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Assessment of potential profitability and payback

Potential profitability (PR) is evaluated when only current indicators are not enough to make a decision, and it is necessary to predict how profitable the enterprise will be in the following periods. This assessment is also required for a planned business or new direction.

When evaluating the PR of an existing enterprise, they analyze:

  • current profitability;
  • indicators of past periods and the factors that influenced them;
  • asset value;
  • external factors;
  • market stability;
  • trends in the economic development of the company.

For the payback forecast, take into account:

  • costs that can be predicted;
  • experience of similar enterprises;
  • competitor performance;
  • marketing research results;
  • factors affecting potential revenue;
  • risk level;
  • How long does it take for the profit to exceed the cost of production?

An assessment of potential profitability and payback is necessary in the following cases:

  • when looking for an investor;
  • when opening a new enterprise or entering a new niche;
  • before the sale of the company;
  • to receive grants or subsidies;
  • before buying a franchise;
  • to make a decision to launch a startup;

Profitability - this is the ratio of production costs and profits, it is expressed by a numerical coefficient. This number allows you to understand how effectively the company uses intangible assets, raw materials, capital or personnel. There are several types of profitability, each of which has its own formula:

  1. Assets (ROA). Profit/Asset Value*100%. The company's assets and attracted funds are taken into account: loans, investments, grants, and subsidies.
  2. Fixed Production Assets (ROFA). Profit/Value of Funds*100%.
  3. Capital (ROE). Net profit/Share capital*100%. Helps to calculate the loan amount required to run a business.
  4. Investment (ROI). Profit/Amount of received investments*100%. When evaluating the PR, the amount of planned investments are used.

If the indicator by which profitability is estimated is not specified, they usually talk about the profitability of sales. It is calculated by the formula: Net profit / Revenue without VAT * 100%. 

When making a forecast, not only the expected income is calculated, but also the profitability threshold. This is the minimum sales volume at which the proceeds will compensate for all costs of production and sales. It is also called the break-even point or critical point.

When forecasting profitability, internal and external factors are taken into account. The choice of internal indicators depends on what kind of profitability management is interested in: assets, shares, funds, and personnel. When assessing the overall payback in consider:

  • marketing activity, and its results;
  • human resources;
  • working conditions;
  • volumes of production, its quality;
  • pricing features: the cost of goods or services, planned or actual revenue;
  • the reputation of the company or the reputation of the founder, if we are talking about a startup;
  • relationships with clients, relations with partners;
  • distribution channels, logistics;
  • intangible assets: technologies, know-how, patents;
  • tangible assets: real estate, transport, equipment.

External Factors - these are circumstances that affect the operation of the enterprise, regardless of its actions. These include tax rules, infrastructure and demographics of the region, demand, and economic sanctions. 

Calculation of PR helps to solve the following tasks:

  • make an informed decision about opening a new enterprise, direction or startup;
  • prove the investment attractiveness of the company;
  • take into account possible financial risks;
  • predict the economic performance of the business in advance and adjust them;
  • reallocate or eliminate inefficient resources;
  • map critical business thresholds;
  • adjust the company's development strategy;
  • avoid predictable losses.

PR score - a more complex study than a simple analysis of business profitability. For destinations or businesses that are just planned to open, most of the required data does not yet exist. In addition, making an accurate forecast requires a deep understanding of economic mechanisms, possible risks, as well as algorithms for a particular segment.