If there’s one question that we hear more than anything else from our clients who are in a startup company, this would have to be the one. “How soon can I expect the business to start becoming profitable?” Of, course, that’s no surprise. I know you love your work, or you wouldn’t have started up the business in the first place. But of course, at some point, it’s going to need to start paying the bills, or at least paying for itself, or you won’t be able to stay in business.
In reality, there’s no simple, single answer to the question. It’s going to be different for every startup company. It’s going to depend on a number of factors, including the nature of the business, the state of the economy, and even how you define profitability. For example, an online retailer, which has relatively very little overhead, can expect to start becoming profitable much more quickly than a manufacturing company, which has much higher production and operation costs.
- “Ramen Profitable”
It’s important at this point to make sure that we have the same understanding of what it means to turn a profit. If we want to be technical about it, a profit is any money that’s left over, after you’ve paid all of your expenses. So your business will start becoming profitable at the moment at which your revenue begins to exceed your expenses. But let’s not kid ourselves here. There are different types of profit. You may have left your job, sold your most valued assets, and taken other big risks to get your startup company going. So, making “just more than your expenses” is not really going to suffice, is it? For this reason, some analysts use the term “ramen profitable” to describe a company that is just barely making enough money to cover basic living expenses, and that’s not what you took all this risk for. What you really want is to continue past this point to the next level, true corporate profitability.
- The Time Line To Profitability
An old “rule of thumb” of entrepreneurship was always that the owner of a startup company should expect to make less money in the first year of business than he or she did the year before in their job. Most of what you earn in that year is most likely going to be reinvested in the business. In the second year of the startup, the owner will hopefully be bringing home as much personal income as he did in his previous salary. By the third year, ideally, there will be greater income than one had before the business. It’s this last phase that most of us would make most of us feel that we’ve started to become profitable.
Keep in mind that no two startup companies are the same, and that there are other factors to consider, like how much startup capital is needed, and what, if anything, you need to pay out to investors or lenders during the startup phase.