Profit Plan
Profit Plan (Integrated Sales, Cost and Profit Target)
What is a profit plan?
- Set cost ceilings backward from target profit
- Revenue, costs, expenses, and investment fit together on a single page
- Training spend survives when tied to a P&L line
What a profit plan really changes is the starting point. If you set the revenue target first and each department submits costs separately, the combined profit only shows up at year-end, and it is usually short. A profit plan starts from target profit and works backward to set ceilings on allowable cost and expense, so a department’s budget review shifts from “how much do we need” to “what will we do within this ceiling.” It only counts as a profit plan when the revenue plan, cost plan, expense budget, and investment plan fit together in a single income statement.
The structure follows the order of the income statement. Revenue is broken down into volume and price, cost of goods sold into materials, labor, and overhead, and SG&A into labor, marketing, training, and general administration, each with its own ceiling. If you also calculate contribution margin and the break-even point, you can see in advance which costs to adjust first when revenue falls short of target. With multiple divisions, you first build a profit plan for each division, allocate headquarters common costs, and roll them up into a company-wide plan; the basis for allocating common costs is a frequent source of disputes between divisions. During the year, a growing number of companies use a rolling forecast, adding a revised outlook each quarter to update the projected full-year profit.
For a training manager, the profit plan is the document that shows where the training budget’s ceiling comes from. Training is one line within SG&A, and its ceiling is a number worked backward from target profit, so the answer to “why are we getting less than last year?” is found here. If you add one line to the training budget request saying which P&L line the training moves, reviewers read it as a variable in the profit plan, not as a cost. Sales training ties to unit price or conversion rate, production training to defect rate or labor cost, and so on; programs that can’t be linked are the first to be cut when spending is capped.
Where it goes wrong in practice is that the profit plan becomes the result of adding costs to a revenue plan. When profit is not set first but is whatever remains after every department’s requests are totaled, that profit is a remainder, not a plan, and it cannot serve as a standard for managing the year. Fitting profit by assuming optimistic revenue is also common, and when the revenue assumption collapses, only the cost ceiling is left, and training and marketing are the first to be cut in the second half. Other common failures: changing the common-cost allocation basis every year so that division profit swings regardless of actual activity, and a profit plan and a bonus standard that don’t line up, so the plan is achieved but no reward follows.
Jinho DanAccounting instructor who makes financial statements, costing, and tax easy to understand
Eunpyo HongExpert in company analysis, startups, and investment fundraisingThe profit plan took shape in the early 20th century, as budgetary control and management accounting developed at large U.S. companies, bringing revenue, cost, and profit together in a single plan. Japan extended it by linking it to target costing, working backward from target profit starting at product development, and Korean manufacturers have adopted much of this approach.
Consider a hypothetical case. Company A makes packaging materials, with 450 employees and KRW 150 billion (≈ US$112,225,000) in annual revenue. Each year it collected division revenue targets and department budgets separately and added them up. This year’s planned operating margin was 3.2%, but the actual came in at only 1.8%. For next year, the finance executive decided to start from profit.
- In the first week of November, the finance executive fixed next year’s target operating margin at 5%. Assuming revenue of KRW 160 (≈ US$1) billion, they worked backward to a cost-of-goods-sold ceiling of KRW 123 billion (≈ US$92,024,500) and an SG&A ceiling of KRW 29 (≈ US$1) billion, and passed these down to each division.
- The head of production pushed back: “Material cost increases alone are KRW 4 (≈ US$1) billion, so how can that cost ceiling make sense?” The finance executive re-split the ceilings by product family on a contribution margin basis and adjusted them on the premise of cutting volume in low-margin families.
- When the sales division broke KRW 160 billion (≈ US$119,706,700) in revenue down into volume and price, it found the plan assumed a 2% price increase. The head of sales said increases would be hard to push through with 3 customers, lowered the revenue assumption to KRW 157 (≈ US$1) billion, and proposed adjusting the cost ceilings to match.
- Deputy Manager Bae in HR attached a P&L line to every line of the training budget request. For the production-line quality training, she wrote “defect rate down 0.3 percentage points, about KRW 400 million (≈ US$299,300) in materials,” and in the review that program stayed within the ceiling.
- Each quarter the company added a revised outlook and updated its projected full-year profit. In Q3 it saw the revenue assumption drop to KRW 154 billion (≈ US$115,217,700) and adjusted part of the marketing spend. The year-end operating margin rose from 1.8% to 4.4%.