must forecast profits, expenses, and sales on some periodic basis in order to be able to establish basic controls through which the business can be managed. Without such forecast, no control system will be effective because the forecast is the basic planning and control tool. "Pre-planned profit and controlled expense", is defined as a system of budgetary control, and used in its generic meaning, is applicable to all types of businesses, guruofhardknox.com.
Departmentalization is a bigger step (and will not be covered here), but is much more effective if the company's chart of accounts is departmentalized so that pre-planned profit and controlled expense can be prepared at department level. If a person in business has definite knowledge of the profit contribution of all income producing departments and can now know whether other non-income producing cost centers are maintaining expenses in line with plan, he/she no longer has to guess at potential weakness. He/she will definitely know what his/her strengths are and when he/she is presented with puffed-up claims of efficiency, he/she will also have the fact and the figures required to refute such claims and the ability to reduce them to the level of measurable reality.
Another obvious advantage of using the pre-planned profit and controlled expense System is that having developed plans and set standards, the business person is now able to measure the performance of his supervisors. He/she has an effective tool to determine their capabilities and which of them are really effective in the production of the profit dollar.
A pre-planned profit and controlled expense system provides an equitable standards of measurement for appraising the performance of key personnel as to their contribution toward profit goal.
This type of system can also be used with financial institutions as proof of effective planning and future profitability. Guruofhardknox.com
Isn't this easier said than done? Discipline has to be the key. Great article John. Very informative and very insightful, well-written. Welcome to Searchwarp!
Nenita, Thank you for your comment. You are absolutely correct...discipline is a key. For the most part I have found that smb's don't posses the tools to start. Congrats on the featured writer.
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