It can be fun to dream about how much profit you’ll make in your first year in business. But have you thought about what profit is, and whether your dream is realistic?
Some businesses do make a profit in their first year, but not all – even in a franchise system. The reality is it takes time for a business to consistently make enough revenue to cover all the expenses, pay a wage to the owner, and have something left over as profit.
So, when I see the results of a poll* that 16.8% of people expect to make than $150,000 in their first year, a question I ask is “What is their idea of profit?”.
This may seem like a silly question, but profit can mean different things to different people – even to different accountants. So when it comes to assessing a business it’s important to be clear what you’re thinking of.
Are you thinking profit is the money received from customers before or after paying business expenses? Is it before or after tax? Would you have paid yourself a wage? How do loan payments fit in to the picture?
After all this, what reason do you have to think that profit number is realistic?
So here are some things to bear in mind as you get an understanding of the financial side of the business.
What is profit?
Here’s one definition: profit is the financial benefit when revenue from business activity exceeds the expenses needed to keep the business going.
Profit = Total Revenue – Total Expenses
This raises another question: “What’s included in total expenses?”. People usually agree it includes all the business costs, for instance cost of goods, rent, electricity, royalties, accounting fees and staff wages.
But what about your wages if you work in the business? In a franchise, there can be debate about whether profit is before or after owner’s wages. Do you consider a business to be profitable if owner’s wages aren’t taken into account?
You might want to think of profit as what’s left after paying yourself a reasonable wage. Which then raises the question, how long will it take to reach that point? The way to get a sense of this is by preparing a budget and cash flow projection.
Having worked through the numbers, there’s another thing to consider. For most business owners, money is important, but it isn’t everything. Some people make a fortune from a franchise, others are happy with a reasonable living. So before you get caught up in the dreams, maybe take a moment to consider your priorities.
* online poll: How much profit are you budgeting for in your first year as a franchisee?
The profit poll results
This franchise.net.au poll reveals that the vast majority of respondents expect to earn more than $50,000 in profit in their first year in business.
Just under five percent believe they will make a loss in their initial 12 months of trading.
View the results below:
Image: polldaddy
Check out some of our other poll results: