Is it REALLY ok to NOT make a profit in your first year?!

I give a lot of talks on making a Healthy Income*. It’s my fave subject and something that I think is super-important. I’ve been thinking about all the questions I get asked and this is the one that comes up the most!

“I’m not making a profit but I’ve only been in business a year. That’s ok isn’t it?”

There’s always a bit of extra emphasis on the “isn’t it?”  which makes me feel such a meanie pants when I say “well it depends”. But it does. And here’s why:

What “profit” means

First of all it’s super-important to understand what PROFIT means. And I don’t want to get all accountant-ish, but here’s what you need to know:

Profit is your income less your expenses.

Income is pretty easy to work out  – that’s what people have paid you (or should have paid you if you’re still waiting on the money!)

Expenses are a wee bit more complicated. It’s everything you’ve spent BUT you want to take out of that the cost of stuff that you haven’t used up yet! So if you’re a jewellery maker and you have some silver on hand you want to take the cost of that OUT of your expenses. You might have also spent a ton on getting your logo and website done. You can take that out too! There’s a clever accounting thing that you do with costs like your website, computers etc to spread them over a few years but you can just ignore that for now.

The important thing to remember when working out your profit is this: you want to match your income with the cost of making that income. That means you can take out of your expenses the cost of stuff you haven’t sold or used yet.

Daisy and Poppy

Now, meet Daisy and Poppy!

They’ve both been in business a year.They both make Teddy Bears. They both sold $20,000 of Teddy Bears last year and both had expenses of $30,000. They both made a loss of $10,000 and they both ask “I’m not making a profit but I’ve only been in business a year. That’s ok isn’t it?”

Well let’s see shall we?!

Let’s start with Poppy

Poppy sold $20,000 of Teddy Bears and made a loss of $10,000. During the year she spent $30,000 like this:

At the end of the year Poppy had not used ANY of the leaflets and she had $6000 of materials left over too, plus she’d also paid for a website! This is all super important because it means she hasn’t yet USED all the stuff she paid for!

Let’s re-do her expense calculation to include only the costs of stuff Poppy actually used. That way we can see what it cost Poppy to operate her business this year:

So Poppy’s profit is now $20,000- $18,000= $2,000. She made a little profit. Hurrah!

Now let’s look at Daisy

Daisy spent her $30,000 like this:

She had no material, stuffing or decorations left over at the end of the year. All her costs related to the Teddy Bears shs sold in the year so she has nothing to “take out” of her expenses.

Daisy’s loss stays the same at $20,000-$30,000= $10,000

So, does it matter that neither Daisy nor Poppy made a profit in their first year of business?

Well…..

For Poppy it’s fine! She really did make a profit when we matched her expenses with her income. And she’s invested in useful stuff for the future: website, materials and leaflets. It feels like she’s on the right track. Yes?

But for Daisy, oh poor Daisy! Her costs, which were all incurred to make this year’s income, are just way too high. Unless she changes something her business is never going to make a profit. NEVER.  It DOES matter that she didn’t make a profit this year ‘cos its’ telling her something she needs to know. Her model – her way of doing things – Just. Doesn’t. Work.

It’s not the end of the road for Daisy. What she needs to do is to work out how to put her prices up and/or make her products in a less costly way, and/or be more efficient with her marketing.  Not easy I know, but better for Daisy to think about this NOW than in a couple of years time. YES?!

What about YOU?!

If you’re in your first couple of years of business and are wondering whether it’s ok that you’re not making a profit, you need to have a look at WHY you’re not making one.

1. Start by taking a look at your expenses. Like we did with Daisy and Poppy. Exclude the costs that relate to stuff that you’ve not used yet. Like stock on hand etc.

2. Now rework your profit with your “new” expenses figure. Do you still make a loss?

3. If you still make a loss have a big think about how you can make the day to day running of the business more profitable. Do you need to raise your prices, shrink your costs or both?!

In a nutshell you need to know the answer to this: Are you like Poppy and investing in the future? Or are you like Daisy with a model that doesn’t really work?!

*Little Note!

Making a profit is different to making a Healthy Income. Making a Healthy Income is about making a good profit per hour. You can work out your profit per hour using our little calculator halfway down the homepage.  In the first few years of your business you might work lots of hours, and that can make your profit per hour low even though your business is still profitable. True!

Want to know more about making a Healthy Income. Take a peep at our Kitchen!

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