How do you create a truly profitable business model?
We’ve recently had some big reminders that while hyper-growth and raising big sums of money can seem cool, it is risky for everyone involved if there isn’t an underlying profitable business.
You might be able to get away with operating in the red for a while. Though, having true profitability, or at least the ability to move back to profitability in a week, will make all the difference in your company’s ability to survive. This is especially true during big economic pivots, industry changes, and one-off natural disasters. In order to keep thriving, you have to be able to survive too.
The Reality Of Starting A New Business
As alluring as the big numbers can be, the reality is that most new businesses take a while to be profitable. According to The Balance Small Business, this is typically six months to several years. Most are losing money during this time.
This makes one of your top priorities as a new entrepreneur and business owner - figuring out how you will have the finances to cover this period on the journey to a profitable business.
You may have your own cash, partners, or need to raise capital. It can be hyper valuable to consult with a business coach or fundraising expert before you launch to make sure you are thinking through the math well. And, to get insights on what you don’t know that you don’t know.
Be wary of counting on credit. Credit is elusive in tough times. When it hits the fan, credit lines can be cut short quickly. Just when you needed to tap them. Do have credit and vendor credit available. Just don’t bank everything on it.
So, what can you do to be different, map a path to profitability faster, or even start out being profitable from day one?
Good Financial Projections
While it is true that many plans will change as you go along, it is smart to lay out some initial financial projections. Almost everything may change in a matter of months as a fast-growth startup. Yet, without some eye on the financials, you just have no idea if you can survive and how much money you need to stay in business from month to month.
It’s smart to start out with financial projections for:
Annually for the first 1-5 years
Monthly for the first 12 months
Cash flow analysis and needs by month
The three big dangers here are:
Overlooking how big your customer acquisition and revenue goals need to be to make ends meet
Going broke in your best month, because you can’t afford to fulfill orders
Not budgeting enough for marketing to keep revenues coming in
Make sure you include great graphs of your financial projections in your business plan which you will use as a road map to guide your execution and also as the document to raise capital from investors.
You can learn how to write a business plan with the video below.
Get The Right Financial Tools & Help
Most small business owners get bogged down by bookkeeping. They either neglect it, and just try to wing it. Or they waste too many hours on it, when they should be focusing on the business side. Most will lose many thousands of dollars in missed tax breaks. Even if you are an accomplished and quick accountant, you owe your business to work on the highest value tasks. This isn’t it.
Instead, find seamless and intuitive bookkeeping tools that you will actually use, without being a time drain. Then, use a virtual bookkeeper to stay on top of monthly tasks. Turn those records over to a real CPA and accounting firm to get the most value.
The less debt and equity partners you take on in the early days, the most financial surplus you can have. Some startups will need to raise capital. Others can make do without it, until they have reached milestones which will enable them to raise much more, on better terms, without giving up so much of the company.
One of the great things about going through crises is that it makes you see how much you can do with what you already have. It makes you resourceful. You start focusing on that MVP, and MV everything. That doesn’t mean to be cheap. Just be conscious of every dollar spent.
Build In A Financial Cushion
Build a sustainable financial cushion into your pricing model and profit margins. Use the good times to steadily contribute to your capital reserves and emergency funds, for the leaner years.
Budget for the unexpected.
Get Revenues Upfront
The most obvious way to de-risk your venture and ensure profitability is to get revenues upfront. Sell it, then build it. Get customers to finance the development. They may even become your best and biggest investors.
Avoid the temptation to splurge and take on more overhead in good times. If you don’t need it, you need to not do it.
That includes taking on physical office space, heavy salaries and benefits packages, advertising expensive perks, buying private planes, and so on.
Commit To Crazy Good Customer Service
Be so good they will miss you. Be so good you win their loyalty, referrals, and want to keep supporting you through a crisis.
This isn’t just about growth and scaling up or expanding into new territory in good times. It equally means being able to scale down quickly in leaner times when markets are contracting. Be able to scale up without taking on extra fixed and long term overhead. Use freelancers and the cloud to stay nimble.
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs.
Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online.
Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).
Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and at NYU Stern School of Business.
Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.