Page 574 - Sensors and Control Systems in Manufacturing

Economic and Social Inter ests in the Workplace
11.1.8 Planning for Profit 527
Projection for income statement and balance sheet figures will indi-
cate the profit, return on investment (ROI), and return on assets
(ROA) management can expect. For example, these statements in
highly abbreviated form may be as follows:

Net profit before interest and taxes $430,000
Interest cost 80,000
Net profit after interest 350,000
Income taxes (40%) 140,000
Net profit 210,000
Debt 1,000,000
Capital or stock investment 2,000,000
Assets $3,000,000
The return of investment (i.e., the profit earned in relation to the
value of the capital required to produce the profit), is expected to be

$210,000/$2,000,000 = 10.5%
Further, the return on assets is expected to be:

$258,000/$3,000,000 = 8.6%

Note: In this last calculation, the return is calculated after taxes
and before the deduction of interest costs. The $258,000 is determined
either by adding the after-tax interest cost of 60 percent of $80,000, or
$48,000, to the net profit, $210,000, or by subtracting the 40 percent
tax on the net profit before interest or taxes of $430,000 from this
amount. The 8.6 percent return on assets is increased to a 10.5 percent
return on investment as the result of the leverage provided by bor-
rowed funds at an interest of less than 8.6 percent.
These ROI and ROA figures may or may not be considered ade-
quate. If they are thought to be inadequate, various parts of the bud-
get should be reviewed to identify possible areas of improvement. In
any case, the profit goal should be high enough to provide a reason-
able return and at the same time be realistically attainable.

11.1.9 Controlling Operation
Budgeting and profit planning are necessary for control of opera-
tions, but the forecasts and budgets do not by themselves control
operating events. A budget is useless without comparisons with
actual operating results, and the comparisons are useless unless the
manager takes action on deviations from the budget.