Profit management – for business owners, making company financial statements at the end of the period is one of the responsibilities to stakeholders that must be fulfilled. Financial statements contain a lot of important information about the company’s performance in a period, especially the profits earned by the company. After all, the main purpose of doing business is to make a profit, right?
Therefore, business owners and other company management ranks need to manage financial statements in such a way that they can display the intended profit. This is where profit management plays an important role in business development strategy.
What is profit management?
Often known as earning management, this term refers to an intervention activity carried out by company managers in order to achieve certain goals in the external financial reporting process. This process is done deliberately, but still within the limits of General Adopted Accounting Principles (GAAP) in order to direct the level of profit to be reported.
So, you can draw the conclusion that profit management can be referred to as profit manipulation in financial statements with the aim of obtaining more profits. However, this action is not carried out without a fundamental motive and purpose. At least, there are some things that make the company feel the need to manage the profits obtained.
- As A Bonus Goal
Managers usually have information from the company’s net profit. So, he tries to manage by maximizing profits so that he can get bonuses (bonus purposes).
- Reasons For Political Motivation
Political motivation is often expressed if the company has a connection with government interests. Companies tend to reduce profits due to public pressure. On the other hand, this action can make the company save on taxes.
- Raising The Company’s Stock Price
Large profits will make the company’s profile increase, so the company’s stock price rises. This is commonly done by management when a company makes an initial public offering (IPO).
- Reporting To Investors
This factor is a common goal that drives companies to manage business profits. At the end of a certain period, the company needs to submit financial statements to investors. Increased profits are seen as one indicator of good performance of a company.
Familiar With Profit Management Patterns
In general, there are four profit management patterns commonly practiced by managers, as in the following explanation.
- Income Maximization
Often applied when profits are falling. This method is aimed at protecting the company when dealing with debt. In order to obtain greater profits, manipulation of accounting data in financial statements is usually done with this pattern.
- Income Smoothing
One of the management patterns that managers often do, is to flatten the reported profit. As a result, profits appear stable and investors positively assess the company’s performance.
- Income Minimization
Generally done in order to reduce the tax burden, so the company does not attract the attention of the government. This method is done by removing cost components that often go unnoticed by readers of financial statements, such as advertising costs, research and development costs, or intangible assets.
- Taking a Bath
Usually this fourth pattern is carried out through the imposition of upcoming costs and write off some of the company’s assets. Alternatively, you can do clear the desk so that the reported profit also increases.
Here’s The Profit Management Technique
Now that you know what profit management is and its goals, as well as the patterns that are commonly applied in companies, now you need to understand how to do this management technique. There are three techniques that can be done, namely:
- Setting Accounting Estimates
Management can take advantage of the opportunity to make arrangements for accounting estimates. Here management can estimate accounting estimates on several components, such as amortization of intangible assets and estimates related to bad debts, asset depreciation periods, and warranty costs.
- Make Changes To Accounting Methods
Changes in accounting methods can be applied to the recording of a transaction. For example, management may change the method of depreciation of fixed assets. If earlier used the method of depreciation of year numbers, then now apply the method of straight-line depreciation. Different calculations certainly produce different profits.
- Shifting the period of income or expenses
This method is also considered quite effective in implementing profit management. Management can shift certain periods of income or expenses in the financial statements. For example, delaying or expediting expenses for the research and development division, or delaying promotional expenses until the next accounting period.
Now you understand profit management in business development strategies. Come on, learn which are the right profit management patterns and techniques so you can develop your business today!
