There are a lot of ideas about how long it should take for a business to become financially self-sustainable. I’ve heard people say that it takes anywhere from 3 to 5 to 10 years to get a business off the ground.
Most of those ideas come about to justify the poor performance of a floundering business.
The other thing we have to throw into the mix is; what’s the definition of a success business? To that, I have to answer … cash is king. If you’ve got a positive cash flow, you might not be a runaway success yet, but at least you’ve got a stable foundation to build from.
Having a positive cash flow means the business is financially supporting itself, without the need to raise additional capital to continue operating. It doesn’t mean that you have necessarily recovered the entire initial investment injected in to get the business going. It means more money comes in every month than goes out.
Further injections of capital at this point are only needed for expansion and growth.
The Time It Takes To Build A Business
There’s an old axiom:
The first year you lose money, the second year you break even, and the third, you make money.
It’s an old axiom because it’s survived the test of time. It’s practical. Planning a business with the goal of reaching positive cash flow in 12-18 months is on the aggressive side of this axiom. And if you’re business plan says this isn’t do-able, you need a new plan.
It would be great to be profitable a lot sooner. And the sooner, the better. Next month would be great! But every new business has its own quirks and problems. There’s a huge learning curve when starting any new business, even when you have extensive experience.
And the bottom line is, you can’t go into this with so few resources that you have to fold up the tent after a month or two if you’re not a huge success. Cause chances are, that’s exactly what will happen.
The Danger Of Taking Too Long To Turn A Profit
Over time, all sorts of things begin to conspire against you. Here are a few:
- You may run out of capital, and may not be able to raise more, or not in the quantities required to break through the barriers to profitability.
- There’s a cost to capital. The longer you need to borrow money or tie it up, the more it costs.
- Significant changes in the economy can occur over time such as inflation, changing interest rates, or market shifts. And technological changes can render a lengthy business strategy useless because it couldn’t possibly foresee or predict the changes.
- Dwindling motivation and gradual acceptance of the status quo.
The Best-est, Simplest-est Strategy For Success
There’s another old axiom:
Go big or go home
This is a bad axiom for business. It’s a business killer.
Too often, businesses start too large. For example, they purchase or lease a building that is too large and too expensive for the amount of sales they are reasonably able to secure within the first year or two. Large capital assets like this are a huge financial drain.
Your purchasing has to reflect your real sales potential. It’s better to have the problem of having to move later, once the business has solid cash flow, than to fail because the sales are not growing quickly enough to pay the rent.
Everything you purchase should be sized and priced to fit your worst case sales projections for the first 12-18 months. Plan on suffering through the growing pains. If you don’t have enough space … perfect! If you’re pushing your equipment to the max … awesome!
These are the kinds of problems we like to have.
They mean you’re on the right track.
This subject is a little above my knowledge, however I would have a hard time getting motivated if I didn’t feel I could have a positive cash flow pretty quickly. I think a lot of business hopefuls make the mistake of taking on a bunch of debt up front, expecting to be able to pay it off easily when things start rolling…..then when it doesn’t, they’re in a mess.
Anthony,
What I’ve written here is a good solid foundation for starting the average business.
Small or micro businesses can achieve profitability pretty quickly. A lot of these start out as hobbies that people have (like blogging). They’d be doing them even if they weren’t making money. The incentive of getting paid for doing something you love just ratchets up the commitment and output.
Micro business entrepreneurs can do well because they usually don’t invest anything extra into the business and keep the overhead super low. Which is a great way to start small and grow with the flow … cash flow that is!
i agree, businesses like blogging (if a blog is monetize) definitely starts as a hobby. little or no startup costs.
“Your purchasing has to reflect your real sales potential”
true, simple but true, and too often overlooked, people wanna go big right from the start, it’s ok to start small 🙂
Hey Jon,
Not only is it okay to start small, it’s critical. Can’t tell you how many times I’ve seen people go big … and then go home because of it. The only way to go big and not go home is to have a boatload of capital and a generous selection of heavy hitters on the sales team.
Great post…It’s said that most businesses fail within the first 3 years of opperations. And yes, people shouldn’t expect a positive cash flow the first year…although that would be nice 😀
Yeah Gregg,
My stance is that 95% of businesses fail. Most within 2 to 5 years, but there are a few stragglers that hang on barely for maybe even 10 years.
There are a lot of different numbers out there, but when you add up all the great business ideas that people invest a few bucks into but don’t get off the ground … they’re not really listed in any stats … so 95% is not out of the realm of reason.
Anyway, it’s definitely MOST. And it happens simply because the costs are greater than the revenues. Which is either starting too big or not getting out and bringing in the sales.
It can take a lot of time, you just have to have patience.