What Is Profit Potential?

Profit potential, often called income potential, is a phrase used in the world of economics and business to describe the potential for a product or plan to make money. The term profit potential is not a definite 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 widely used in business and investment literature, sometimes as a marketing ploy.

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

Factors that are included when figuring the risks involved with a product include production and service cost, administrative costs, insurance and local licensing fees, and promotional costs. In addition to these expenses, transportation of products and raw material prices must be accounted for. For a true analysis of risks, possible expenses such as returned items, taxation, or legal services should also be figured into 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 sale price of the product. These numbers offer a rough calculation of how much revenue can be earned through the sale of any given product. The calculation can be made even more precise if the sale of byproducts is figured in. An example of byproduct sale could be a meat-packing plant that sells unusable pieces to a pet food manufacturer.

Once the figures for both projected expenses and projected revenue are computed, the two numbers can be compared to determine profit potential. A number that reaches the break-even point, in which risks and potential profit are balanced, or one that leans towards the expense side, is considered a risky investment. If the projected revenue is higher than the projected cost, the investment is usually considered to be a safe investment, meaning the investor is not likely to lose money. When projected earnings are significantly higher, the profit potential of the product becomes a more lucrative offer to potential investors.