Is profit only about “making it rain”?
When it comes to Profit, the third P in the Entrepreneurial Design™ Framework, it’s important to recognize that this P may play a different role across organizations and industries. What is consistent in our research and experience building high performing organizations is that it's imperative to know the role “profit” plays for your organization, and implement the financial model, process and accountability that allows your form of profit, and ultimately your business, to thrive.
Finance is one of the most important aspects of a business. One of the top reasons a business fails is not having the right financial model and management in place to yield the organization’s growth and financial sustainability. It’s understanding where your money is coming from and where it’s going. More specifically, financial management helps ensure the right strategies and tactics in place to bring in required funds, and determine what, where and when to spend. Whether you’re for-profit or not-for-profit, a private or public company, starting a new business or scaling an existing one, it’s imperative to get a handle on this third P to make smart financial decisions and realize your organization’s goals in a scalable and sustainable manner.
As a starting point, here are five questions we encourage every entrepreneur and intrapreneur to ask themselves. And yes, the role it plays is so much more than just “making it rain”.
1. What role does Profit play in your business?
Whether you're a for-profit, a not-for-profit, or a social enterprise, having a viable financial model, a pulse on your business’ financial health and developing a culture of financial accountability will help you make the right decisions and secure long-term financial stability. When starting any organization, it’s critical to determine your financial goals and plan alongside your business plan, marketing plan and operations plan. The starting point is being very clear on what “Profit” means for your business in the short-term and long-term.
For a for-profit early-stage startup, “profit” may be about revenue generation, customer acquisition and securing seed investments to scale. For a later stage startup, it may be about turning a profit and securing the next funding round. For a public company, it could be about achieving profit predictions and expectations consistently for shareholders. On the other hand, for social enterprises and not-for-profits, it could be about generating the funding required to scale the desired social impact of the organization. Knowing what role ‘Profit’ plays for your organization and your financial purpose and goals is a critical first step to building a thriving business.
2. What is your financial model?
Now that you know what “profit” means to your business and the goals associated with that, it’s about building a financial model to achieve your desired impact. Your financial model is not a standalone plan, but should be embedded in your greater business model. At its simplest, it outlines money in and money out, and how you plan to make that happen in a scalable and sustainable way. There are key levers you should consider when building your financial plan including revenue sources, pricing strategies, customer acquisition strategies, major overhead expenses and critical one-time investments. You will also have to evaluate the level of risk you’re willing to assume, and how long you’re prepared to manage different areas of risk before your financial model is a well-oiled machine.
3. Do you have a consistent process or cadence for reviewing your annual budget and health of your business?
Once you’ve established your financial model, the next question is “is it working?”. Here are three simple tips to creating a strong and simple approach to financial management: 1) Set budgets, financial targets and know the key metrics to monitor; 2) Build a culture of financial accountability where everyone has a number and understands their role in achieving your financial goals; and 3) Establish a consistent cadence to review both within the finance function and with business leaders to review your actuals against the planned with enough frequency to enable leaders to adjust and take action if it’s required. There are a lot of great approaches and tools out there to establish and optimize this cadence regularly. One of our favourites is the Entrepreneurial Operating Systems approach using Level 10 meetings and scorecards.
4. Do you consider the financial impact when making decisions?
This is where the rubber hits the road. What’s the point of having financial goals, a financial model, and a cadence of review and reporting if you’re not going to use it to make sound, informed decisions? Ideally if you have a strong handle on questions 1-3 above, considering the financial impact should come naturally. Whatever the business decision you may be facing, always consider the impact on profit, whether it be from a financial forecasting perspective, a financial process or management perspective, or against the greater impact you’re striving to make. In our experience, sometimes weighing the financial impact can dominate a decision, and while it may be appropriate to be the leading factor to consider, we always encourage the clients we work with to consider the financial impact alongside the other three Ps to make balanced and sustainable decisions.
5. Do you empower your team to have financial accountability?
Financial health is not just the concern of the leadership team or finance and accounting teams - it’s everyone’s concern. Creating a culture of financial accountability and fiscal responsibility is key to every thriving business. This is where we truly see the difference between great companies and good companies. Those that have clear cadences of financial reviews, where every team member knows their key metric are those that truly thrive as an organization. It doesn’t have to be overly complex, but table stakes for all employees should be a foundational level of financial literacy and a clear understanding of how their specific role can and should impact the health of the organization. As Gino Wickman, creator of the Entrepreneurial Operating System says, “Everyone has a number”. So, what’s your number?
Last but not least in the 4P blog series is People. This is the P we feel is at the heart of every thriving business and brings Entrepreneurial Design™ framework together. Without the right People to run it, would you even have a thriving business?
leaders, data, profit, non-profit, for-profit, nfp, business, startup, corporation, graphs, people, purpose, passion, entrepreneurs, intrapreneurs.
(Photo description: Page with bar graph and line graph with a hand on it pointing a finger to the data on a wooden table as the background.)