What Leads to Profitability? In a New Survey, Successful Business Owners Share Lessons Learned
Four years seems to be the magic number for reaching profitability -- or else figuring out why you're not there yet.
The entrepreneurial journey can be exciting but also one filled with missteps and regrets. While some mistakes are unavoidable, business owners can reduce their learning curve by following wise advice from those with seasoned experience and long-lasting success. Who are those people? Their peers.
That was the idea behind a new survey by our company, Kabbage. In collaboration with the small business research firm Bredin, we polled 500 small business owners in nearly every industry across America and across the various life stages of a business. Our findings revealed what we consider valuable lessons on key, growth-producing moves by small business owners.
These are moves that could give newer entrepreneurs actionable knowledge.
Finding 1: What it means to be "in the black"
So what’s the benchmark time frame for turning a profit? A resounding 84 percent of our respondents stated that they had achieved profitability within the first four years of business and that they viewed this window of time as critical to prove that their business was, and is, built to last.
While overnight success isn't commonplace, a surprising 68 percent reached profitability within the first year while 16 percent did so between years one and four. Only 8 percent reached profitability after their fifth year in business, and only 7 percent of respondents said they still were not profitable.
The strong indication was that the first four years are truly make-or-break years for any new company.
Still, it's worth noting that these levels of profitability varied among 23 of the top industries in America that took part in the survey. While some entrepreneurs in fields such as medical equipment, personal services and publishing said they had yet to reach profitability, other industries, including advertising/marketing services, architect /engineering, automotive and banking/insurance reported having reached 100 percent profitability.
Two notable industries -- restaurants and retailers -- showed more staggered growth on their path to profitability; the reason might be both industries' highly competitive and seasonal nature.
The takeaway. Regardless of the industry, the four-year mark is a good time to take stock of yourbusiness. Is it profitable? Is it close to that status? If not, business owners should consider changes to their business model, from finding new ways to acquire and engage with customers, and reducing operational expenses, to changing products or services, or perhaps even hiring more employees.
Whatever the solution, the four-year factor in entrepreneurship common among our respondent may be helpful for you to compare your business against.
Finding 2: What "the cost" of doing business actually costs
The survey also uncovered a disconnect between business owners’ personal expectations, versus real-life examples of the costs and the level of credit required to do business.
Respondents stated that they needed to access as much as $10 million of working capital during certain phases of their business, to support growth; the majority said they actually needed less than $500,000. However, these entrepreneurs as a whole fell short of anticipating the amount of capital their businesses would use in the future, versus the amount established businesses actually borrow:
- 27 percent of business that that were in their first year (at the time of the survey) didn't think they'd need to borrow funds -- whereas, 38 percent of older companies borrowed in their first year
- 57 percent of businesses that were in their first to fourth year of business didn't think they'd need to borrow funds -- whereas, 29 percent of older companies borrowed between their first and fourth years
- 50 percent of businesses that were in their fifth to ninth year of business didn't think they'd need to borrow funds --whereas, 26 percent of older companies borrowed between their fifth and ninth years
- 74 percent of businesses that were in their tenth to 19th year of business didn't think they'd need to borrow funds -- whereas, 17 percent of older companies borrowed between their tenth and 19th years
- 84 percent of business that were in their 20th-plus year of business didn't think they’ll need to borrow funds --whereas, 14 percent of older companies borrowed during these years.
- Years 20-plus: 14 percent accessed capital -- versus 84 percent who expected to borrow
The finding: While the need for capital declined over time, a sizable percentage of businesses in the survey still required access at every age of the business.
Overall, there was a misconception of how much money companies believed they'd need in order to build a long-lasting company. As many as 67 percent of respondents said they would not need to borrow capital in the remaining years they expected to be in business; and 84 percent expected to be in business from five to 20-plus years.
Even though most businesses reach profitability in their first four years, our research showed that businesses still needed extra capital for unique opportunities or challenges they encountered This might mean capital to bridge cash-flow gaps, make strategic purchases, increase marketing spend or open new locations.
The takeaway. To reach high growth, capital is a vital tool to help you scale your business and take advantage of unique business opportunities.
While reaching profitability is a commendable achievement for any business, owners may find extra capital a great help for something like a wave of marketing initiatives if their acquisition of new customers has slowed or the retention of existing ones is not at the level needed.
Our research made a case for starting and building marketing programs early, even when budgets for these steps are minimal or nonexistent. In that case, a focus on PR, customer reviews and social media can help. These alternative forms of PR can help an owner make a big impact, just starting out, because online outreach helps the owner tell his or her unique story to a broad audience at a low cost.
Small businesses can also use Facebook as a customer-relationship management tool. It's the perfect forum to both build a one-to-one experience with customers and to demonstrate to potential customers how responsive those businesses are to their needs.