Starting a New Business? Plan to Make $0 for The First Few Years. It's Normal.
It would take Facebook 5 years to book a small profit in 2009
How long does it take for a business to make a profit? This is a question we hear entrepreneurs ask all the time. Perhaps, this is one that you are currently pondering yourself. Most of us go into business, if for the first time, with lofty expectations. Expectations that typically have very little basis in reality, but rather fueled by emotions and blind pursuit of success.
The reality is, profitability is somewhat of a distant goal, for any business. Did you know that all things being equal, it takes the average startup anywhere from 2 - 3 years to show a profit? Amazon operated at a loss for most of its history. It would take Facebook 5 years to book a small profit, a milestone the company cleared in 2009.
So you see, when starting a new business, you have to plan to operate at a loss for at least the first two years, and thus all your planning should reflect and lay out a plan to fund the business while you grow your customer base and flush out your brand identity.
Setting yourself up for success
The best thing you can do to start the planning process for your new business is to clearly identify what you consider "profitability" to be. Will you consider your business profitable when you can pay all expenses plus yourself? Or will you say you are profitable at a point when you can pay all expenses, plus tax, payroll, and put a little bit in the bank? This question is important as it will help you know how to setup your financial models.
To set your self up for success, I recommend taking the time to write out a detailed business plan. Be sure to include any outside funds you would like to raise. I also strongly recommend having two pitch sheets, one for yourself and your team, and the other for potential investors or strategic partners.
The internal one should go into detail about how you plan to grow your business plus any proprietary advantages you may have. The other should just give a broad overview of your mission, vision, and plan.
Others may disagree with me on this but I value your financial forecasting/pro forma above all other planning documents. For me, here is where I get to see if I can invest in a business idea or not. Oh, I should also mention that I do not like to start any venture without knowing I can piece together the funding ( initially and ongoing) till profitability. But that's just me. I do not like Hail Mary situations in business.
Here, it is best to create various scenarios for cash flow, revenues ( starting at $0 ), future loans, outside investments, etc. Take inventory of how you will fund this business until it is able to stand on its own.
Using Live Plan to build these financial models is the best way to go. For $20/mo you will have access to the company's powerful business planning tools.
There are three ways to measure profitability: for the principals, for the investors and for the business as a whole. Consider they hypothetical case of an entrepreneur who leaves a $50,000 salaried job to start a business. In the first year the business clears $125,000, which becomes the entrepreneur's salary.
The business as a whole shows no profit, as that salary is another business expense, but the entrepreneur she has profited well from the startup. Likewise, payments to investors can be structured so they're earning interest even when the business is officially breaking even or losing money.
You really need to have a marketing plan
Start out with a solid, practical plan on how you will get the word out to your prospective customers about your products and services. After carefully analyzing your market and clearly identifying your target audience, i.e who in the market place consumes products like yours, or could benefit from your offering, not who you would like to buy your product. You want to map out a multi-platform marketing campaign approach.
If your target audience is younger, then you want to invest most of your resources to communicate your value proposition via digital marketing. Building a robust social media and email campaign strategy is the best way to go here.
Mailers and just straight up calling people up works with an older, more rural audience. Yes, people out in the country still talk on phones. Be prepared to invest heavily in marketing, and I advise having several types of marketing campaigns running simultaneously at all times. Make adjustments in your financial forecasting to cover the cost of marketing on an ongoing basis.