What is profit potential? (with photo)

Determining profit potential consists of all the costs involved in producing a product.

Profit potential, often called revenue potential, is a phrase used in the economics and business world to describe the potential of a product or plan to make money. The term profit potential is not a definitive guarantee of earnings, but rather an indicator of what the estimated return on investment may be. Due to the liquid nature of the concept, the term is used extensively in business and investment literature, sometimes as a marketing ploy.

To determine profit potential, several factors are taken into account. This calculation is sometimes called a risk versus profit assessment. What valuation does, in essence, is look at the costs and risks associated with producing and selling a product or business. It then weighs these output expenses against the estimated revenue from the sales projections to decide whether the product will result in a profit and, if so, whether the profit will be high enough to make the product cost-effective.

Factors that are included when calculating the risks involved with a product include production and service costs, administrative costs, insurance and local licensing fees, and promotional costs. In addition to these expenses, product transport and raw material prices must be accounted for. For a true risk analysis, possible expenses such as returned items, taxes or legal services should also be included in the assessment.

The profit side of the equation is much simpler to calculate. To estimate potential revenue, a reasonable estimate of public demand for the product is created and multiplied by the projected selling price of the product. These numbers provide a rough calculation of how much revenue can be earned from selling a particular product. The calculation can be even more accurate if by-product sales are included. An example of a by-product sale could be a meatpacking plant that sells unusable parts to a feed manufacturer.

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Once the projected expense and projected income numbers are calculated, the two numbers can be compared to determine profit potential. A number that hits the break-even point, where the risks and potential profit are balanced, or that leans towards the expense side, is considered a risky investment. If the projected income is greater than the projected cost, the investment is generally considered a safe investment, meaning the investor is unlikely to lose money. When the projected earnings are significantly higher, the profit potential of the product becomes a more profitable offering for potential investors.

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