No matter any other intentions you might have, when you start up a small business, it’s natural that you’ll want to see profits as soon as possible. But it may take a little while before you start seeing your business consistently in the black. Start-up funding is a tricky issue, so gather as much information as you can before starting out.
How Long Does It Take for a Small Business to Make a Profit?
The Numbers
Of course, when a business first makes a profit depends on plenty of different factors, but we can get a good idea of general trends by looking at statistics. Studies indicate that most start-ups won’t turn a profit until around their third year of existence, with around 84% of small businesses reaching profitability within the first four years. That might sound like a long time, but in the life of a business, it’s not too long.
Of course, there are many different levels of profitability which your business could reach. The term profitable can include everything from a mom-and-pop store making just enough to get by to a global mega-corporation making billions for its shareholders. Ultimately, if your business is turning any kind of profit, then that’s a success, but it’s important to understand the different steps on the ladder.
Break-Even Profitability
Breaking even is the first step on a long road to serious profitability. While it may be frustrating to see your business failing to bring in a profit, if you’re at the stage when you’re not actively losing money, you’ve won half the battle. On average, businesses reach this stage in the first one to two years, and it represents an important milestone on your journey.
When your business begins to break even and you’re considering expanding your operations, it’s important to take a thorough look at your finances and carefully decide your next step. Although you’re close to turning a profit, a wrong move here could be disastrous. Comb over your finances with business partners or trusted advisors to work out exactly what you’ve got right so far.
Ramen Profitability
It’s not ideal, but ramen profitability is a huge step in the life of your business. This means that your business is not only breaking even, but you’re making enough to cover your basic living expenses. Many businesses achieve this level of profit after two or three years of business, and while the books may not show huge gains, investors will be impressed by these early stages of development.
You may also have a little money set aside at this point to pay off debts and make some small expansions. Ideally, you’ll have enough money set aside so you don’t actually have to live on instant noodles. But these early gains are a big move in the right direction, and as long as you keep working hard, it likely won’t be long before the cash flow is significantly increased.
Corporate Profitability
Anyone who starts up a business is probably dreaming of corporate profitability! This is the point when a business begins generating a healthy amount of profit, allowing you to live the lifestyle of a successful businessperson, as well as granting you the capital you might need to reinvest in your company, or put into other new business ventures.
Once you reach this stage, it’s a good idea to take a little time to reflect on how you got here. Sure, enjoy yourself a little. But remember this is the business world and things can change fast. You’ve enjoyed a taste of success, and you likely want more. Stay focused and try to continue pushing your enterprise onto new and better heights.
Staying Humble
If you’ve made it to any level of profitability, you should be proud! You’ve shown that you can be a success in the world of business, and even if you’re only turning a small profit, you’re definitely heading in the right direction.
But it’s vital you don’t get ahead of yourself. Take some time to reflect on your journey so far and appreciate the fact that you can now meet your basic needs from the profitability of your business. What an achievement! To keep the good times rolling, be careful with how you proceed, and remember that things can change quickly when you take your eye off the ball.
More Factors to Consider
There are a huge number of different factors which can have an impact on a business’s early profitability. Startup capital, your field of business, and current market conditions all play their part. If you’ve started a business when the national or global economy isn’t doing so hot, it makes sense your business might be a little slower to turn a profit.
It’s important not to see other businesses in a vacuum. Sure, some might have turned a profit more quickly than yours, but if they were facing the same conditions your business is, things might be different. Just remember that business is a highly changeable game and while the stats and numbers can give you a basic indication on what to expect, they shouldn’t be taken as gospel.
Start-Up Funding
The level of funding your business receives on starting out can have a huge impact on profitability. While large amounts of funding can be helpful, paying back big investments may mean it takes you a little longer to make a profit. Factor in your start up capital along every step of the way.
Protecting Yourself
Hopefully you didn’t jump straight into the business world expecting to make an immediate profit. Very likely, you put a little money aside to help you ride out those rough early days. But business is a tough world, so it’s a good idea to have as much protection as possible.
If you haven’t yet established your business, it’s important to give yourself a layer of protection before you start. Having some insurance to help you will give you a little peace of mind and allow you to take the rough with the smooth. Business insurance can be a great idea, helping protect your enterprise from financial shocks.
Speedier Profits
Certain types of business are quite naturally more suited to making quick profits. Obviously, enterprises with lower overheads can hang onto profits much easier, as well as riding out the tough times. An online business offering out a simple service, for example copywriting, graphic design, or transcription, might employ their workers as freelancers, meaning they only have overheads beyond the minimum when work is coming in.
Of course, some businesses may be unable to take advantage of minimizing their overheads during quiet spells. If your business doesn’t lend itself to this model, there’s not much that can be done. But it’s good to remember this is another reason some businesses are quicker to reach a profit than others.
Keeping Positive
Perhaps you’ve been running your business for a few months or even a year and you’re yet to see a profit. Although this can be a tough time for you and your family, it’s important to remember that this is a perfectly natural stage in the journey of any entrepreneur. Rome wasn’t built in a day and even the huge multinational corporations you see bringing in billions of dollars weren’t immediately profitable.
It’s important to stay focused and keep pushing through the hard times. Working through the early months or years when things might be a little difficult helps to build character and one day you’ll be able to look back on these days with pride, remembering how you worked through a difficult situation to build yourself up as a successful businessperson.
When it comes to business, it’s important to have as much information as possible to ensure your enterprise is a success. Want to learn more about how to not only make your business profitable but also use technology to compete against and eventually beat much larger competitors? Keep up with us at David versus Goliath podcast for more great tips.
