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.
How to tell if a company is profitable from a balance sheet? ›
The two most important aspects of profitability are income and expenses. By subtracting expenses from income, you can measure your business's profitability.
What do you mean by financial statement? ›
What is a financial statement simple definition? A financial statement is a document that summarizes an individual or business's financial position, including assets, liabilities, and net worth. It is used to assess the financial health of an individual or business.
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.
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.
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 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 is the most important financial statement? ›
Types of Financial Statements: Income Statement. Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time.
What is the formula for profitability? ›
Formulaically, the structure of a profitability ratio consists of a profit metric divided by revenue. The resulting figure must then be multiplied by 100 to convert the ratio into percentage form.
How Is Business Profitability Best Measured? 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.
What are the 5 basic financial statements explain briefly? ›
They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.
What are 5 elements of financial statements? ›
The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.
What are the qualities of a good financial statement? ›
What makes a financial statement useful? FASB (Financial Accounting Standards Board) lists six qualitative characteristics that determine the quality of financial information: Relevance, Faithful Representation, Comparability, Verifiability, Timeliness, and Understandability.
What are the 5 P's of success? ›
They are Passion, Patience, Persistence, Perception & Purpose!
What are the 5 P's of performance? ›
Purpose, People, Processes, Passion, and Performance
This is often the stated vision and mission that are supported by the organization's values. These leaders help everyone in the organization see how the work they do contributes to that higher PURPOSE.
