Starting a business is a challenging journey, especially for first-time founders who are often juggling multiple roles. Losing sight of the main objective – profitability – is an easy pitfall to fall into. In the first one to three years of business, it is common to show a loss or break even on tax filings as companies focus on growing their brand.
While this may result in low to zero tax payments, it is crucial for business owners to avoid the catch-22 mindset of purposely breaking even or overspending to avoid taxes. Without the guidance of a financial advisor or a background in business, this may seem like a favorable option, but it can ultimately hinder the long-term success of the company and its eligibility for secure funding options.
Profitability is a crucial factor in accessing traditional forms of business lending, such as Small Business Administration (SBA) loans, lines of credit, or even personal loans used for business purposes. A business must demonstrate profitability on their taxes or show they can personally guarantee the loan. Banks and lenders won’t go off profit and loss statements because they fluctuate.
A common misconception many first-time founders have is believing venture capitalists will invest in their company simply because they have a good idea or have been in business for a while and have sales. Shows like Shark Tank, though entertaining, add to this false narrative.
“Unfortunately, too many small companies focus solely on sales, without even understanding if they are profitable. No matter how great your idea is or how high your sales are, if you aren’t profitable, it doesn’t matter,” says Lori Williams of Business Simply Put LLC.
Here are five actionable steps to help you achieve profitability and increase your chances of securing funding for your business.
1. Lower Expenses
As a business owner, letting go of someone can be challenging, but if you can’t afford certain roles, it is essential to take over for the time being. Consider which positions, freelancers, or subscriptions you can cut back on to reduce expenses.
When it comes to vendors, negotiate rates by shopping around for lower prices. If your current vendor cannot match the same pricing, it may be time to change. While switching suppliers can be difficult at first, it can ultimately lead to increased profitability in the long term.
2. Increase Sales
Although it may seem like an obvious step, increasing sales is often overlooked when a business owner is wearing multiple hats in the early stages of their business. However, there are feasible ways to boost sales. If you have a product-based business, consider reaching out to more wholesale accounts or listing your products on wholesale websites.
Leveraging your network through LinkedIn and contact list can also help you connect with potential customers or peers who can introduce you to the right people.
A proactive approach to boosting sales can be highly effective, and email marketing and SMS are among the least expensive marketing tools. Creating strategic campaigns offering discounts and valuable information can incentivize consumers to purchase from your business.
Lastly, consider raising your prices. Founders often avoid raising prices or charging for shipping, for fear of losing customers. While this fear is understandable, not having healthy margins could be a significant factor preventing a business from being profitable.
3. Seek Reputable Financial Guidance
Building a successful business requires sound financial management, but not every business owner can afford a full-time CFO. Fortunately, there are resources available to help you navigate the financial side of your business.
The Small Business Development Center (SBDC) offers free guidance from advisors paid by tax dollars. Other organizations like SCORE and the Small Business Administration (SBA) offer similar services.
Websites like Upwork and Fiverr allow you to list job postings and view potential candidates for accountants and part-time financial advisors or remote CFOs. Before hiring anyone, make sure to vet their experience by checking with past and current clients. Finding the right person or team who fits within your budget can help set you up for financial success in your business.
4. Plan Ahead
Looking ahead and setting achievable goals is critical to ensuring that your business meets its financial objectives. This involves creating a plan for your revenue, funding, and tax planning. “Ideally, you want to know how much you will need in debt next year so this year you show enough net profit to prove you can repay the loan,” says Sebastian De Vivo, List Ventures.
Proper tax planning is essential for any business, and working closely with a CPA or tax preparer can ensure your business is taking advantage of all available deductions and demonstrating a healthy margin of profitability. “Clear communication of your business goals and long-term plans is key to receiving tailored guidance from your CPA and setting your finances on the right path from the start,” advises Julia Shumskaya, CPA.
5. Explore Funding Options
Research and explore all funding options available to you, including grants, friends and family, loans, and investors. Different funding options have different requirements and terms, and it is crucial to consider what is best for the long-term success of your business.
If your company is not yet profitable, it is still a great time to start building relationships with banks and credit unions which can be helpful when you eventually apply for a loan. Ask questions about what the eligibility requirements are for a loan and check in when you have had successes to keep them updated on your progress.
Once you have reached profitability and have worked on the necessary requirements for lending, you will be able to go through the process with more ease.
By implementing these practical steps, businesses can increase their profitability, improve their chances of accessing funding, and achieve long-term success. This tax season and beyond, take the necessary steps to become profitable and secure the funding needed to take your business to the next level.