As a small business owner, one of the things you worry about is if your business is profitable, whether you are making money. You are aware that the survival of your small business is dependent on your making money and money importantly, make enough profit after expenses.
The financial definition of profit is the balance of total revenue less than your total expenses. So the question that comes to mind is, How does your small business become profitable and how long might that take?
Look out for answer to this and many others in this article. But first, what is a small business?
- What is a Small Business?
- How Long Does it Take For a Small Business to Become Profitable
- How to Know if Your Small Business is Profitable
- 20 Most Profitable Small Business Ideas
- How Does a Small Business Become Profitable
What is a Small Business?
A small scale enterprise, or more simply, a small business, is one marked by a limited number of employees and a limited flow of finances and materials.
Clearly, Google, General Motors and Wal-Mart are not companies that anyone would mistakenly label a small enterprise. By the same token, it’s just as obvious that a one-person home business, or a mom-and-pop corner candy store are the epitome of a small business. But where does the boundary lie?
What is a reasonable definition of small business? What number of employees or what level of activity is sufficient to distinguish a large scale company from a small-scale business?
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There is no single cutoff to distinguish small from medium or large businesses. Different government agencies and private organizations rely on different sets of criteria when talking about a small enterprise.
In some cases, industry sector matters as well. A 250-person company in the automobile industry, say, may be considered small while a similar sized firm might be categorized as a medium-scale operation in another sector, such as clothing manufacture or legal services.
So too with annual revenue. A company doing $5 million a year in sales might be labeled a small business in some contexts but not in others.
How Long Does it Take For a Small Business to Become Profitable
It takes two to three years for a business to be profitable on average. When a company starts to make profit depends on how high its startup costs are.
The more capital a business needs upfront to provide its products or services and the higher its salaries, the longer it will take for a company to become profitable, according to the Houston Chronicle.
Two to three years is the standard estimation for how long it takes a business to be profitable. That said, each startup has different initial costs and ways of measuring profit. A business could become profitable immediately or take three years or longer to make money.
Profitability Based on Business Type
Entrepreneur estimates that businesses making a new product take at least three years on average to become profitable. There’s the cost of adding a partner or experts to the payroll to produce products as well as marketing costs, among other expenses.
Occasionally, a company makes a profit from a new product before three years. But these instances are rare; most owners need to be patient and wait.
On the flip side, a home-based online business may generate a profit immediately as it requires little money to start up.
An online business only requires an internet connection and a computer—or even just a tablet or smartphone. Not all online businesses will generate instant profit though, as marketing and product costs can add up.
For inspiration, read up on these profitable business ideas you can run from home. Some you can even start without any money at all.
Profit Calculator
Each business’s profitability timeline will differ so it’s important to do the math to see when your business will make money.
This formula is called a “break-even analysis,” according to Forbes. It will reveal how much revenue you need to cover your expenses and when your business will generate that revenue.
A break-even analysis is a standard part of every business plan, meaning it’s done before the business is even launched. The U.S. Department of Commerce recommends this free online calculator to figure out your break-even point.
Definition of Profitability
Whether a business is profitable or not depends on who’s asking. For example, a company makes $100,000 from sales in its first year. It has $100,000 in expenses so it breaks even.
To an outsider, this business isn’t making a profit. But, say the owner made $40,000 in their previous job. They receive the $100,000 in revenue, which is profit to them. And if investors are able to receive interest, they might consider that the company is profitable, as well.
That said, an owner shouldn’t take a large salary, especially in the first year. It’s more important to reinvest that money back into the business to stimulate growth.
It’s also important to know the difference between “ramen profitability” and actual profitability. Ramen profitability means the business can support its owners financially (though barely).
Online or home-based businesses that take little money to start up can reach ramen profitability quite quickly.
Actual profitability means that the founders can take healthy salaries, with enough cash leftover to show a profit in the books. Still, what profitability means to you depends on your goals as a business owner and what success means to you.
