Risk management - Business revenue and profit risk
Business revenue and profit risk
Previously [see business schedule risk] you saw how you might consider the uncertainty of the start and duration of projects as well as being able to weight their possible occurrence through the ‘win’ value.
We now need to use our experience to estimate the revenues from these projects and from this data calculate potential profits.
The above example calculates the profit from the revenue with assumptions for profit margin.
The revenues are in £000’s.
If we follow Opportunity 4:
Revenue
We enter a 3 point estimate of:
MINIMUM = 50
LIKELY = 85
MAXIMUM = 110
We then calculate the revenue contribution as;
Contribution = (50 + 85 + 110)/3 = 245/3 = 81.7
Margin
For Opportunity 4:
We enter a 3 point estimate of:
MINIMUM = 0.16
LIKELY = 0.20
MAXIMUM = 0.23
We then calculate the margin contribution as;
Contribution = (0.16 + 0.20 + 0.23)/3 = 0.59/3 = 0.20
Profit
As referred to earlier above, the profit is calculated from the revenue and the margin.
You have to multiply the ‘revenue’ and ‘margin’ contributions together.
That is:
81.7 x 0.20 = 16.06 (when calculated accurately to 1 decimal place).
At this point we have not weighted any of the results by using the ‘win’ probability [see business revenue and profit risk part 2].