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What is Profit Planning and how is it related to Finance Function?
Planning the future profits is a good decision because it keeps organizations away from overspending. Moreover, as earning profits is the ultimate aim of all companies, being able to foresee the profit is very valuable for a firm. However, it is easier said than done.
Managers often have no control over future shocks and natural disasters.There are other factors that affect the organization's decisions too.Financial managers' duty is to calculate the profits after deduction or paying insurance for these risk factors.
Note − The financial managers must be able to find the rate of future profit for the betterment of the financials of the firm.
Profit planning is a factor that affects planning and investment decisions.In other words, financial managers deal with conscious efforts to invest in such a manner that the profits obtained from the deal are optimum.
For optimum profits, the financial managers need to balance two kinds of costs- the fixed costs and the variable costs. Fixed costs usually remain constant over time while the variable costs vary with day-to-day activities. Controlling these two factors is key to the success of a financial manager's aim.
It is notable that in the case of a company's fixed cost remaining constant and variable cost being high, the cost structure keeps changing dynamically over time. Due to fixed costs, profits fluctuate more than in the case of sales. This fluctuation of profits is known as operating leverage and firms use it to get the ideas of costs, volumes, and outcomes of using a mix of asset and debt investment.
Note − Profit planning is related to the operating leverage of a firm.
Profit Planning and Finance Function
Profit planning is a deeply rooted finance function. The financial managers know that they should have the knowledge of the day-to-day activities in regard to finance to build a profitable firm. Without having ideas of profit planning, the firm would lose track and may become uncontrolled in terms of finance.
A sudden and unexpected income can impact a company's base hard to destabilize it and it could lead to the overall inefficiency of an organization.However, a good manager can save the firm from such astance by planning the profits. If the plan is in force, the organization cannot go out of control in general.
Therefore, profit planning can be thought of as a financial function or decision in its entirety.
Note − Profit planning is a financial decision because the idea is to get the financial position of the company right.
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