Revenue is critical to a company’s operations – without it we can’t produce profit and cash flow. All businesses require a certain level of revenue to support their business model of operating expenses.But once that level of revenue is achieved, the emphasis must turn to profitability in order to achieve growth. Profit creates the cash flow needed to reinvest in your business to continue to grow revenues.Low profitability, or losses with high revenues, will make growth more challenging or futile.
Much of my work with small to mid-size business owners focuses on implementing the financial fundamentals to maximize profitability and cash flow. Profitability is affected by a variety of factors – not all of which are strictly financial.I refer to these as the “Five Ps” of business success: Product, Pricing, People, Process, and Planning. These foundational elements encompass the resources critical to a strategic plan that prioritizes factors to move your company forward, maintain positive cash flow, and create an environment for growth.
Product
Your product may also be a service – it’s what you sell and more. A company’s product is the manifestation of your vision, the tangible result of what motivated you to start your business in the first place. Here are some things to consider when evaluating your product:
- Target market
- Product positioning
- Product capacity
- KPIs
- Competition
- Costs
Pricing
Pricing is the most vital component for making money and is central to your company’s strategy to increase profitability. Consider the following as you determine the right pricing structure:
- Profitability goals
- Pricing for profit
- Gross profit formula
- Cost knowledge
- Gross profit review and analysis
People
Having the right people on board is a foundation for success, but they should also be in the “right seats” – matching roles with unique talents and abilities. When your people have the opportunity to bring their unique talents to their work, they feel energized, valued, and naturally perform well. Consider your own values, along with the following points, and review your plan for attracting and keeping the right people.
- Culture fit
- Skill requirements
- Behavior requirements
- Primary job responsibilities
- Hiring process
- On-boarding process
- Training process
- Compensation
- Engagement and retention strategies
Process
The Process component of a business is the key to everything your business does, from realizing your vision and fulfilling your mission, to reaching your goals and operating efficiently. Often neglected, take time to develop, refine and documenting your processes and be sure to include the following:
- Efficiencies
- Effective processes
- Written processes
- Clear roles and responsibilities
- Optimal quality and quantity
- Measurements
- Benchmarks
- Clear outcomes
Planning
Vibrant, successful businesses do not exist without two vital elements – vision and execution. Solid, actionable planning is the key to bridging the gap between the two. It’s sometimes daunting to develop a plan so, break it into manageable components and consider the following:
- One year outlook
- Objectives in the coming year
- Profit plan versus budget
- Rolling 12-month profit plan
- Sufficient cash flow to implement your plan
I work with growth-oriented companies to help them build a sound financial infrastructure that enables accountability, profitability, cash flow, and growth. As the former owner of a multi-million-dollar company, I’m a CFO with a CEO perspective, which provides me with a unique understanding of the Five Ps and how each contributes to a company’s overall financial picture.
An analysis of financials—cash conversion cycle, working capital, receivables, debt/equity ratio, and statement of cash flow—demonstrates how the Five Ps come into play relevant to your own business profitability. In the coming months, I’ll address each of the Five Ps in more detail. In the meantime, feel free to contact me to discuss how I can help you integrate these foundational elements for success into your own profitability plan.
FAQs
Profitability is affected by a variety of factors, not all of which are strictly financial. I call these factors the “Five Ps” of business success: Product, Pricing, People, Process, and Planning.
What are the 5 P's of profitability? ›
Profitability is affected by a variety of factors – not all of which are strictly financial. I refer to these as the “Five Ps” of business success: Product, Pricing, People, Process, and Planning.
What are the 5 P's of success? ›
They are Passion, Patience, Persistence, Perception & Purpose!
What are the fundamentals of business finance? ›
Understanding Fundamentals
For businesses, information such as profitability, revenue, assets, liabilities, and growth potential are considered fundamentals. Through the use of fundamental analysis, you may calculate a company's financial ratios to determine the feasibility of the investment.
What is financial profitability? ›
Profitability is a measure of an organization's profit relative to its expenses. Organizations that are more efficient will realize more profit as a percentage of its expenses than a less-efficient organization, which must spend more to generate the same profit.
What does the 5 P's stand for? ›
The 5 P's of marketing – Product, Price, Promotion, Place, and People – are a framework that helps guide marketing strategies and keep marketers focused on the right things.
What do the 5 P's mean? ›
product, price, place, promotion, and packaging: the idea that in order to be successful, you must have the right product, sell it at the right price, in the right places, with the right advertising and support, and in an attractive way: The five Ps of marketing can help you improve your website.
Which of the 5 P's is most important? ›
People. Four Ps may have been all well and good in 1960, but, to put it mildly, times have changed. Even back then, it was clear that people — their characteristics, behaviors and preferences — were the through line across the four Ps of marketing. That's what makes the fifth P the most important.
Why are the 5 P's of strategy important? ›
These 5 Ps were developed as a framework through which you can assess the strength of a business strategy. So they are not a framework that helps you build your strategy, or a way of structuring your plan. Rather, the 5 Ps are intended as a way to test and examine the merits of your strategy once you have produced it.
What are the fundamentals of financial statements? ›
The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, its revenues, and costs, as well as its cash flows from operating, investing, and financing activities.
Finance degrees are generally considered to be challenging. In a program like this, students gain exposure to new concepts, from financial lingo to mathematical problems, so there can be a learning curve.
What are the fundamentals of accounting and finance? ›
There are five most referenced fundamentals of accounting. They include revenue recognition principles, cost principles, matching principles, full disclosure principles, and objectivity principles. This principle states that revenue should be recognized in the accounting period that it was realizable or earned.
What is the profitability formula? ›
Margin or profitability ratios
Gross Profit = Net Sales – Cost of Goods Sold. Operating Profit = Gross Profit – (Operating Costs, Including Selling and Administrative Expenses) Net Profit = (Operating Profit + Any Other Income) – (Additional Expenses) – (Income Taxes)
What is profitability strategy? ›
Profit Strategy: Meaning. When an organization deploys a profit strategy, it aims to maintain a profit by any means possible. This can be done through a variety of activities. Cutting costs related to materials, production, business processes, sales, and people. Reducing investments by selling off assets.
How to analyze profitability? ›
The best way to analyze a company's profitability is with as much financial data as possible. You want access to all the company's financial statements, including their balance sheet, income sheet, and statement of cash flows. You'll use this information to holistically analyze the company.
What are the 5 P's of planning? ›
Purpose, people, prep, process, and product—this is how we plan our meetings, online and off. Use this tool to design and structure a productive meeting in a fixed period of time.
What are the 4 levels of profitability? ›
These profit margins include gross margin, operating margin, pretax margin, and net profit margin. The margins between profit and costs expand when costs are low and shrink as layers of additional costs (e.g., cost of goods sold (COGS), operating expenses, and taxes) are taken into consideration.
What are the five key drivers of profit and value? ›
At the core of developing business acumen is this fundamental mental model called the five drivers. Those five drivers are cash, profit, assets, growth, and people.
