Profit potential refers to the chance any asset has to earn money for its owner. Investors calculate the profit potentials of various stocks and other products before deciding which to buy. Businesses attempt to project profit potentials for new products and divisions. In each case, calculating profit potential makes use of some of the same financial and analytical tools.
A risk graph is a basic financial instrument that allows you to visualize your profit, or loss, from an investment. Risk graphs use cost accounting, which means you start by listing the value of an asset, such as a share of stock, as the price you paid to acquire it. This forms the midpoint of a simple graph with a vertical axis that represents profit or loss and a horizontal axis that represents different possible values for the asset. For each increase in the value of the asset, your profit will be equal to the rise in value over the cost you paid. More complex risk graphs add factors for time and volatility to help you understand the profit potential of an investment in more detail.
A market analysis, which relies on research and comparisons, is another useful tool to understand the likelihood of certain profit potentials in the future. For example, a small business owner who starts a business offering computer repair services may observe a major upward trend in similar businesses within the same region, indicating a high and growing level of demand. Likewise, stock buyers can study markets to see which industries are poised for growth, and what profit patterns have been like in the past. These pieces of information help form an estimate of business extensibility, or a business's ability to grow and increase its value, resulting in profits for owners and stockholders.
Budgets are also necessary tools in the process of forecasting profit potentials. A business's profits depend not only on growth and revenue, but also the ability to keep costs under control. If a company projects increasing labor, supply and interest costs in a coming fiscal year, it may indicate a reduced profit potential. Likewise, if a business makes budget cuts through selling assets, layoffs and securing new suppliers, it will have a higher profit potential even if its sales remain flat.
Within a business, many factors play roles in determining how corporate leaders see their profit potential. Surveys are tools that can reveal some of these factors in concrete, numerical terms. For example, if a business is planning to release a new product, customer surveys that ask about likelihood to buy or consider buying such a product can help forecast demand, which directly affects sales and profit. Customer satisfaction surveys indicate how likely buyers are to make additional purchases, which also can help a business project its future profit potential based on the size and loyalty of its customer base.
- John Foxx/Stockbyte/Getty Images