Achieving profit for an activity, based on a robust strategy and cost structure, is the essence of the complex business environment.
Knowing how much effort we need to achieve a number is the first step in strategic planning. Calculating Break-even point for a business unit or an event is important because it gives the target revenue to be achieved with certain cost components. However, business is not to achieve a break-even or let's say 'no profit and no loss' position but it is more about how much profit we can secure by conducting business activity. The thought of securing desired profit has given the boost to the 'Target Profit Analysis' concept.
The concept is quite similar to break-even analysis, where we find out the revenue needed to ensure and cover all direct and indirect costs. However, 'Target Profit Analysis' is one step ahead. It is used to find out the amount of revenue needed to reach the desired profit.
Calculating ‘Target Profit Volume’ is quite similar to the calculation of Break-even analysis. The only change in the formula is that to add the ‘Targeted Profit’ number with 'Fixed Expenses' before dividing it from ‘Gross Profit Margin’.
The formula is similar to the calculation of Break-even, i.e.,
(Fixed Expenses + Target Profit)/Gross Profit Margin %
A concept, actively used for Events and promotional activities when the management team agrees for an activity with a 'desired profit amount'. With this, the cost structure is important and comes within rigid lines because going over forecasted cost means the entire projection tower trembles. Cost variation also affects the pricing model because if the pricing of product cannot swing in similar lines, the impact to be borne by 'targeted profit'.
Target Profit analysis is the technique that gives the Managers a free hand to decide the cost structure and expected profit
Target profit is a very popular concept in the trading stock market where the user chooses the profit amount and calculates the selling price of his stock after adding up all costs incurred. This action, although limits the potential profit of trade, also provides security. A profit target ensures not to hold a position too long and capitalising on each move.
However, we hoteliers use it differently for promotional activities, events, and even for advance forecasting at a certain level.
Effective use of ‘Target Profit analysis’ is,
It optimises cost structure by limiting it where the user fixes the cost budget and the ‘Targeted Profit’. Thereafter, one can find out the estimated revenue. We frame strategy with the agreed cost structure.
It is a Formal & Systematic process because of the optimised cost structure; we get enough time to fine-tune and strategise for Business promotion or event.
A higher profitability level is possible with an agreed cost structure where each unit of extra sale converts into a higher contribution.
A robust model once used successfully creates a system used for future events and promotions. Its re-usable tested system assists to pace up work, giving enough time to Managers, to achieve numbers strategically and ahead of the competition.
The above explains the effectiveness of ‘Target Profit Volume’ which covers all the points for conducting the event or business promotion.
It is a very effective tool for Business Manager when they are planning any event. In hotels, we have many festive events where the purpose is not only to get milage in marketing brand and product but also to make a decent profit and cover cost.
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