Starting a business is a risky proposition.
It takes time, planning, preparation, perseverance, and copious amounts of hard work.
Sometimes, even that might not be enough. Around 20% of startups fold within two years. Upwards of 45% of new businesses shut down within five years, and up to 65% close before their tenth birthdays.
Barely a quarter of new businesses survive for 15 years or more.
The odds aren't great, and the risks are enormous, but that hasn't stopped entrepreneurs from throwing their hats in the ring.
The number of new businesses is growing: the Census Bureau recorded a record 4.4 million unique business applications in 2020, then another record-breaking 5.4 million applications in 2021.
While many of those businesses won't make it in the long run, many will succeed and grow into significant players in their respective industries.
Success is never guaranteed — otherwise, everyone would own a billion-dollar company — and it almost always takes time for new businesses to grow from part-time labors of love to profitable enterprises.
The question is: How long does it take for a new business to become profitable?
From Hobby to Job
A lot of new businesses start as hobbies.
Maybe you like making jewelry, or you've gotten good at sewing costumes over the years. You may have discovered you have a natural talent for baking or coming up with recipes for specialty chocolates. Maybe your friend was impressed with a website you made and offered to refer you to some other possible customers.
Hobbies may differ, but they're often the first step toward being full-fledged businesses: someone offers you money to do something you were doing for free.
Though there's much daylight between a one-off purchase and an actual business, your first sale is always an exciting development, a compliment, and a payday. It may take a while for a new company to become worth it once you factor in all the time and capital it may take to get it off the ground.
The Path to Profitability
There isn't a single answer to how long businesses take to start paying off; everybody is different! Some companies take longer to turn a profit than others because of their industry and startup costs. Different kinds of businesses require different amounts of capital and labor, and some need to reach a specific scale to become genuinely worth it from a financial standpoint.
Several different factors go into estimating how long a business will take to turn a profit.
- Startup costs
- Operating costs
- Required permits, certifications, and other bureaucratic costs
- Expansion costs
You can start some businesses with little more than your hands and feet.
Other companies require a large amount of spending upfront even to start operating. Recouping those startup costs may be a significant roadblock between you and profitability.
A dog walking business, for example, doesn't require much more than a phone, a few leashes, some plastic bags, and a decent pair of shoes. All the money you'd make would go straight into your pocket.
On the other hand, a snow plowing business can only get started once you shell out for a snow plow. Buying a good plow will be a significant expense, and even the detachable ones you can stick on a truck will set you back at least a few hundred dollars.
Part of every dollar you make will have to pay off that initial expenditure, naturally extending the time it'll take to turn a profit.
Operating costs include all the expenses you incur from normal business operations. It's a fairly broad category: the rent you pay on buildings or equipment, the overall cost of making and selling products, and anything that helps you keep the business running.
Say you're running a small bakery out of your kitchen.
The amount of electricity you use to make and bake your products, rental payments on any specialized kitchen equipment, the cost of the ingredients you use in your recipes, the packaging you use to ship your goods to customers, and paying for shipping is all operating expenses.
High operating costs aren't a big deal as long as you can sell your products and services for a profit.
However, it can be a problem during times of high inflation or input shortages. Rising operating costs will eat into your margins if you don't increase your prices to match, and increasing your expenses risks irritating or scaring off price-conscious customers.
Some products (and many services) benefit from Economies of Scale: the phenomenon wherein producing items or supplying services in bulk is more cost-effective than in small batches.
Say you've mastered the art of home brewing. Your friends and acquaintances are willing to buy your beer, and you can make a small profit on each batch.
Unfortunately, you're limited because you need more time and production capacity to produce and sell enough beer to make a significant profit.
You do a little digging and find out that you need an extensive facility with much, much bigger equipment to make enough beer to earn more than a bit of pocket money.
The only problem is that it will take way more money than you have access to for you to buy and rent it all.
Those costs are a massive, maybe even insurmountable, barrier between you and making a living off of your passion.
How long does it take for a new business to make a profit?
Many estimates say that the average startup will take between two to three years to turn a profit, but it depends on the type of business you're starting.
Companies with little to no capital requirements and operating costs will naturally turn a profit sooner, as will businesses with high profit margins on each unit or service sold.
The opposite is true of businesses that need a lot of capital and equipment to get started.
However, one thing is true of all new businesses: To succeed, you need passion, patience, and perseverance.