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What Kind of Profits Can I Expect?

  • When your company might achieve profitability and what profit margins you can expect
  • For those starting, managing, or expanding a business
  • Different definitions of profitability and margins

One of the top goals for any entrepreneur starting or expanding a business is to achieve profitability. Once your revenues exceed your expenses, you can use them to further invest in your company or enjoy higher earnings for yourself and your employees.

Reaching profitability takes patience, as it often takes several years to reach this point. Entrepreneurs should also be aware of the different types of profit margins and what they might expect as a typical margin for their industry.

Profitability timeline

It’s unrealistic to expect your business to be profitable right away. Considerable expenditures are needed before you can launch for tasks such as product development, building a staff, and marketing. It will also take some time before your company develops a customer base and a reputation enabling consistent or growing sales.

Two to three years is standard for reaching profitability, but this timeline can vary from business to business. Home-based companies or others with minimal overhead may achieve profitability more quickly. The timeline will also depend on factors such as total startup costs and the amount of money regularly paid to the entrepreneur, employees, and investors.

Business planning involves the calculation of a break-even point, where a company generates enough revenue to cover expenses. You don’t need to wait until this point to collect earnings from your business. Even if you’re recording losses on paper, your expenses can include a personal salary as well as payments to investors at a fixed rate.

Avoid drawing a high salary early on, and consider reinvesting early profits back into the business. One strategy is to draw less than your former salary in the first year, a salary equal to your previous job in the second year, and a higher salary in the third year.

“Ramen profitability” is an informal term for companies that are doing well enough that their founder can live on the profits, as long as they maintain a spartan lifestyle. Corporate profitability, or the ability to sustain a comfortable income based on your business’s profits, is more likely to be the goal that you and your investors pursue.

Profit margins

Profit margins, calculated as a percentage, include:

  • Gross profit margin, or the difference between the cost of providing a product or service and the price you set
  • Net profit margin, or difference between overall expenses and overall sales
  • Operating profit margin, or the difference between day-to-day expenses (excluding non-operational costs like taxes and debts) and revenues
Calculating each margin provides different types of valuable information. Gross profit margins offer insight into which products or services are most profitable, while net profit margins give you an overall picture of the company’s financial health. Operating profit margins show what sort of earnings you are generating from your daily activities.
Profit margins vary from industry to industry. The more overhead costs and expenses involved, the lower the profit margin will be. However, you shouldn’t get discouraged by a lower margin; your actual earnings will depend on your sales, so generating a high tally of sales with a low profit margin can still lead to success.
Margins will be impacted by other factors, such as the need to hire more staff when expanding your business’s territory or offerings. This can also result in a lower profit margin even as it offers the potential to boost your earnings.
If you are not satisfied with your profit margin, you can develop strategies to improve it. These might include eliminating poorly performing products or services, finding ways to reduce operating expenses, raising prices when necessary, and taking steps to improve customer retention.

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