Some owners want good salaries and don’t worry about appearing profitable on paper. Others, especially those looking for investors, will want a formal profit.
How to Know if Your Small Business is Profitable
There’s a simple formula to determine if your small business is profitable in the first year:
Revenue – Expenses = Profit
If it’s a positive number, that’s profit. If it’s a negative number, your business is sustaining losses. If your number is zero, you’re breaking even.
For example, a business with income of $100,000 and expenses of $60,000 is making a profit of $40,000 per year.
Most small business owners can’t expect profit in their first year, though—it can take up to two to three years to make money.
Tracking profit is even easier with an accounting system—this article looks at the most popular methods of keeping the books. Accounting software will generate a profit and loss statement for your business, with profit as the last line on the report.
It’s important to not only look at profit by year, but by month. You want to know how your profit is trending—whether it’s the same month-to-month or if it’s increasing or declining (and how rapidly).
With this knowledge, a business can correct course to improve profitability. Get in the habit of checking the previous month’s profit on the first of every month.
Most businesses don’t make any profit in their first year of business, according to Forbes. In fact, most new businesses need 18 to 24 months to reach profitability. And then there’s the reality that 25 percent of new businesses fail in their first year, according to the Small Business Administration.
Even companies that turn a profit may lose it in their first year when they invest back in their business by hiring new people or expanding their product or service offerings. And then there are taxes to pay on any profits you do make.
Here’s another way to look at it: Payscale estimates that small business owners make an average of $40,000 per year in their first five years of business.
Salary isn’t dependent on profit, though. An owner can still draw a salary while their business suffers losses
20 Most Profitable Small Business Ideas
Starting a business is not the end of the journey; you still need to make sure it grows and stays healthy by making regular investments.
Because if you don’t put any money into your business, it will definitely stagnate, and, if you fail to do something about it, you might have to face closing your business.
All small businesses are ruled by one simple law: “It takes money to make money.”
So, once you start your business, always keep in mind that you should always plan for inversions, even if these mean getting external funding.
Here we will provide you with a comprehensive list of the most profitable businesses that are currently thriving.
1. Online courses
It’s a no-brainer. Any form of education is commonly considered as priceless. Think of running an online course – teaching a second language or even English (particularly for immigrants), news writing, design, SEO techniques.
The possibilities are endless, depending, of course, on your area of expertise. You can provide a course on real estate brokering or the stock market, auto mechanics, or any subject a student is interested in learning.
This is a profitable business venture, and once you establish a base of students, it can be one of the most profitable businesses since the overhead expenses are meager.
You could work out special arrangements with other digital content companies that can provide you with tools to help carry out your lessons.
The most costs involved in this would be the minimum amount you pay for your domain name and hosting space or the fee a digital content outfit will charge you for featuring your course in their platform.
2. Tutoring Center
With the increasingly demanding and competitive lives we’re leading today, students in their formative years are almost always compelled to excel in their studies.
Parents are aware of this. They generally don’t mind spending money to help their kids achieve good academic standing – reason enough to make starting a tutoring center a pretty profitable business. If you are or have been a teacher, this is the type of business that’ll be right down your alley.
Some people may simply require a background or some experience of helping someone get through his/her school test requirements. If you’ve got some specialized skills (Math, foreign language, creative graphics, etc.), it’ll help promote your business and start getting students right away.
It’ll be good to locate your tutoring center in the vicinity of a big school where you can hand out fliers and install posters or small ads.
A tutoring program for a student running for 8 weeks with 1- 3-hour sessions typically comes with a fee ranging from $500 – $1800. That accounts only for one student: definitely, this is one of the most profitable businesses you can consider.
3. Catering services
Like the previous one, you don’t need a large investment to start your own catering business. If you have a suitable kitchen, equipment, and a recipe book worth-sharing, you can operate your service from home.
If you are extremely well organized and can count on a pair of extra hands to help you (as well as suitable transportation), this is a good way to set foot on the food industry.
