Is Your Business Profitable? Let’s Discuss
It’s easy to get caught up in the day-to-day responsibilities of running a small business and forget to spend much time looking at the big picture. But it’s necessary to regularly take a step back and evaluate how it’s really going, especially when it comes to profitability. In other words, is your business actually making any money?
If you’re used to seeing cash flow in on a regular basis, you might assume that your company is profitable. But there are instances when this might not be the case. Read on to learn more about profitability and how to tell if your company is on the right track or not.
How Long Does It Take To Become Profitable?
If you’re wondering how long it takes for a company to become profitable, it’s important to realize that there isn’t a specific amount of time set in stone that applies to all businesses. Instead, it can vary and is dependent on the type of company, the industry it’s in, and the market it serves. However, there are industry standards that you can use to get a general idea of how long it may take for your company to move into the black (research these standards and then use them as benchmarks).
Also, keep in mind that it’s not at all unusual for it to take multiple years for a small business to become profitable. In fact, it’s not unheard of for it to take as many as three to five years to reach this milestone. So, if you’re in the situation where you’re not quite there yet and you’re only a few years in, keep going!
Believe it or not, some companies operate for many years without even breaking even. They can sustain this for quite some time if they have access to credit and enough cash coming in to run their daily operations, but in reality their sales have not exceeded their expenses and other financial obligations.
How Can You Tell If Your Business Is Profitable?
It may seem obvious, but not everyone is aware of what it means for a business to be profitable. To break it down into simple terms, if you have sales that means that you’re making money. To be profitable, however, those sales need to exceed your operating expenses, personal living expenses (e.g., salaries of all the owners), taxes (both business and personal), health insurance premiums, savings, and retirement funding. (Refer to this post for more in-depth information about what it means to run a profitable business.)
To figure all this out, you’ll need to refer to your company’s financial statements, especially the balance sheet, to see if you have enough cash and assets to cover all of your debt and expenses. Looking at this while considering the true definition of profitability will tell you if your business is truly profitable or not.
Tips To Improve The Profitability Of Your Business
While there’s no magic wand, there are some things you can do to improve the chances that your business will end up in the black. These include:
Maintaining a sound accounting system.
Looking at and understanding your financial reports on a regular basis.
Setting frequent financial goals. (You might not always meet your goals but having them gives you the opportunity to update or extend them so you’re still making progress versus not having any goals and just randomly seeing where things end up.)
Creating and sticking to a business strategy (and then revising it as needed).
Implementing the Profit First™ methodology of managing cash flow.
A Final Word From Tuesday Brooks Founder of AJOY
It’s essential that you regularly remove yourself from the daily grind so you can spend time looking at your company’s finances. Allocate time for this because knowing whether your business is profitable or not (or when it might reach this milestone) will help you make wise decisions (after all, this is your livelihood!) And if you haven’t reached profitability yet, hang in there! You can do this! Sometimes it just takes some time.