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 refer to these as the “Five Ps” of business success: Product, Pricing, People, Process, and Planning.
What are the 5 Ps of finance? ›
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 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.
How to measure profitability? ›
The simplest measure of profitability is net income, which is revenue minus expenses. This shows the amount of income you generate from your business after accounting for all expenses.
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 is the 5 P's of strategy? ›
Mintzberg's 5 Ps of Strategy include Plan, Ploy, Pattern, Position, and Perspective. Plan refers to a deliberate course of action that outlines the steps necessary to achieve a specific goal. Ploy refers to a maneuver or tactic used to gain an advantage over competitors.
What is the profitability formula? ›
Gross Profit Ratio is a profitability ratio that measures the relationship between the gross profit and net sales revenue. When it is expressed as a percentage, it is also known as the Gross Profit Margin. Formula for Gross Profit ratio is. Gross Profit Ratio = Gross Profit/Net Revenue of Operations × 100.
What is the financial indicator for profitability? ›
The gross profit margin and net profit margin ratios are two commonly used measurements of business profitability. Net profit margin reflects the amount of profit a business gets from its total revenue after all expenses are accounted for. Gross profit margin indicates profit that exceeds the cost of goods sold.
What is a good measure of profitability? ›
A good metric for evaluating profitability is net margin, the ratio of net profits to total revenues.
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 is a good profit margin? ›
A net profit of 10% is generally regarded as a good margin for most businesses, while 20% and above is regarded as very healthy. A net profit margin of less than 5% is relatively low in most industries and can indicate financial risk and unsustainability.
What are the 5S in finance? ›
5S workplace – Sort, Set, Shine, Standardize & sustain
However, the benefits of implementing overweigh the effort required for implementation. Few benefits are huge cost saving, productivity improvement, improvement in customer service and it changes the culture of bank working.
What is 5P in finance? ›
The 5P's represent - People, Philosophy, Product, Process, Performance. In finance, the 5P's served as a rule-of-thumb guide for our evaluation of whether to invest in a particular fund - hedge funds or private equity funds in my context.
What are the 5 P's of banking? ›
Since the birth of formal banking, banks have relied on the “five p's” – people, physical cash, premises, processes and paper. Customers could not bank without being exposed to the five p's.
What are the five F's of finance? ›
To be truly wealthy, you've got to find a way to convert those figures into experiences and memories. A smart way of doing this is to split your life into five categories: Family, freedom, fitness, fun and fortune. These are known as the Five Fs.
