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EFFECTIVENESS OF PROFIT
PLANNING IN NIGERIAN ORGANIZATIONS
CHAPTER ONE
INTRODUCTION
1.1 BACK GROUND OF THE STUDY
In modern economies, prices are generally expressed in units
of some form of currency. Although, prices could be quoted as quantities of
other goods and services (BARTER SYSTEM). Prices are sometimes quoted in terms
of vouchers such as trading stamps. Price sometimes refers to the quantity of
payment requested by a seller of goods or services rather than the actual
payment amount.
One of the most crucial operating decisions management must
make is establishing a setting price for its products but this is quiet
unfortunately that many firms are still mismanaging pricing causing lots of
money and anticipated profit to be unexplored and wasted.
In many financial transactions, it is customary to quote
prices in other ways. The requested amount is sometimes called the asking or
selling price, while actual payment may be called the transaction or traded
price.
However in explaining the importance of pricing, Egbunike
(2007:83) sustained that setting the price for an organizations product or
service is one of the most difficult, due to some number of variety of factors
that must be considered. The primary decision arises in virtually all types of
organization, just to mention but a few of them such as manufacturers set
prices for their products, they manufacture, merchandising companies set prices
for their goods, service firms set prices for such services as insurance
policies, bank loans etc.
A company’s survival and profitability depends upon its
pricing decisions, thus price is the only element in the marketing mix that
produce s revenue and thus ensures profit ability (kotler and keller 2006:475)
Price adopted by firms must be able to cover all cost in the long run as well
as to leave a profit margin to reward management.
The Price of a Product has a direct relationship with many
operations of the firm’s activities. A price decision will affect demand and
this in turn affects the revenue generated by the firm. Similarly, a firm which
makes profit has the propensity of attracting more new capital. This shows that
the public has confidence in the ability of the firm to yield return to them.
So, the performance of management is usually measured by the amount of revenue
it generates to satisfy the share holders of the organization.
The actual process of profit planning involves looking at
several key factors relevant to operational expenses. Putting together
effective profit plans requires looking at such expenses as labour, raw
materials, facilities maintenance and upkeep and the cost of sales and
marketing efforts.
It is evident that management has a big responsibility before
them in setting and adopting the most advantageous pricing policy and the most
effective profit plan for their firms, since prices are not set arbitrarily
therefore management must focus on all the important factors in setting its
price. Thus, it has become imperative to investigate the effectiveness of
pricing policy and profit planning in Nigerian organizations.
In the course of this study, two companies would be examined:
Vintage Nigeria plc, Ijanikin Lagos, manufacturers of vintage beauty products
and cosmetics (e.g. body creams, relaxers, shampoos, etc) was established in
the year 1992, and also, Ojukwu pen farms, producers of poultry proceeds (eggs
and chickens) and farm proceeds and has been in existence since 1987.
1.2 STATEMENT OF THE
PROBLEM
Hilton (1991:201) observed that both the market forces of
demand and supply and the cost of production have a Significant bearing on
determining prices. Equally he explained that there are other variables that
influence pricing decisions according to him, this includes: Manufacturer’s
pricing objective, economic situation, level of competition, and availability
of close substitute.
For pricing to be effective, firms must incorporate all these
factors in selecting the most advantageous price for its product. At times,
firms are not in the habit of considering these factors and this has led to the
shutting down of many factories, downsizing of workforce and in most cases,
winding up of firm’s (Hilton, 1991:201).
Profit plan are made in form of budget and they help firms to
forecast the level of profit, cost and revenue, they intend to generate in
order to gain competitive advantage. Unfortunately many firms still do not
prepare these plans, thus, this has led firms undertaking unplanned ventures
resulting in escalation and inability of firms to foresee shortage in resources
or finance or personnel needed in the future operation of the firm. Where no
plans exist, there will be no basis for firm to compare or evaluate their
performance.
Based on the foregoing, the problem of this study is in three
(3) folds.
The failure of some firms to incorporate factors such as
economic situation, level of competition, availability of close substitute,
among others in their pricing decisions, may have resulted to the minding up of
several small scale manufacturing firm (SSMF) in Nigeria.
