More than 80 percent of start-ups that fail do so because they don't have enough money coming in to pay their bills. Becoming profitable is important for you and for everyone who's invested in your company. It's hard to predict the average time for a new business to make a profit, but standard advice is that you should prepare to run three years before you reach that point.
TL;DR (Too Long; Didn't Read)
Different businesses face different challenges. A home business or an online company has fewer fixed expenses than a new manufacturer, so it's easier to become profitable sooner. The variables make it hard to predict the average profit of a first-year business or the average time for a new business to make a profit.
What Counts as Profit?
It's normal to measure business success by money. For a start-up, there's more than one benchmark to shoot for.
- The break-even point. This is the moment the money you're bringing in matches the money you're spending. Your business is no longer losing money. There's a formula you can use when making financial projections to calculate this point in advance.
- "Ramen profitable." This is when your business makes enough money to support you, as long as your living expenses are low. Plenty of start-ups don't make it to this point, so it's an achievement.
- "Corporate profitable." This is what investors, and a lot of owners, think of as profitable. It's the point at which you can make payments on debt, pay yourself a good salary and still have money left in the bank.
What's Considered a Good Salary?
Like the average time for a new business to make a profit, there's no absolute answer to what's considered a good salary. A salary of $50,000 or less is common in tech start-ups, for instance, but the pay scale goes up as the founder raises more investment money. If you're a sole proprietorship selling baked goods out of your home, it's unlikely you can afford that much.
Among the questions you should ask yourself:
- How much can your business afford to pay you? Suppose you start out with $600,000 in investment capital; after paying for equipment and deducting fixed costs, what will you have left?
- How long before you turn a profit? If you have $150,000 you can spend on salary and expect to turn profitable in the fifth year, the $150,000 is all you can spend on yourself during the first four years.
- What do your investors expect? Most investors figure as long as the money is there, $50,000 to $75,000 is reasonable. If you raise more, a higher salary is reasonable.
- Are you siphoning off money that could be better plowed back into the business? You need money, but so does your company. You have to find a balance that won't leave either of you starving.
Don't Just Guess
The average time for a new business to make a profit and the average profit of a first-year business aren't the standards you should be going by. What matters is how long your business takes to become profitable and having the reserves to keep going that long. One of the things to do before launching your business is project future profits:
- Research your industry until you know the market. Use that knowledge to project your future sales for the first one to three years.
- What's the cost of goods sold, the measure of how much it costs to make your product?
- What are your other expenses? These may include rent, payments on loans, accounting, website maintenance and advertising.
Your sales will give you your revenue. Subtract the cost of goods sold and other expenses and you get your profits or losses. Once you have an estimate of how long until you become profitable, you can use that to set your salary and answer investors' questions.
- StartUps: How Long Will It Take To Have a SuccessfuL Startup?
- Forbes: How Soon Can You Become Profitable?
- Quickbooks: How Long Before Your Business Is Profitable?
- Small Biz Trends: Start Up Statistics
- We Work: How Much Do Startup Founders Pay Themselves?
- Inc.: Most Startup Founders Pay Themselves This Totally Reasonable Salary
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com