There’s a big difference between generating revenue and generating profit. As a business owner, your goal is simple: generate more revenue than you spend on expenses. Doing so leaves you with a profit—and that’s what you need to grow your business.
This leads to an important question: at what stage of growth is a business profitable?
As you can imagine, the answer varies from one organization to the next. For example, if you’re a solopreneur with few expenses, you may be able to turn a profit shortly after launching your business. Conversely, there are globally recognized companies—such as Uber—losing a lot of money every year.
To answer this critical question, you must first understand the five stages of business growth.
During this stage, you’ll constantly face the same question: can you land enough customers to become and remain a viable business?
It’s possible to become profitable during the existence stage, but it may not be your primary goal. Even if you’re losing money, you should still have a clear view of your revenue and expenses.
If you reach the survival stage, you’ve proven to yourself and the market that your business is workable. You have enough customers to generate the cashflow needed to sustain your business. Profitability at this stage is more likely than the previous stage, but you may not be there just yet.
Set a goal of generating enough revenue to break even. If you’re already there, turn your attention to boosting profits as you grow. You’ve made good progress, so you don’t want to make decisions at this point that could drive you out of business.
Congratulations! This is the stage where most businesses find they are profitable. Now, you have a big decision to make: do you keep your company stable and profitable, or do you follow through on an expansion plan?
Expanding quickly can cause more harm than good, so carefully examine your situation and only take calculated risks.
Your business is profitable and you’ve decided to take it to the next level. This leaves you with questions such as:
Since your business is growing rapidly at this stage, you will need to figure out a plan that will allow you to finance that growth.
You’re still profitable, but that doesn’t mean you’re on easy street. There’s a lot to think about, such as whether or not you have the staff and financial resources available to maintain your growth without sacrificing stability.
Eliminating inefficiencies while maintaining your flexibility are crucial. Tools such as strategic planning, budgets, and standard cost systems are now more important than ever.
Now, let’s turn our attention to how to calculate profit.
In basic terms, profit is revenue minus expenses. So, if your company has a revenue of $500,000 and expenses of $300,000, then your profit is $200,000.
There are three types of profit :
Gross profit shows that you’re selling goods and/or services for more than they cost you. Operating profit shows that you’re making money after paying all expenses, with the exception of interest. Net profit shows that you’re making money after paying all expenses and taxes.
It’s important to understand all three types of profit, however, many companies focus primarily on net profit, as this is the amount of money that you truly get to keep.
Don’t worry if you have a lot of questions about business profitability and when to expect it. The truth of the matter is that there’s no defined answer. There are many factors at play.
Here are some questions you can expect to face:
Answering these questions to the best of your ability will help you make more informed and confident decisions regarding the future of your business.
While invoice factoring doesn’t directly generate revenue or profit, it does provide you with the opportunity to collect on accounts receivable in a more timely and efficient manner.
Here’s how invoice factoring can help your business become more profitable:
If you’re ready to use invoice factoring to your advantage, submit an application on our website today. Once you’re approved, we’ll work with you to seamlessly implement factoring into your current operating system.