Imagine you are in your board room, you’re a startup. You’ve received your initial funding. You’ve got a great idea for a new, break-through, and innovative product. You’ve built a prototype and done an initial consumer test.
The results are great and now you’re ready to continue building your product to make it ready for market. You are so excited, but all of a sudden your palms start to sweat. Your investors start asking questions about your financial results. “Oh no! What now?”
Then they ask the dreaded question, “When will you turn a profit?”
Don’t Make This Claim About Profitability
You think, “I’ve just started my company. I haven’t launched my product yet. How can I be profitable when my product’s still in beta testing, my customer base is small, and I have very little revenue?” Then you think, “Well, there must be some way we can show a profit.”
This is what I call the danger zone.This is where we may be tempted to create new ways to define standard accounting and business terms.
Let’s step back for a moment. What does “profit” really mean?
What Really Is Profit?
Merriam-Webster defines profit simply as “money that is made in a business, through investing, etc., after all the costs and expenses are paid: a financial gain.” Simple enough. Right? Well, not really.
- For some businesses, gross profit (revenue less direct selling expenses) is the key measure of profitability.
- In other businesses, they may look at the “bottom line” which starts with gross profit, then takes into consideration marketing and operating expenses, income taxes and depreciation expense.
- Still others may look at EBITDA (earnings before interest, taxes, depreciation and amortization) as a measure of profitability.
These are all good measurements, but let’s go back to the definition provided us by Merriam-Webster. Profit, is money, or rather income, earned by a business after all expenses and costs are deducted.
When discussing “profits” or “profitability” with your investors, it is critically important to not only be consistent in your reporting of profits, but to also be open and honest in your communications.
To me, this means reporting revenue and expenses in accordance with generally accepted accounting principles. This will most likely not be a reflection of the actual cash you have in your bank account, but you can bet that if you have a positive “bottom line” your bank account will reflect this.
Stay true to yourself, your employees, and your vision. If you’ve got a product or service that is unique in the market and it’s a product that your customers want, then profit will follow. There is no need to “play” with the calculation of profit. It is best to know what your income is and the expenses you incur to develop and deliver your product and run your business.
Need help expressing your value to investors when they ask about your profitability?
Find out how I can help you show the value of your business even if you aren’t profitable yet. Schedule a free consultation to talk about the current state of your start-up and where you want to go.
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