Financial Fundamentals – the 5 Ps of Profitability
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.
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
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
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
- Engagement and retention strategies
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:
- Effective processes
- Written processes
- Clear roles and responsibilities
- Optimal quality and quantity
- Clear outcomes
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.