Editorial Team
5 min read
Most new business owners know they need to work toward one initial goal: to become profitable. Investors and lenders will want to know how long it will take for your business to be profitable before they offer financing. And, you’ll need to do some careful planning. On average, most new businesses take two to three years to become profitable.
When a business is profitable, that means that it generates more revenue (sales) than it spends (expenses). There are a few layers to this definition, so let’s dive deeper into what makes a business profitable—and how to get there.
What is business profit?
Business profit is a simple concept, but there are a few definitions that can help you figure out what levers to pull as you consider how to grow your business.
Profit, profitability, and profit margin are all part of the big picture. There’s a simple formula that can help understand the definition of profit.
Profit = Revenue – Expenses
When revenue covers expenses, profit is zero: this is known as break-even point. Profit can be calculated on an item-by-item basis or on a business level. Profitability generally refers to the state of the overall business, meaning total sales are more than enough to cover total expenses.
Then, there’s also your profit margin, which is expressed as a percentage. Profit margin indicates how many cents of profit have been generated for each dollar of sales.
Why is profit a good barometer of success? As a new business, you may start making money as soon as you open, with items flying off the shelves. These sales are great, but they don’t guarantee that you’re covering your expenses. It’s only when your total revenue is higher than your total expenses that your business is truly profitable.
The restaurant industry is one area where profit margins are notoriously thin. As a rule of thumb, two-thirds of restaurant revenue goes to cost of goods sold (e.g., the ingredients) and employee expenses (e.g., payroll). The remaining revenue must cover overhead with some leftover for profit. When all is said and done, most restaurants only earn 3% to 6% net profit.
In retail, high overhead costs and employee expenses can also create challenges. Certain products might be profitable, but the majority of your items need to turn a profit in order to cover your overhead. Retailers must carefully manage cash flow and be strategic about discounts to ensure they don’t undercut their profitability.
READ: 15 of the most profitable businesses to start
How to make your business more profitable
If you’re not satisfied with your profit margin, there are ways to move the needle in the right direction. Start by diving into your data. Clover Reporting offers real-time insights into sales trends and data, including key information about your cash flow that can illuminate whether your business is trending toward profitability.
Clover Reporting can also track sales by item and give you item costs, so you can identify your profit margins on a deeper level. See what items are both popular and have a high-profit margin—those products or services are where to focus your marketing efforts. In addition, look out for items that aren’t worth their investment, either because they don’t sell or cost more to make than they’re worth.
Then, look for ways to maximize your cash flow. This could include expanding into new revenue streams or offering a different pricing model, such as a subscription or membership payment plan.
Revenue is only part of the equation, so you should also look for ways to streamline costs. Automate manual processes, reduce hourly staff during lulls in the business day, or eliminate services that aren’t frequently used.
What makes a business profitable? Customer retention
Every business (especially new ones!) needs to attract new customers. But, existing customers are behind every successful company. Consider some of these statistics:
- Increasing customer retention rates by 5% is shown to increase profits by 25% to 95%;
- Acquiring a new customer can cost up to five times more than keeping an existing one;
- Repeat customers spend 33% more than first-time customers.
Maintaining a loyal customer base can help keep sales consistent over time. Focus on incentivizing customers to visit your business—without adding costs that can eat into your profitability. Clover’s Customer Engagement Suite offers a powerful toolkit integrated with Clover’s POS systems to help build your customer list, reward loyal customers, send timely promotions to drive sales, and continually foster long-term value.
It can take time to build a loyal customer base and to become a profitable business. Clover can help keep you on track, optimize your pricing model, and keep costs down so your profit margin continues to grow. To learn about other ways in which using the right POS solution can help you build a profitable business, talk to a Clover Business Consultant today.
This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.
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