Startup Company and Profit
In this article, we’ll cover:
- How Long Does It Take a Business to Be Profitable?
How Long Does It Take a Business to Be Profitable?
Two to three years is the standard estimation for how long it takes a business to be profitable. That said, each startup has different initial costs and ways of measuring profit. A business could become profitable immediately or take three years or longer to make money.
PROFITABILITY BASED ON BUSINESS TYPE
Entrepreneur estimates that businesses making a new product take at least three years on average to become profitable. There’s the cost of adding a partner or experts to the payroll to produce products as well as marketing costs, among other expenses.
Occasionally, a company makes a profit from a new product before three years. But these instances are rare; most owners need to be patient and wait.
On the flip side, a home-based online business may generate a profit immediately as it requires little money to start up. An online business only requires an internet connection and a computer—or even just a tablet or smartphone. Not all online businesses will generate instant profit though, as marketing and product costs can add up.
For inspiration, read up on these profitable business ideas you can run from home. Some you can even start without any money at all.
Each business’s profitability timeline will differ so it’s important to do the math to see when your business will make money.
A break-even analysis is a standard part of every business plan, meaning it’s done before the business is even launched. The U.S. Department of Commerce recommends this free online calculator to figure out your break-even point.
DEFINITIONS OF PROFITABILITY
Whether a business is profitable or not depends on who’s asking. For example, a company makes $100,000 from sales in its first year. It has $100,000 in expenses so it breaks even.
To an outsider, this business isn’t making a profit. But, say the owner made $40,000 in their previous job. They receive the $100,000 in revenue, which is profit to them. And if investors are able to receive interest, they might consider that the company is profitable, as well.
That said, an owner shouldn’t take a large salary, especially in the first year. It’s more important to reinvest that money back into the business to stimulate growth.
It’s also important to know the difference between “ramen profitability” and actual profitability. Ramen profitability means the business can support its owners financially (though barely). Online or home-based businesses that take little money to start up can reach ramen profitability quite quickly.
Actual profitability means that the founders can take healthy salaries, with enough cash leftover to show a profit in the books. Still, what profitability means to you depends on your goals as a business owner and what success means to you. Some owners want good salaries and don’t worry about appearing profitable on paper. Others, especially those looking for investors, will want a formal profit.
How Do You Know If Your Business Is Profitable in the First Year?
There’s a simple formula to determine if your small business is profitable in the first year:
Revenue – Expenses = Profit
If it’s a positive number, that’s profit. If it’s a negative number, your business is sustaining losses. If your number is zero, you’re breaking even.
For example, a business with income of $100,000 and expenses of $60,000 is making a profit of $40,000 per year.
Most small business owners can’t expect profit in their first year, though—it can take up to two to three years to make money.
Tracking profit is even easier with an accounting system—this article looks at the most popular methods of keeping the books. Accounting software will generate a profit and loss statement for your business, with profit as the last line on the report.
It’s important to not only look at profit by year, but by month. You want to know how your profit is trending—whether it’s the same month-to-month or if it’s increasing or declining (and how rapidly). With this knowledge, a business can correct course to improve profitability. Get in the habit of checking the previous month’s profit on the first of every month.
For more tips on determining profitability, read this small business guide.
What’s the Average Profit for the First Year in Business?
Most businesses don’t make any profit in their first year of business, according to Forbes. In fact, most new businesses need 18 to 24 months to reach profitability. And then there’s the reality that 25 percent of new businesses fail in their first year, according to the Small Business Administration.
Even companies that turn a profit may lose it in their first year when they invest back in their business by hiring new people or expanding their product or service offerings. And then there are taxes to pay on any profits you do make.
Here’s another way to look at it: Payscale estimates that small business owners make an average of $40,000 per year in their first five years of business. Salary isn’t dependent on profit, though. An owner can still draw a salary while their business suffers losses.