Think that those requesting catering are willing to pay well for this type of service since it serves in celebrations, important events, or meetings.
If you are willing to maintain a high standard not only in your food but also in your customer service and every single small detail, this could be one of the most successful and most profitable businesses for you
4. Travel Agency
This is probably one of the easiest industries to get into. Not a lot of investment is required. It’s a great business opportunity to help people get their plane tickets or arrange for other transportation options, hotel reservations, tours, and much more.
By tying up with a host agency, you could open up a home-based travel agency. You should obtain your IATA (International Air Transport Association) and your ARC (Airlines Reporting Corporation) numbers. These numbers allow you to issue air tickets while earning a commission.
With tourism on the upswing in most parts of the world, getting into this travel business should prove to be one of the most profitable businesses.
5. Real Estate and Real Estate Brokering
If you have an extensive network, this business is especially for you. Apart from setting your own schedule and working on your own time as a realtor, you can also acquire a broker license and establish a brokerage firm. Brokers act as an intermediary between sellers and buyers.
With an average net profit margin of 17.4% for leasing and 14.8% in sales, real estate has a lot to offer, and once you have acquired experience, it can turn to be one of the most profitable businesses.
6. Gardening & Landscaping
If you live in warmer weather states, gardening can be a lucrative business. Take it a step further and go for landscaping — you’ll not only be contracted by homeowners but also by hotels and larger businesses who love a beautiful outdoors.
Because no commercial space is required outside of storage space, it’s possible to start a landscaping business with a modest investment of up to $15,000 for landscaping equipment.
7. Business Consulting
If you’re an expert in your industry and have been working at it for years, consider consulting. Consultants who are most successful tend to embark on the journey later in their careers, have niche expertise, and are incredibly organized and well-connected.
Plus, they know how to scale a business and have the keys to keeping clients happy. Just like other types of freelancing, being an independent consultant is a business and requires networking and negotiating.
8. Website Design
This falls into a more I.T category, but it’s worth highlighting. Provided you are technology savvy and creative; this could be an excellent choice to run one of the most profitable businesses.
Every single company, big or small, has its own website, and the demand for a good website designer is only increasing. Consider the low cost of starting your own website design service company, since you can run it from home.
If you think you need some extra education on technology, you can find a course that suits you on this list.
9. Handyman
You’d be surprised at the number of individuals who don’t know how to change a light bulb — or simply don’t have the time! If you’re an expert at building and know your way around a well-manned home, this is the job for you.
Handymen are usually paid by the hour and can have multiple clients at once. You can also partner with larger handymen companies as an employee or franchisee partner, meaning they will take a percentage of your pay, but give you loads of work in return, generally.
10. Party Services
We all love a good party, and even better — a good party planner. Even in times of economic despair, weddings and birthday celebration still happen.
Party services can be flexible and versatile, covering planning, catering, bartending, and serving, among other functions. Since you can use contractors for most of these services, the overhead costs can be as low as you negotiate them.
11. Personal Training
If you have a passion for helping others feel like their best self, personal training is the route for you. This is last on the list because although it is a booming small business field, it’s also not a field for those who are shy or not willing to get out there.
It’s all about networking and sharing your passion. Helping others look better is not a simple task, so be proud of your work, get out there, and train hard.
12. Food Trucks
A few years back, consumers were hesitant to buy food from a truck parked in a parking lot. Now, there are actually food truck festivals for foodies who can’t get enough.
If you have a mouthwatering recipe and want to make a business out of it, the days of brick-and-mortar are over. You can pick a truck, paint it your favorite color, and get to ridin’ and cookin’.
Before you begin considering a food truck business, head to your local health department to inquire about the required permits. In addition to being a street food vendor, you can offer your services to cook for weddings, barbeques, festivals, and other celebrations.
13. Auto Repair and Auto Leasing
Car emergencies happen 24/7: oil needs changing, headlights go out, you get a flat tire, you name it. Reportedly, auto repair companies made big bucks in 2019, according to National Business Capital & Services.
