daily articles for founders

Running a startup in the UK (or with a UK subsidiary)? Get in touch with my company, GrantTree. We help with government funding.
Ramen profitability and long-term, sustainable profitability  

Jason Cohen explores the fact that many people mis-define profitability and claim to be profitable when in fact all they've achieved is that their business isn't oozing money just from basic operating expenses.

As Jason puts it:

If you are living off it, even if that's $3000/mo, then you've made it. You might not have a dynamo on your hands (yet!) but at least you're in a somewhat sustainable place. Maybe next month you'll make $3200 and you can "plow that extra $200 back into the company."

Or, to rephrase, if your business can pay for the staff that's needed so that it can exist on a month-to-month basis, then it is profitable... kind of. Let's call that level ramen profitability. It means you're not going to go bust next month.

However, that's hardly the time to pat yourself on the back and take a holiday, because if you do that, you don't have a business anymore. Not only that, but it's not clear that basic operational profitability is that amazing unless it covers the cost of growing the business.

If the business is not busy growing, it's busy dying. It might take a year, it might take 10, but unless someone's deliberately trying to grow the business and figure out how it can expand and do better tomorrow than it did yesterday, it's a dying business.

Early on, all the energy for growth come from the founders, and they're not paid for their efforts. Large companies have entire divisions, not to mention a large chunk of the senior management team, dedicated to this task of growing the business, and compensated for it. Ramen profitable startups are borrowing the resources for growth from founders that aren't paid nearly enough salary for that kind of work to be worth their while (but they're compensated by the fact that they own the business).

So that's the next step up: truly sustainable profitability, not just from a month-to-month perspective, but for the long term. Of course, something could still come out of left field and destroy your business overnight despite the fact that it is sustainable for the long term, but at least that will be the exception, not the rule.

One way I've heard it phrased (can't remember where), is that you know you have built "A Business" - as opposed to a business-like entity that's only there to make you some short-term money - is when the founders can take a year off and come back to find a business that's better off than when they left it.

Needless to say, most "profitable" small businesses are not sustainably profitable, and, as Jason points out, that's ok. Just don't fool yourself into thinking you've built a profitable business, until you have well paid and incentivised directors who can continue to grow it for you while you do something else.

More from the library:
Sell the dream, not the job
Learn to think big and small
How to rely on other businesses