On January 28, 2004, InfoWorld announced that the previous year’s fourth quarter earnings reports were available. The results revealed that Amazon officially recorded its first profitable year. in the history of the company.
It was a decade after Jeff Bezos founded Amazon in 1994.
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The moral of the story is that – even if you have the biggest business idea in a century and execute everything perfectly – if you aren’t prepared to be patient while the profits start rolling in, you better be ready to be disappointed.
What Makes a Business Profitable?
The motive for profit is the fundamental pillar of capitalism. Some entrepreneurs go into business because they want to make the world a better place with a new product or service. Others believe they have such a brilliant idea that it will etch their name in history forever like Ford and Rockefeller. Underneath it all, however, all entrepreneurs end up going into business for the sake of making money.
There is an easy way to find out if your business is profitable. When you subtract all of your expenses from all of your income:
If the rest is positive, you have made a profit
If the rest is negative, you face losses
If the remainder is zero, you have reached the breakeven point
One of the most important things an entrepreneur can do is identify the company’s break-even point, which determines the amount of revenue a business must earn in order to reverse its expenses and not incur losses. The two main factors that will determine how long it will take to make a profit are start-up costs and start-up capital. Entrepreneurs who start a business with a lot of money and low expenses will pay off faster than those who start a business with high expenses on a shoestring budget.
Keep in mind that profit is different from growth
In the decade that Amazon has remained unprofitable, the business has grown in leaps and bounds – and Jeff Bezos wasn’t starving. The business owner and his investors can take profits even when the business is not profitable on paper. If a business makes $ 80,000 in profit in its first year and the owner takes that as a salary, for example, the business hasn’t made a profit, but the owner is doing well. If the business breaks even – or even if it loses money – investors can still earn interest.
On average it takes a few years – maybe more
Typically, an average business only becomes profitable after two to three years. But in almost all cases the savvy businessman would never follow the previous example of the entrepreneur who took the full year’s profit as his salary.
It’s just not a good deal.
Bleeding the income to finance the founder’s lifestyle when a business is born is a recipe for disaster. Most entrepreneurs – at least those who value survival – reinvest almost all profits back into the business during those crucial early years, even if that means living off their savings or working a second job. There is also a formula here.
According to Chron, it usually goes like this:
Year 1: Entrepreneurs receive a lower salary than the previous year
Year 2: Entrepreneurs withdraw their old wages
Year 3 and beyond: Entrepreneurs earn a higher salary and begin to profit from the sale of shares or other property benefits
All of this, of course, depends on the smooth running of things. Many business owners chase their dreams, take the leap, take the risk, and never experience the joy of seeing it all turn into profit. But if profit is even remotely possible, there will always be a cunning and optimistic entrepreneur ready to chase it away.
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Last updated: June 22, 2021
This article originally appeared on GOBankingRates.com: How long does it take for a small to medium business to make a profit?