Profit Planning

Jeetendra Dangol, PhD

 Profit Planning
(Why)

• Turns a profit
• Healthy Balance Sheet
• Generates goods Cash Flow
• Produces a good Returns on Investment
(ROI)
 Business Plan

 Technical feasibility
 Market feasibility
 Financial feasibility
 Budget
A budget is a detailed financial plan that
quantifies future expectations and
actions relative to acquiring and using
resources
 Financial Statements
Financial Statements Schedules
•Budgeted Balance Sheet 1.Sales Budget
2.Production Budget
•Budgeted Income Statement
3.Raw Material Consumption Budget
•Budgeted Cash Flow 4.Raw Material Purchase Budget
Statements 5.Direct Labor cost Budget
6.Overhead Expenses Budget
(Marketing, Office, Manufacturing
Overhead – All expenses)
7. Cost of Goods Sold Budget
8. Account Receivable Budget
9. Account Payable Budget
10. Loan Repayment Schedule

Note: Please note. You need ASSUMPTIONS while making financial plans!
 Revenue

Cost
Quantity Sale *Variable cost Selling Price
*Fixed cost

*Market size *Competitive market price

*Customers *BEP (Units) (alternatives)
*Area *BEP *Customer interview
*Target market capture (Amount) (target pricing as per
*Growth strategy product features)
*Assumptions *Seasonal effect
*Value deliver
*Assumptions
 Sales Budget

• Sales • Key factors

– Factors consideration – Budgeted sales units
– Seasonal effect – Budgeted selling price
– Pricing technique
– Growth strategy
– Market share
Question 1
Months Jan-2019 Feb. March April May
Sales units 1,000 2,000 3,000 2,000 1,000
Budgeted selling price = Rs. 100 per unit

Required: Sales Budget for 3 months ending March 2019

Solution:
Sales Budget
For 3 months from 1st Jan 2019 to end of March 2019

Months Sales Units Price Sales Revenue

January 1,000 100 1,00,000
February 2,000 100 2,00,000
March 3,000 100 3,00,000
Total 6,000 6,00,000
Production Budget (Contd. Qu 1)
• Key Factors
– Sales units (from sales budget)
– Inventory policy
• Inventory should meet 50% of next month’s sales
• Expected inventory balance as on 1st January 2019 is 500 units
• Required: Production Budget for 3 months ending March 2019
• Solution:
Production Budget
For 3 months from 1st Jan 2019 to end of March 2019
Months Jan Feb March April May
Budgeted Sales Units 1,000 2,000 3,000 2,000 1,000
Add: Ending inventory 1,000 1,500 1,000 500
Total need 2,000 3,500 4,000 2,500
Less: Beginning Inventory 500 1,000 1,500 1,000
Budgeted Production units 1,500 2,500 2,500 1,500
Raw Material Consumption Budget (Contd. Qu 1)
• Key Factors
– Production units (from production budget)
– Raw material consumption rate
• Raw material “X” required 5 kg for 1 unit of finished goods
• Required: Raw Material Consumption Budget for 3 months ending
March 2019
• Solution:
Raw Material Consumption Budget
For 3 months from 1st Jan 2019 to end of March 2019
Months Jan Feb March April
Budgeted Production units 1,500 2,500 2,500 1,500
Raw material consumption (kg) 3,000 5,000 5,000 3,000
(@ 2 kg per unit)
Raw Material Purchase Budget (Contd. Qu 1)
• Key Factors
– Raw material consumption quantity (from raw material consumption budget)
– Inventory policy
• Inventory should meet sufficient of following month’s consumption
– Raw material purchase price = Rs 5 per kg
• Required: Raw Material Purchase Budget for 3 months ending March 2019
• Solution:
Raw Material Purchase Budget
For 3 months from 1st Jan 2019 to end of March 2019
Months Jan Feb March April
Raw material consumption (kg) 3,000 5,000 5,000 3,000
Add: Ending inventory 5,000 5,000 3,000
Total need 8,000 10,000 8,000
Less: Beginning Inventory 3,000 5,000 5,000
Raw material purchase in Kg 5,000 5,000 3,000
Raw material purchase in Rs. 25,000 25,000 15,000
(@ Rs. 5 per kg)
 Cash Budget
For the months from ……….to………….
Details/Months 1 2 3 4
Beginning Cash Balance (a)    
Add : Budgeted Cash Receipts        
Cash Sales    
Collection from Debtors    
Cash from Selling of Fixed Assets    
Interest and Dividend Received    
Issue of Shares and Debentures    
Any Other Sources of Cash Inflows    
Total Cash Receipt (b)    
Total Cash Available for Payments (c = a + b)    
Less : Payments        
Cash Purchases    
Cash Pay to Creditors    
Wages and Salaries Paid    
Cash Paid for Overhead Expenses    
Payment for Fixed Assets Purchases    
Interest and Dividend Paid    
Loan/Debenture Redemption    
Any Other Sources of Cash Outflows    
Total Payments (d)    
Ending Cash Balance (Before Financing) (c – d)    
Add : Borrowings    
Less : Repayment of Loan – Principal    
Less : Interest    
Ending Cash Balance (After Financing)    
Prepare a cash budget of a company for April, May and June coming Year:

Months Sales Wages Purchases Expenses

(Rs.) (Rs.) (Rs.) (Rs.)

Actual: Jan 80,000 20,000 44,000 4,000

Feb. 80,000 16,000 40,000 8,000
March 70,000 22,000 44,000 6,000
Budget: April 88,000 20,000 44,000 8,000
May 84,000 20,000 44,000 6,000
June 80,000 18,000 36,000 4,000

Additional Information:

(a)20% of sales are for cash. 50% of the remaining is collected in same month and
balance after 1 month.
(b)20% of purchases are for cash and remaining are paid after one month.
(c)Wages are paid half monthly. Expenses are paid after one month.
(d)The rent of Rs. 1,000 is not induced in expenses. The rent is paid monthly.
 SOLUTION
Cash Budget
For April, May and June 19xx
  April (Rs.) May (Rs.) June (Rs.)

Opening Balance 20,000 28,800 41,400

Add : Receipt :      
Cash Sale 17,600 16,800 16,000
From Debtors :      
Current Month 35,200 33,600 32,000
Last Month 28,000 35,200 33,600
Total amount available for payment 1,00,800 1,14,400 1,23,000
Less : Payment :      
Cash Purchases 8,800 8,800 7,200
Creditors 35,200 35,200 35,200
Wages: Current Month 10,000 10,000 9,000
Last Month 11,000 10,000 10,000
Expenses 6,000 8,000 6,000
Rent 1,000 1,000 1,000
Total Payment 72,000 73,000 68,400
Closing Balance 28,800 41,400 54,600