On the other hand, with the rise of ride-sharing companies like Uber and Lyft, consumers are more hesitant to buy cars. This doesn’t necessarily affect the auto repair services industry in a negative way since older cards in households need more maintenance and repairs than brand-new automobiles.
14. Marketing & PR Services
Speaking of marketing services… every brand has a story, but not every business owner knows how to tell it. Here is where marketing gurus enter.
Marketing & PR professionals have the skill-set and tools to tell your brand’s story and make sure the right audience hears it. It is an ever-changing field with the rise of influencers and the decline of print media, but lucrative nonetheless within the new avenues that are at the marketer’s disposal.
15. Freelancing
This can go many routes: graphic design, freelance writers, and social media gurus. The outsourcing services are continuing to make a difference in the way companies interact with their employees.
Which means more opportunities for freelancers to take on projects. Websites such as UpWork and Creative Circle make it much easier for freelancers to become visible.
16. Copywriting
For the past couple of decades, the increasing number of hours people spend on the internet has raised the demand for quality web content. This is where somebody with a true talent for language and creative imagination can succeed as a copywriting entrepreneur.
Good copywriters create advertising and marketing materials that a lot of online and offline businesses need. What’s more, you don’t have to have a big, expensive commercial space as most copywriters work from their homes as freelance writers with practically no overhead expenses.
17. Property Maintenance
Are you a handyman (or woman!)? If you can multitask and are willing to get your hands dirty, this could be a good choice for you.
There is, and there will always be a demand for people who can repair lighting, fix plumbing problems, clean gutters and pools, paint fences, replace doors and carpets… you name it.
While the hourly rate for property maintenance is not high, this can turn into one of the most profitable businesses if you live in an area where apartment complexes and rentals abound.
18. Cleaning Services
Other than the right attitude, you don’t need much to start this business. All you need is basically some good cleaning equipment and products, a vehicle, and a catchy website to attract potential customers.
If you already do your own cleaning at your own home and people praise your place for being spotless, why not turning this into one of the most profitable businesses you can find?
19. Delivery Services
Some restaurants or other local businesses in your area may provide a delivery service to customers. If you go this route to start a profitable business as a self-employed delivery person, other than a reliable vehicle, you don’t need a large budget.
However, make sure you research the demand in your area. And of course, that your vehicle (car or motorcycle) is in excellent condition and up to date regarding inspections.
20. Courier Services
A courier service is a service that allows someone to send a parcel or consignment from one location to another.
Courier services are distinguished from ordinary mail services by features such as speed, security, tracking, signature, specialization, and individualization of express services, and swift delivery times.
Delivery doesn’t cost much — other than gas. However, getting contracted by a large firm, such as Amazon, can prove to be profitable for couriers.
You can even go fully independent if you have established the right connections of people who will use your services, especially if your fees are more affordable than the fees at larger companies.
Some entrepreneurs love the idea of running a brick and mortar store or physical location. Others would just rather manage their business from their homes.
You can stay home and still have a profitable business; you just need the drive, the creativity, and, of course, the right idea. If you’re one of those creative minds ready to start a business from home, there are several business ideas that you can choose from.
How Does a Small Business Become Profitable
Small businesses can struggle with profitability for a number of different reasons. They keep prices too low. They focus more on big picture ideas than real consumers. They have way, way too many expenses. The list goes on and on.
But even if your business doesn’t make a lot of money early on, the goal should eventually be to sustain operations and earn a profit. Sam Pillar, CEO of scheduling software provider Jobber, provides some insights.
In order to accomplish this, you need to follow the tips highlighted below.
Calculate The Cost of Your Business
Before you focus on increasing profits, you have to know where you’re starting from. That means you need to know all of your costs.
And don’t just calculate general expenses either. You also need to know how much your regular activities are worth to your business.
