On Jan. 28, 2004, InfoWorld reported that the previous year’s fourth-quarter earnings reports were in. The results revealed that Amazon had officially recorded its first profitable year in the company’s history.
That was a full decade after Jeff Bezos founded Amazon in 1994.
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The moral of the story is that — even if you have the greatest business idea in a century and you execute everything perfectly — if you’re not prepared to be patient while waiting for profits to start rolling in, you had better be prepared to be disappointed.
What Makes a Business Profitable?
The profit motive is the foundational 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 an idea so brilliant that it will etch their name in history forever like Ford and Rockefeller. Underneath it all, however, all entrepreneurs at the end of the day go into business to make money.
There’s a simple way to know if your business is profitable. When you subtract all your expenses from all your revenues:
- If the remainder is positive, you’ve turned a profit
- If the remainder is negative, you’re facing losses
- If the remainder is zero, you’ve broken even
One of the most important things an entrepreneur can do is identify the business’s break-even number, which determines how much revenue a business has to earn to negate its expenses and not incur losses. The two biggest factors that will determine how long it takes to turn a profit are start-up costs and start-up capital. Entrepreneurs who go into a venture with a lot of cash and low expenses will be profitable more quickly than those who start a business with steep expenses on a shoestring budget.
Keep in Mind, Profit Is Different Than Growth
In the decade that Amazon remained unprofitable, the company was growing in leaps and bounds — and Jeff Bezos was hardly starving to death. Both the business’s owner and its investors can take profits even when the company is not profitable on paper. If a business earns $80,000 in profits in its first year and the owner takes that as a salary, for example, the business has not turned a profit, but the owner is doing fine. If the business breaks even — or even if it loses money — investors can still reap interest payments.
On Average, It Takes a Couple Years — Maybe More
Generally speaking, the average business doesn’t become profitable for two to three years. But in almost all cases, the wise businessperson would never follow the previous example of the entrepreneur who took the full year’s profit as a salary.
It’s just not good business.
Bleeding revenues to finance the founder’s lifestyle during the birth of a business is a recipe for disaster. Most entrepreneurs — at least those who value survival — reinvest almost all profits back into the business in those crucial first few years, even if it means living off savings or working a second job. There’s a formula here, too.
According to Chron, it generally goes like this:
- Year 1: Entrepreneurs draw a lower salary than they earned the year before
- Year 2: Entrepreneurs draw their former salary
- Year 3 and beyond: Entrepreneurs draw a larger salary and begin taking profits from selling shares or other ownership perks
All of this, of course, is contingent upon things going well. Many business owners follow their dreams, make the leap, take the risk and never experience the joy of seeing it all come to fruition in the form of profit. But if profit is even remotely possible, there will always be a crafty and optimistic entrepreneur willing to chase it.
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Last updated: June 22, 2021