It has been shown in accounting literatures that profit
planning is a potential tool for achieving profit objectives and efficiency.
Which small scale manufacturing firms seems to ignore the use of profit
planning (or budget) in their operations. This has led to far reaching problem
such as huge unforeseen operating cost as well as shortages in good financial
and human resources.
Most importantly, the problem that stringated this study is
the knowledge gap, that is, it looks as if small scale manufacturing firms are
not aware that pricing policy and profit planning impact positively on profit
performance.
1.3 OBJECTIVES OF THE STUDY:
This research is aimed at achieving the following objectives.
To determine if pricing decision (s) can make an impact on a
firm’s profit and efficiency.
To investigate if profit planning (or budgeting) can result in
cost reduction and increased profit performance.
1.4 RESEARCH QUESTIONS
Does pricing decision(s) make an impact on a firm’s profit
and efficiency?
Does profit planning (or budgeting) help in cost reduction
and increased profit performance?
1.5 FORMULATION OF
HYPOTHESES.
To achieve the objective of the study, the following
hypotheses are formulated.
HYPOTHESIS ONE
Ho – Pricing Policy of a firm has no influence on the degree
to which a firm can achieve optimum profitability.
Hi – Pricing Policy of a firm has influence on the degree to
which a firm can achieve optimum Profitability.
HYPOTHESIS TWO
Ho – Effective profit planning has no effect on the profit
performance of a firm.
Hi- Effective profit planning has a major effect on the profit
performance of a firm.
1.6 SCOPE OF THE STUDY
Since no single research can validly cover all areas of the
topic the researcher tends that thrust of this project will be limited within
the scope of how management’s performance of small scale manufacturing firms
are influenced by the choice of its pricing policy and its profit planning. The
study will focus primarily on small scale manufacturing firms in Lagos state to
be precise and its environs from where the manufacturing firms of this study
are drawn to enable the researcher carryout on extensive investigation on this
subject. The companies to be studied are: vintage Nigeria plc ijanikin Lagos
and Ojukwu pen farms igbesa Ogun state.
1.7 LIMITATION OF THE STUDY
The researcher is limited by time constraints. Since the
semester is very short and has a bulk of academic exercise. The researcher is
also constrained by unavailability of funds required for an extensive research
of this magnitude.
Finally and importantly, most small scale manufacturing firms
that were studied lack adequate and organized accounting and decision making
system, poor organizational chart and structure also their general
unwillingness to corporate or give out information, all, these married the
effectiveness of this research.
1.8 SIGNIFICANCE OF
THE STUDY
This research will serve as a guide to firms in setting the
most advantageous pricing policy giving its individual unique situation which
will enhance profitability in the short and long run situation. It will help
them to avoid choosing arbitrary prices without considering its distinctive
situation and important factors.
It will serve as a guide in choosing pricing strategy which
strikes a balance between what the consumers wants to pay for a product and the
price the firm is willing to sell; also this research will expose them (the
firm) to the need for accounting information in carrying out this decision.
The research work will also be useful for the economy in the
sense that if firms have substantial control over price setting, then their
pricing behavior can influence national output/income and hence community
welfare.
Finally, the research work will be useful for those carrying
on further research on this or related topic.
1.9 DEFINITION OF TERMS.
PRICING POLICY: It is a guiding philosophy or course of
action designed to influence and determine pricing decisions. Pricing policies
set guidelines for achieving objectives.
PROFIT PLAN: The profit plan is the operating plan detailing
revenue expenses and resulting to net income for specific period of time. It is
the firm’s optimal plan in the light of management expectation in future.
COST: Expenses incurred to procure something which may be
labour, material, facilities or resources
PROFITABILITY: This is the capacity or potential of an
organization to make profit
PRICE: This is the amount of money charged for a product or
service, or a value that a consumer exchanges for the benefits of having or
using a product or service.
VARIABLE COST: They are cost that varies with level of
production. They are constant per unit but vary with total production.
PRODUCT: This can be seen as any item, sub-assembly or cost
unit manufactured or sold by an organization.
MARKETING MIX: This is the combination of the four primary
elements that comprises of a company’s marketing programmes which are price,
place, product, and promotion (advertising).
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