Are You Profitable?
There was one question I heard most often as a business owner and it told me something about the person asking the question. It told me they don’t understand business, that they haven’t owned a business, especially a business with employees, and don’t understand overhead costs.
I didn’t think less of anyone asking this question, as a matter of fact, it was an opportunity to educate them, to let them know just how big a riskentrepreneurship can be. At the same time I didn’t want to seem as if I was complaining, I didn’t want pity, and most of all, I didn’t want people thinking that I was in over my head (even though sometimes I was).
This month, Feb. 2018, marks the fifth anniversary of opening our massage and facial spa to the public, to having our first paying client. The business was running long before that, however, as startup is not synonymous with operating.
About three months into operating the business I was visiting a rental property I own on the Jersey Shore to prepare it for the upcoming vacation rental season. Knowing that I had recently opened the spa, friends would ask how business was doing. This was small talk. They weren’t looking for a long recap of the ups and downs, trials and tribulations that is owning a business.
“It’s going well,” I said. “Every week is a bit busier than the last,” I’d continue.
“Well, that’s good. Making a profit?” They’d ask.
At this point I wanted to scream, “A profit? Are you kidding me? I’m barely making the payroll. I’ve had to add thousands of dollars (it’s called an investment) just to pay bills. Construction cost more than expected. I ordered the best equipment so my clients and staff would be more comfortable. I’m there before we open and I’m there after we close because I can’t afford to hire another person. Am I profitable? Are you insane?”
Of course I never did yell at anyone, but I did let them know that it’s not that easy?
“Well, we’re on our way,” I’d say. “Construction was a big expense and we have loans and the overhead is high relative to revenue in the beginning but we’re certainly working toward profitability.”
Sometimes the look on their face said it all, “Oh poor AJ, I knew this wasn’t a good idea.” A lot of times I agreed but imagine if I had told them the whole truth!
This went on for a while and finally I just started saying, “Yes, yes we are profitable.” It was too much to explain and by whose standards are we profitable, anyway? The government? No. Our bank account? Sometimes.
As just one example, to answer the profitability question you have to have an understanding of cash flow and accounting. What you and I consider profit, money in our pocket, accountants and the government might consider a liability, money you owe rather than income you received.
This is true especially if your business accepts and uses gift cards. Assume you have 100 clients and they each buy a $10 gift card. You have $1,000 in your pocket, or bank account (minus credit card fees — there’s always fees). Today 10 clients come in the door and they each “spend” $5. You made $50? No you made $0 because they used the gift card and you still owe them $5 of products or services. That $1,000 was a liability until the gift cards are redeemed.
Your bills continue to come due and every day more of your clients come in and they all use their gift cards. You’re still paying your bills but the cash flow has stopped. Which is exactly what happened with our first Christmas/Holiday gift card rush, the money was great but over the next month or two, new revenue dropped and paying all the bills become a bit harder.
I understand my friends and family meant well when they asked if we were profitable, and wanted to see me succeed, but before asking if I, or any entrepreneur, is profitable try to understand the investment, the risk, and the time it takes to recoup the upfront costs of starting a business. If you’re thinking of starting a business, understand that there is no such thing as instant success. Profits take time.
Instead of asking, “Are you profitable,” ask “Are you meeting your expectations?”