Earning potential is the estimated return on investment for a product or plan, taking into account factors such as production costs and revenue projections. It is not a guarantee of profit, but a risk versus benefit assessment used in business and investment literature.
Earning potential, often called income potential, is a phrase used in the world of economics and business to describe the potential of a product or plan to make money. The term profit potential is not a definitive guarantee of profit, 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.
Several factors are taken into account to determine earning potential. This calculation is sometimes called a risk versus benefit assessment. What evaluation does, in essence, is look at the costs and risks associated with the production and sales of a product or business. It then compares these outgoing expenses with the estimated revenue from the sales projections to decide whether the product will generate a profit, and if so, whether the profits will be high enough to make the product profitable.
Factors included when calculating the risks involved with a product include the cost of production and servicing, administrative costs, local license and insurance fees, and promotional costs. In addition to these expenses, the prices of transportation of products and raw materials must be accounted for. For a true risk analysis, potential expenses such as returned items, taxes, or legal services should also figure 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 product’s projected sales price. These numbers provide a rough estimate of the amount of revenue that can be earned from selling a given product. The calculation can be made even more precise if the sale of by-products is included. An example of a by-product sale might be a meatpacking plant selling unusable parts to a pet food manufacturer.
Once the figures for projected expenses and projected income are calculated, the two numbers can be compared to determine profit potential. A number that breaks even, where potential risks and rewards are balanced, or one that leans toward the expense side, is considered a risky investment. If the projected income is higher than the projected cost, the investment is generally considered a safe investment, meaning the investor is not likely to lose money. When projected earnings are significantly higher, the earnings potential of the product becomes a more lucrative offering for potential investors.
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