There are many, many moving parts to any business, and small businesses are no different. When a new business is launched, whether by a first-time business owner or a veteran business owner, one of the first questions on the business owner’s mind concerns business profit and will likely be, “when will my business be profitable?”.
It’s certainly a fair question considering the initial outlay and time involved in setting up and launching a successful new business. New business owners are certainly well within their right to want to know with as much accuracy as possible when their new business will start making money. Business profit in the first year can vary, and business owners shouldn’t read too much into the profit figures for their first year in trading.
However, arriving at the answer can be easier said than done, because there are lot of variables and moving parts that go into determining the answer. As such, the average time for a business to break even can vary, as can the average time for a business to become profitable.
Different industries move at different paces, and no two small businesses are ever exactly alike. Building a successful small business in any industry is marathon, not a sprint. So treat it as such, and don’t feel dismayed or disappointed if you don’t turn a profit in your first year or two in business.
Defining profitability
There are different interpretations, or levels, of profitability, for small business owners. Say your small business does $200,000 in sales for the year, but it’s total expenses for the year are $195,000. Yes, you’ve made a profit and technically your business is profitable.
But in business, real, tangible profitability is when you as the business owner (and your co-owners, if you have them) can pay yourselves healthy salaries, while still having adequate cash in reserve to show a profit in your books.
That being said, what profitability means to you will depend on your own business goals as a business owner and what success looks like to you. Some owners want to take decent salaries and aren’t too concerned about appearing profitable on paper. For other business owners, such as those looking for investors, demonstrating a formal profit is essential.
Profitability depends on business type
The profit a business makes is determined by the revenue it takes in minus what it spends as costs. A small business owner only starts to make a profit once they’ve paid all of their overheads and taxes. So clearly, the more cost-effectively you can run your business, the faster your business will be able to become profitable.
Recommended reading: Which Business Structure is Right for Me?
On the other hand, a business owner with high manufacturing costs, commercial spaces, and a larger number of employee salaries to pay, can take longer to turn a profit.
Three steps to make your business profitable
1. Get creative with reducing your overheads
You don’t need to focus all of your attention on sales to become more profitable. Redirect some of your efforts to reducing your overheads. And you can get creative here too – use refurbished electronic goods such as laptops and mobile phones instead of brand new hardware.
You may even turn your whole business operation to a remote working model, which will save you save untold amounts of cash you were spending on leasing office space, paying utility bills, and on office furniture.
2. Sell smarter
If you are struggling to find realistic and practical ways to reduce your overheads, then it may be time to look at the other side of the coin and instead focus on growing your revenue. Keeping a close eye on monthly revenue trends, you will be able to precisely tell what is working and what isn’t working in your business and make profit-boosting adjustments.
Growing revenue from sales isn’t always easy to do, but focus on these three time-proven methods for increasing profit for your small business:
- Raise your prices: It can be easier to increase your pricing by 10 per cent than to reduce your costs by the same amount.
- Increase sales volume: Sell smarter by building a pipeline of prospective customers while at the same time incentivising existing customers to buy more from you.
- Take on customer feedback: Incorporating customer feedback can help you add more value to your product or service. And more customers will soon follow as a result.
3. Embrace outsourcing
Paying an expert to handle tasks you don’t like or aren’t knowledgeable about can be a much faster way to profitability than doing it all by yourself. Outsourcing you accounting is a great place to start.
As you consider strategies for making your small business more profitable over the long-term, it’s important to remember that as the business owner you will also benefit financially from safeguarding your business from risks. A great way to do that is to invest in small business insurance*.
At BizCover we’ve created a truly quick and simple way to get your small business insurance online. Visit BizCover.com.au or give us a call 1300 920 864 to see how we can help protect your small business.
