Profit Model

The Profit Model is fundamental to the success of the Business Model and ensures continuity of business whilst providing a platform for Stability and Growth. The Resource Model and Business Process Models provide the means of ensuring consistent performance as defined by the Profit Model and underpins the Value Proposition. Therefore the Profit Model and the decomposition of Profit Levels establish the core metrics for measuring Business Performance and assigning ownership and responsibility within the organisation.  Profits are recorded in the Profit and Loss Account and measured over a period of time i.e. Yearly, Quarterly and Monthly. Profit is also defined at different levels:

1. Gross Profit (Sales Revenue – Cost of Sales)
2. Operating Profit also known as Net Profit (Gross Profit – Overheads or Expense)
3. Profit after Tax and Interest PATI (Operating Profit – Tax-Interest Payments), which is the money on which Dividends to shareholders is paid
4. Retained Profit or Retained Earnings (PATI – Dividends), the money left for the business to reinvest

The management of Revenue, Cost of Goods Sold and Expenses items and the time period over which they are measured can be assigned to resources and business processes within an organisation providing a decomposition of responsibility.  The diagram illustrates the main operating and non-operating cash in-flows and out-flows and highlights the importance of balancing them to sustain a successful business model. The cash flow cycle provides an understanding of a business’s financial position, proving a confidence in whether it has sufficient cash, over the immediate future, to meet its short-term liabilities as they fall due. Unless the answer here is positive the company is in a financial crisis irrespective of its profit performance. This can be translated into working capital days, which provides the metrics that can be monitored and is part of an end to end process that if managed ensures that the Profit objectives are continuously achieved.

 

The diagram to the right shows the relationship between the Supply Chain high-level processes and the cash-flow through the business. It illustrates the relationship between operational processes and the operating profit within company. The measure Working Capital Days is an important indicator of how well the business is performing and is able to meet its financial commitments.

Taking it a bit further the diagram below shows the impact that suppliers and customers can have on the business model. It also highlights that if anyone in the supply chain has cash-flow problems it affects all parties. It is import that there is Supply Chain transparency and communication with customers and suppliers essential to the success of the business model will not have a negative impact the Value Proposition.

Communication between customers, your company and suppliers binds the participants in the Supply Chain and provides an early warning to all participants of potential problems or changes in the market dynamics. Shared metrics will ensure that each participant is fully aware and prepared to meet the challenges of fulfilling their contractual arrangements.

·         Revenue model - How much money can be made: price x volume. Volume can be thought of in terms of market size, purchase frequency, ancillary sales, etc.

·         Cost structure - How costs are allocated: includes cost of key assets, direct costs, indirect costs, economies of scale.

·         Margin model - How much each transaction should net to achieve desired profit levels.

·         Resource velocity - How quickly resources need to be used to support target volume. Includes lead times, throughput, inventory turns, asset utilization, and so on.