- 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.
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, 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