What is the definition of incremental profit?


Quick Answer

An article in the Houston Chronicle states that incremental profits are an indication of a company's growth rate due to how it chooses to spend its capital and are best defined as the amount of increase in a firm's earnings because of its investments. These figures are used in incremental analysis, a financial analysis method that examines revenues and costs to predict future growth.

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Full Answer

According to the Chronicle, the calculation of incremental earnings involves estimating future profits and losses based on a number of variables. Analysts calculate the operating earnings before taxes in order to estimate the earnings after taxes. Depreciation figures into the former but is often added back into the latter because it is a cost, but it is not a cost that happens all at once.

The Chronicle explains further that incremental earnings calculations come into play when a company decides to use incremental budgeting, a form of budgeting best applied by firms whose budgets change very slowly over time. Incremental budgeting assumes that the expenses for each department in a fiscal year are going to be roughly the same as they were the previous year. This form of budgeting is often adopted by educational institutions and other organizations with fixed funding.

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