When Do New Businesses Reach Profitability?
You’ve started a business, and you’re making sales — it’s only natural to wonder how long it will take until your business becomes profitable, but unfortunately there isn’t a clear-cut answer. Profitability can be measured in different ways, depending on your business structure. However, there are some things to consider that can help you estimate a timeline.
Investopedia defines profit as “a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity.”
In a business’s early stages, it’s common for the owner to take a small draw and invest profits right back into a business. As a result, the company isn’t profitable on the ledger. However, a company can be successful when it shows little to no profit if it’s growing quickly and reinvesting in their growth.
The need to get to profitability also depends on your goals. If you’re looking for investors, partners or traditional business loans, it may be more important to demonstrate a profit. However, if your goal is to simply live off of the proceeds of your business, you may find that drawing a competitive salary lowers your profits but sustains your standard of living. It may not be necessary for you to demonstrate a profit, and it can minimize the taxes your company pays.
Estimating a Timeline
While your measurements may vary, business owners want to see a steady income flow that demonstrates sustainability. A survey by the small business lender Kabbage found that 84% of small business owners reach profitability within the first four years of business. This window of time was considered to be a good standard for measuring a business’s chances for longevity.
The survey also found that 68% of small businesses were profitable within the first year, but it can vary greatly across industries. Advertising and marketing services, architects and engineers and banking and insurance become profitable the fastest — medical, personal services and restaurants take the longest, mostly due to the highly competitive and seasonal nature of their industries. To estimate how long it will take to get your business to profitability, using industry-wide data and benchmarking can help you understand what to expect.
Increasing Profits Quicker
To reach a profit, business owners need to stay apprised of income and expenses, optimizing revenue while reducing costs. On the income side, review your pricing strategy to ensure that your products and services are profitable and competitive in the marketplace. Set monthly sales goals or income projections to stay focused on building your earnings instead of becoming sidetracked by day-to-day operations.
On the expense side of the equation, review your spending regularly to ensure that each item brings value to your business. Routinely check that you’re getting the best rates on items such as phone service, office supplies and printing services. Before paying annual fees to professionals or organizations, make sure that you’re getting a good return on the investment and utilizing everything the membership has to offer. Ask your employees to suggest ways in which your company can reduce waste and control costs; they may have insights that you don’t. By reducing your monthly bills, you can boost profits.
Tools That Can Help
Finally, make sure you have the right tools in place to keep your business running smoothly. The Kabbage survey found that 27% of business owners didn’t think they’d need to borrow funds in their first year, yet 38% of those same businesses ended up needing to borrow funds that same year. The need for capital often declines over time due to growing revenue, but 14% of businesses operating for 20 years or more still required access to additional funds.
Plan for financial needs by setting aside money or applying for funding before you need it. This will enable you to handle an unexpected cash flow issue, as well as make a large purchase, market to new customers or expand your business when the time is right.
Longterm Benefits of Profitability
Being profitable is proof that your business is healthy and sustainable for the long term. Not only is it good news that you’ve created a successful business, but it’s also a sign of stability that the employees and customers who’ve come to count on you will appreciate.