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Calculating profit potential for new financial year

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WITH a new financial year starting and accountants calculating profit, many companies assess how much profit their business can really deliver. When corporations start out on a journey they prepare themselves by working out the length of the journey, setting goals and identifying targets.

According to Maxell Consulting , profit potential can be worked out in four steps:

Step 1 – Performance analysis

Companies must consider their potential relative to their current position. Targets are meant to encourage achievement, but must be realistic enough to be achievable. A long-term vision can be motivational but must be attainable. The performance should look at overall sales growth, changes in direct and indirect costs and net profits.

Step 2 – Improvements and ideas

Different actions generate different results. Consider implementing changes in price, rebranding products or services, reaching new markets, cutting costs and increasing capacity.

The most important aspect is to use a structured process to identify ideas, and evaluate what each idea will do. Expand the ideas generation to include contributions from employees.

Step 3 – Evaluating impact on business

Generating great ideas is often exciting and motivating - but reality must set in at some stage. Evaluating each idea for its impact on sales and profits must follow. Rank the ideas according to their impact on sales and profits then identify what resources are required to implement them.

Step 4 – Calculating profit potential

Once a company has decided on possible ideas, it pays to recalculate the profit potential of the business. Also include the investment in assets required to achieve this and ask from where these new assets will be financed.

Incorporating new ideas into cash flow projections will also give some idea on the current value of the business.

Maxell Consulting has developed a Profit Potential Calculator for business owners and managers to highlight what potential exists in their business and what to do to get at it. It is a simple spreadsheet that calculates the profits and return on investment from new ideas, based on past and current performance. It also provides a very quick means of reviewing business performance.

It can be downloaded at www.maxellconsulting.com.au.

Questions about this article

11/07/2012 - The profit potential of an idea is the net present value of all cash flows resulting from implementing the idea. This effectively equates to the "value" of the idea to the business. The first step in calculating this is to determine the sales likely from implementing the idea over the next 5-7 years or whatever the life of the idea. Subtracting relevant costs of the idea arrives at an estimate of the profit. This profit should then be adjusted for depreciation, interest, tax and finally adjusted back to present day values. Subtracting the total investment over the life of the project will determine the "net value" of the idea.

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