Methods of planning and forecasting profits - Corporate finance

Methods for planning and forecasting profits

Profit is the economic category of the commodity economy. The economic essence of profit, its scope and boundaries of use within the framework of entrepreneurial structures largely depend on the impact of the incentive of gain in the market. The very fact of ownership allows owners to take measures to increase the amount of profit.

Profit is a complex economic category and in the external manifestation has the signs of a transformed form. The economic content of profit consists not so much in its external manifestation, as in the inner essence, but in the form of manifestation - in the degree of development of the commodity economy.

As economic category profit expresses complex economic relations between: entrepreneurs (corporations) and employees about pay; between the entrepreneurs themselves (corporations) on the exchange of goods; between entrepreneurs (corporations) and the state regarding relations with the budget and state centralized funds; between entrepreneurs (corporations) and investment institutions, etc. These relations are clearly expressed in nature and have many forms. Profit as a source of money thus mediates all stages of the reproductive process from the stage of production to the stage of consumption.

Profit as an economic category performs two functions: evaluation (measures of efficiency, production goals) and stimulating. It is possible to single out the third function of profit as the main source of state revenues, but its significance depends entirely on the system of state regulation of the economy and the activities of corporations.

Different interpretations and understanding of the essence and appearance of profit, the complexity of its interrelations with other indicators led to different definitions, classification criteria, methods of calculation, etc. The main indicators for corporations are:

• balance and gross profit represent the difference between total revenue (revenue) and total costs;

• Accounting profit is calculated as the difference between revenue and the amount of external costs;

• Economic profit is the total amount of revenue minus external and internal costs;

• net profit - the difference between revenue and economic costs (explicit and implicit);

• Net (undistributed) profit - profits remaining at the disposal of the corporation, less tax due from profits and other similar compulsory payments and sanctions;

• taxable profit - profit subject to taxation on income tax;

• Marginal profit - the difference between revenue from production and sales of products (works, services) and variable costs attributed to these production and sales;

• Normal profit is the minimum profit that remains with the corporation and is necessary to support the aspirations of the entrepreneur, to use his capital in the corporation;

• Extreme profit - one-time profit, which is obtained from risky transactions, when the amount of capital loss risk is equal to the risk of profit;

• global profit - as income from the sale of the corporation or its complexes; and others

From the correct definition of the value of profit organization (enterprise) depends on its availability of monetary resources. Profit planning - a complex and multifaceted process, including the study of the economic relations of the corporation for the period preceding the planned one. From the correctness and validity of the profit forecast depends on the financial resources of the production and scientific and technical development of the corporation, as well as the level of dividend payments to shareholders (owners). The optimal profit plan is also necessary for the development of tax and other budgets.

The Corporation independently develops a profit plan, based on contracts concluded with suppliers and consumers of its products; economic standards established by the state; materials analysis of activities for the previous period; accounting and reporting data, etc. Profit planning includes two interrelated processes:

• Determination of accounting profit and the identification of factors that affect its value;

• profit distribution planning.

The volume of profit largely depends on economically justified methods of its planning in accordance with the principles of accounting policy adopted by the corporation for the coming financial year.

Traditional profit planning methods from product sales are:

• method of direct counting;

• The analytical method;

• The combined account method;

• factor method;

• the normative method;

• Economic and mathematical method.

In the direct account method , the total amount of the accounting profit from the current (operating) activity consists of the profit from sales of the product (sales profit) and other revenues less expenses incurred.

The profit from the sale of products includes the profit from the commodity release and the profit in the balances of unrealized products at the beginning and end of the calculation period (quarter, year). The profit from the commodity release (PTW) is calculated by the formula

where Цi - the selling price of the product i -th type; Сi - the total cost price of the product of the i-th species; Кi - the number of products i -th type, subject to release in the planned period (based on concluded contracts with customers); n - number of product types (groups).

In addition, set profit on commodity balances in the warehouse and in the shipment at the beginning and end of the planned period along their entirety. Warehouse commodity balances are accounted for by costs. Therefore, profit on carry-over trade balances is defined as the difference between their value in sales prices and in costs. Then the profit from the sale (PR) is:

Where Пн and Пк - profit in the rests of unrealized production on the beginning and the end of the planned period; Fri - profit from the commodity release in the billing period.

Then the accounting profit (profit before tax) can be represented as

where BP is the accounting profit; Pr - profit from the sale of products; PD - other income (net of other expenses incurred).

The method of direct counting is relatively easy to use and does not require much labor, if you use modern methods of processing information. The use of this method is possible only in conditions of stable economic situation, the presence of a pre-formed order portfolio in the corporation, a product chain and planned cost calculations for each type of product (group of homogeneous products).

The basic principle applied to the calculation of profit by this method is the orientation to the level of cost intensity or profitability on the basis of analysis of the corporation's activities for prior periods. Calculations use planned, reported and refined data.

Calculation of the planned amount of profit analytical method by using the cost-factor (Kse) is carried out according to the formulas:

where PIrp - total costs for production and sales of products; OR - the planned volume of sales; Кпп - factor of profitableness of production, shares of unit; Fri - profit from commodity output; TV - planned commodity output.

Profit planning by level of basic profitability produced and sold products (works, services) is carried out in stages:

1) calculation of the basic profit, which is determined on the basis of actual reporting data adjusted for certain changes in the reporting period (prior to the planned);

2) determine the percentage of the basic profitability of produced and sold products (works, services) in the current year, taking into account adjustments - calculated as the ratio of profit to costs or profits to sales (sales);

3) calculation of planned volume of produced and sold products (works, services) in monetary terms for the planned year;

4) calculation of profit from sales, taking into account the basic profitability - the volume of sales is multiplied by the basic percentage of profitability;

5) the received amount of profit is adjusted for the amount of profit received from the production and sale of those types of products (works, services), the profit on which was calculated by the direct calculation method.

This method is used in the development of corporate development plans, as the basis for calculations is the total volume of the commodity output. This method is applied only if the products (works, services) are comparable, t.s. was issued in the previous period.

A combined method is used when a comparable (used analytical method) and incomparable (new) products are produced in a corporation (use the direct counting method).

The factorial method includes the following stages of planning profit margins:

1) determination of the basic indicators of the reporting period (periods) - gross profit; profit from the sale of products (works, services); other income and expenses; costs for the production and sale of products (works, services); the value of structural elements of costs, etc.;

2) determination of the planned indicators of the corporation's economic activity - an increase in the volume of production and sales of products (works, services); reduction of costs, changes in other income and expenses, etc .;

3) Definition of inflation indices: prices for manufactured and sold products (work, services); prices for consumed material resources; prices for consumed labor;

4) definition of indices for other changes, including: depreciation charges; other costs.

The profit amount is calculated by any method of profit planning, and then it is adjusted for inflation expectations and other changes.

The normative method (budgeting method) is used in case it is possible to establish norms and norms for the expenditure of materials, fuel, salaries for specific types of products (direct and indirect costs) - on the responsibility centers of the corporation. Profit is considered a method of direct account, but when establishing specific tasks for the use of enterprise resources by responsibility centers. This method is a combination of the direct calculation method and the establishment of norms and standards.

Economic and mathematical method is used only in large or large corporations, where it is possible to use a large accounting information base and corresponding computer programs.

Other methods of profit planning are usually considered in special financial literature.

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