Profitability Unveiled: Demystifying the Business Profit Model

A business profit model defines how a business will generate sales at a profit to generate continuously improving cash reserves.  Put another way, the failure to generate sufficient sales to cover business operating costs means you don’t have a model for making a profit.

As reported in the P&L Statement, the gross, operating, and net profits a business produces, as reported in the P&L Statement, is the best summary of management’s performance.  A business that earns profits has a profit model that is working.  The lack of profits or lower-than-planned profits from business operations indicates issues with either your profit model or management’s ability to execute the model.

Through your P&L Statement, you will see an itemization of the revenues and expenses that flow through your profit model, leading to either a profit or loss.  Your Profit Model shows you how you intend to make money, and your Profit Plan establishes what you should make, and your P&L Statement shows you what you did make.

A positive difference between actual P&L Statement results and your Profit Plan indicates that you made more money than you planned to make.  Even if you showed a profit, a negative difference confirms you aren’t working your profit model as you should as confirmed by your business, making less than you planned.

The Net Income your business produces will land your business in one of five profit stages

To better appreciate how the business profitability model results in one of the five stages of business profit progression, it is essential to understand the meaning of light and darkness.  Light is the natural agent that stimulates sight and makes things visible, whereas darkness is the partial or total absence of light.

Darkness is the absence of light, which equates to the absence of information, the absence of understanding, and the absence of confident actions.  When light is present through accurate and timely business reporting, darkness disappears.  What needs to be done to improve gross profit, operating, and net income becomes clear.  To better appreciate the differences between the five stages of business profitability, consider the degree of light versus darkness in working with business reporting that make informed business decisions possible:

Survival	Stuck	Stable	Stretch	Substantial
Darkness	Star	Stars	Moon	Sun
No light	Little light, mostly dark	Some light, mostly dark	More light than darkness	All light, No darkness

Big businesses become substantial because they are very good at converting their data into actionable information.  They do this to minimize their risk of loss as they put large amounts of money at risk in their business to earn higher sales and profits.  Businesses that find themselves in survival mode are just the opposite.  They never look at the financial statements because they are too business fighting the fire of the day or trying to chase down cash to make payroll to bother with lighting their path forward with actionable information.  Click here to learn more about the five stages of business profitability.  (Redirect to P-1  Stages of Business Profitability)

Take the test to learn what business stage your business is in?

If you want confirmation as to what business profitability stage your business is in, click here to take our no-obligation business profit stages test to learn which of the following best represents your business stage today:

Upon completing the business profit stage test, you will receive a profit stage profile showing you what stage your business is in and likely to be in the next three years.