When Will My Business Start To Make A Profit?

You’ve just started a business – congratulations! It takes a lot of courage to get this far, so it’s a real achievement. The next step is turning your start-up into a stable, profitable success. We’ll explain how to measure your profit, and when you can start to expect it.

What actually is profit?

Profit is the financial gain you’re left with after paying all your business costs and expenses, and this is the magic number you’ll be taxed on. It sounds simple enough, but you’ll see start to notice different types of profit pop up once you get into the nitty gritty of your Profit and Loss reports. Especially if you’re working with an accountant.

Knowing the difference between each definition is crucial if you’re hoping to avoid chaos. And by chaos we mean no money, or worse, taxes you can’t pay and business debt.

Gross profit versus net profit

Which one will I pay tax on?

The answer is actually somewhere in the middle! You’ll be taxed on the total income your business makes, minus any expenses, allowances, or other types of tax relief. In very basic terms your taxable profit is everything you earn, minus everything you pay out (except tax).

How long does it take for a business to become profitable?

You might not like the sound of this, but most startup businesses typically take 3 years to start showing a profit. This is on average though, and the time it takes you to become profitable will vary depending on all sorts of factors. For example, the type of industry you’re operating in can affect how much you’ll need to spend to launch, and what you can expect to make and spend on an ongoing basis.

That’s not to say your business can’t become an overnight sensation, especially with businesses blowing up on the likes of Tik Tok and Instagram every day.

But a word from us first. If you are ‘planning’ on going viral, for example with marketing strategies and influencers, make sure you’re prepared to scale things up quickly so you can meet demand! You don’t want to give your nemesis the satisfaction of framing any negative reviews. A detailed business plan will help you set realistic goals.

What does breaking even mean?

In financial terms it means your business is now making enough to cover its expenses. This is a huge achievement for start-up businesses. It’s like when you go the races and get your drinks money back in winnings. Who doesn’t love that?

We get you’ll be pretty eager to start making a profit once you hit this point, but remember how huge this milestone is. Give yourself a pat on the back, and take a breather. Only for a minute or two though. Got work to do.

How do I become and remain profitable?

There will always be months that do better than others. But the high you get from your first month of breaking into a profit is a high no business owner wants to come down from. Whilst this isn’t entirely possible, and your business will go through slower periods, there are things you can do which will help you remain profitable overall.

Know your numbers. Get to know them really well. No guessing. This isn’t Cluedo. Or bingo. The diagram below shows the relationship between different financial reports in your business.

Track everything

Ignore the fact that recording everything is in fact a legal requirement (but only for the purposes of us making this point). Keeping excellent financial records helps you track what does well in your business. You’ll know when and where you’ve made a profit or loss.

Review this information regularly to keep on top of everything. Bookkeeping software (like Pandle, hi there) can help you with this. No humble brag, just facts.

Cash flow forecasting

Cash flow forecasting is bookkeeping’s answer to Mystic Meg. This type of financial reporting uses trends from previous financial periods, and any information available about upcoming financial commitments (like supplier invoices or wages you need to pay), to predict how much cash will be available at a point in time.

The idea is that comparing what you’ll need to spend in a few months’ time against how much you expect to earn will help you make sure you can pay your bills when the time comes. It makes it easier to spot issues affecting your cash flow. For example, a dependency on one supplier. Or that one client who is consistently late paying their invoices.

Cut unnecessary costs

How many subscriptions are you signed up to that are a ‘just in case you need them’ kinda thing? Or how many are languishing in the corner, unused and semi-forgotten? We hate to say it, but they’re eating into your profits. Do a thorough run through of your outgoings and be ruthless about what you need, and what you don’t.

The same goes for your suppliers. Paying the same firm you’ve used every month since the day you launched might seem less hassle, but it’s always worth shopping around for a better deal. Even if you just use it to negotiate, rather than actually moving somewhere new.

And whilst you’re at it, cancel that gym membership. You know you haven’t stepped foot in there since 2020.

Diversify your revenue where you can

Relying on a single client, product, or stream of income is risky business (literally). To ensure you have a fruitful stream of income you can:

Understand business expenses, tax reliefs, and allowances

If you’re nervous about what you can claim as a business expense, speak to an accountant. They will almost always save you more money in the long run, and will help you claim everything you’re entitled to.

You don’t want to purchase something huge and forget to deduct it from taxable profit, or splurge money somewhere to find it isn’t tax-deductible.

There may be reliefs you’re entitled to which will change the decisions you make about your business. For example, you might be reluctant to take on an employee until you realise you’re entitled to the Employment Allowance to reduce the amount of employer’s National Insurance you need to pay.

Taking advantage of knowledge like this means more profit for you, and more reliable business decisions all round. Sounds alright to us.

Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.