What is a Corrective Action Plan? - Definition, Procedures & Examples

Lesson Transcript
Instructor: Carol Woods

Carol has taught college Finance, Accounting, Management and Business courses and has a MBA in Finance.

What is a corrective action plan, and when would you need one? In this lesson, we'll discuss what it is, why it's used, and how to develop one if you need it.

How Does a Corrective Action Plan Work?

A corrective action plan is a document describing exactly how a specific situation will be changed to better meet the goals of a company. A corrective action plan is a response to a situation that is problematic for a company.

For example, a company's auditors may have found discrepancies in inventory figures stated in the financial statements. In this situation, the problem identified is poor inventory tracking, and the corrective action plan will state how this situation will be corrected.

Another situation might be sales coming in below the budgeted amount. The sales manager might be asked to come up with a corrective action plan showing how he's going to increase sales to meet the budgeted numbers for the year.

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  • 0:00 How Does a Corrective…
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Example Demonstrating the Process

To understand the corrective action plan process, we'll follow Joe, a sales manager whose team is not meeting budget. The plan should include the following information:

  1. A clear statement of the problem that has been identified. In this situation, the problem is that sales are below the budgeted amounts. A clear statement might be, 'Sales year-to-date are $535, 29% below budget.'
  2. A statement of the desired situation going forward. Joe has been asked to meet the budget for the year, so his statement of the desired situation might be, 'Sales for the rest of the year will ramp up rapidly, so that total sales for the year will meet the budget of $1,500.'
  3. A listing of specific steps that need to be taken to move from the problematic to the desired state. Each step should list the specific person who is responsible for completing the step and a due date of when this work should be completed. This is where Joe needs to develop a plan for meeting the desired objective and specify who will complete each step and when they will be finished.

Joe has come up with a list of actions to improve his team's results and, hopefully, meet budget by the end of the year. These actions include reviewing the performance of all salespeople and providing training and a performance plan. His plan states that all salespeople who are below quota year to date are required to bring their sales up to quota within two months or they will lose their jobs. Joe lists himself as the one assigned to this task and notates that he should complete this task within two weeks.

Another step in the corrective action plan includes training all salespeople on offering accessories to all purchasers, which will, in turn, increase the average sale amount. Joe assigns this task to himself and gives himself a completion date of one week.

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