The two approaches to profit planning are top-down and bottom-up. The top-down method begins with projected revenue. Then staffing needs are determined. This approach is useful when revenues are declining and utilization rates are low. The bottom-up method begins with the available labor staff to determine the required revenue to support the current or planned staffing level with a planned profit target.
The managing principal of a design firm is often an architect or engineer who is a non-financial manager not trained in accounting. This managing principal is responsible for making decisions that determine the firm’s financial success. The Executive Summary Analysis of Operations and Graphic Charts communicate the analysis of the firm’s operations in a meaningful way so that appropriate decisions can be made to keep the firm on target with the profit plan goals. This firm manager should have a basic understanding of the Key Indicators of Financial Performance and how they relate to the profit plan goal. The profit plan key indicators provide the benchmarks to measure and control the progress toward the firm’s financial goals and objectives.
The measuring process begins after the bookkeeping for the period is completed. Once the profit plan goal is established by a profit plan, progress toward that goal is measured and evaluated. Actual values are compared to planned values and variances are identified and analyzed. The results of analysis are interpreted so that informed decisions can be made on what actions need to be taken to reach the profit plan goal.
The profit plan goals and objectives must have specific values. If the profit plan goals and objectives have specific values, they can be measured. If the profit plan goals and objectives can be measured, then the profit plan can be managed and controlled. The Controller’s job is to measure the progress toward the Profit Plan goals and objectives.