The decision to start up a business is always an exciting one, but also one that carries a mix of risk and opportunity. Smaller, start-up businesses without the benefit of big investment behind them are at a natural disadvantage compared to bigger, more established businesses, but that doesn’t mean they are doomed to failure.
However, deciding to become your own boss and getting into a start-up isn’t something that’s going to be easy either. You have to adjust your expectations, especially when it comes to certain things bigger businesses take for granted, like profitability. How long will it take for your start-up to become profitable?
Define Your Terms
The first thing you need to do is define what you think profitability means for your company. At its simplest, it means you’re not making a loss, and you’re making more money than you’re spending. But your profitability will depend a lot on your commitments. If you’re running a business yourself, with your own money, you may feel obligated only to worry about ensuring your own financial commitments are met.
If, however, you’ve got some investors, whether this is friends, family, or business partners, then you must now take those investments into account and ensure some kind of return. So how your business is funded influences the way you define profitability.
The First Year Is Growth
Once you begin a start-up, your immediate goal should be growing that start-up, not your salary. As a result, it’s normal for entrepreneurs to take a decrease in wages from their previous job, even though they are controlling their own salary.
The reason for this is because deciding to pay yourself more now than what you made in your previous job can only hurt your business in the long run. By making the sacrifice of a lower monthly salary, and putting any available profits into the growth of the business, you can increase your potential to bring more business—and subsequently more profit—to your finances.
Profit Is Not Always Success
This means that in the first year or two, it may not be a good idea to be profitable! Corporate profits are determined by what money is left after all business expenses have been deducted. However, if you’re growing your business in the first year or two of a start-up, then much of the profit you made can be directed right back into business expenses; more employees, better equipment, or even investment in employee benefits to attract better talent.
This means that it’s possible for a business in the early stages to show a “loss” while experiencing tremendous business and growth.
When To Declare Profit
If you’re running a private start-up and answer only to yourself, you may never need to disclose large profits publicly. However, if you’re interested in bringing in further investments, this is when you should think about adjusting your finances, and setting aside some of your profit as corporate profit.
If you want to get even more business advice here, we can help. Call Smart Business Doctor now, or schedule a call with us for a free 15-minute business consultation. 866-797-0396.