Pillar explained in an email interview with Small Business Trends, “Profitability isn’t rocket science — it’s about the relationship between revenue and expense. Getting a very accurate view of what’s referred to as “unit economics” — what the entire revenue and cost chain looks like at a micro level (e.g.: how much a minute of drive time costs, the revenue yield on a specific piece of machinery, etc.) — is essential to supporting the business.
Getting clear, accurate and real-time visibility to your unit economics is key. When owners can find the bandwidth to focus and spend their time on the things that matter, they tend to be able to make good decisions.”
Automate Some Processes Where Possible
Since some of the low value or mundane activities you want to cut out are essential functions, you need to find ways to accomplish them without spending tons of time on them. That’s where automation software and online solutions come into play.
Pillar says, “Automating those out frees up much needed time to work on the business, instead of in the business. A key development over the past number of years for small businesses has been the emergence of mobile solutions to these essential, but low value activities, enabling businesses to manage their team, their clients and their billings from nearly anywhere, and often in a single platform solution.”
Don’t Spend Too Much Time on Low Value Activities
Once you know what your time is worth, you can focus more of your time on the things that actually drive results to your business. That means cutting out the things that don’t add much in the way of value.
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Pillar adds, “Running a small business is an all-encompassing world — once the company starts to grow, the biggest mistake people make is spending too much time on essential, but low-value activities.
A great example is things like payroll, accounting, invoicing, scheduling — all activities that are essential, but can often consume way too much time for a business owner, the employees, and their office staff.”
Analyze Your Finances Regularly
Once you have systems in place for tracking things like time, expenses and earnings, you need to keep an eye on those things regularly. Analyzing any changes can help you determine what’s working for your business and what isn’t.
Carry Your Team Along
However, there can also be tons of waste when it comes to how your employees spend their time. So you need to also find ways to keep track of this and hold people accountable.
Pillar says, “For many small businesses, the single biggest expense is people. Salaries and related compensation is only one factor employers need to consider; the time and effort those employees consume can spell lost revenue and profitability for business owners if it’s not spent efficiently.
In service-driven companies, especially those that do work outside of their own offices, factors like drive time and fuel costs are fairly well understood today.
Track Your Time
You also need to know exactly how you spend your time if you want to eliminate other types of waste in your business. Use a time tracking software or keep track manually so you can get a good picture of what’s happening.
Don’t Undercharge Customers
One of the major mistakes businesses make that leads to low profits is undercharging. If your prices are so low that you can barely cover expenses, you might want to re-think your offerings to make everything more sustainable.
Focus on the Big Picture
Once you make your business more efficient in terms of the day-to-day operations, you can then focus more on the important, big-picture things that go into running a successful business.
“Many customers believe that the most difficult parts of the business involve working on the tough stuff — finding good people, retaining them, acquiring more customers and managing their brand.
These are the important, rather than the urgent, things for a business owner to be working on — automating out the menial stuff can be very liberating, and impactful to the business overall.”
Don’t Go After Every New Opportunity That Sounds Exciting
New opportunities can really help to grow a business. But that doesn’t mean you should always chase after the next big thing. Carefully research and consider the risks involved with new opportunities before pursuing them so you don’t end up wasting tons of time and resources.
Focus on Providing Great Service
No matter what type of product or service you offer, providing a great experience to customers should always be a top priority. Doing so can help you build repeat business and even gain referrals, which essentially serve as free marketing.
Pillar says, “Do everything in your power to absolutely delight your customer. Going above and beyond to deliver an amazing customer experience increases the chance of repeat bookings, and might inspire your customer to recommend your business. These are both positive levers on the unit economic model of a business.”
Finally
It is one thing to recognise what needs to be done and it is great if you make the commitment to implementing the changes. The problem is that as well as making the business decisions you also need to act upon them.
Create simple, easy to understand plans and communicate them with clarity and passion. Then take the massive action required to make the difference needed.
This is not about small, nervous, tentative steps but it is about boldness and passion – a great combination. When properly done, all these steps will contribute to the overall success of your small business.
