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How Long should it Take for a New Business to Become Profitable?

That is a question I get a lot. There is really no correct answer, but the sooner the better. After all, no one wants to run a business that loses money over the long run. When we are looking at reaching profitability, we need to look at the two major drivers. Revenues and expenses.It is extremely important to look at the point of becoming profitable business  before one decides to start a new company.

As a new business starts growing, revenues will start expanding. As long as revenues are higher than expenses, the business is profitable. It is that crossover point when revenues eclipse expenses that we consider the point of becoming profitable. The lower the expenses for the business the easier to get to this point.

That is why it is a wise idea to keep the expenses of any new business to the absolute minimum. Once money is flowing in one can decide to spend more on further expansion or any other necessities.

Certain businesses have different expense ratio requirements. For example, a restaurant has a very large expense ratio. Rent, salaries, perishable food items make it very hard to reach profitability. That is why most restaurants fail within a year of opening.

Low overhead businesses, like a recruitment agency or a software development company that can be run out of the spare bedroom, can become profitable after the first sale as the overhead is practically zero.

A simple spreadsheet can help model different scenarios. But regardless what business it is and how it is implemented the old adage of Keeping the Overhead Low should always apply. If it does, then just Sell, Sell and Sell to bring in the revenues.