Stop claiming you’re profitable

 

My company is profitable, and has been from day one.
                           — every high-tech bootstrapped founder

I know what you really mean.

What you mean is that the only business-related charges on your PayPal MasterCard — aside from those on intentional detour for tax-deduction like the external DVD drive you needed to rip CDs after you realized the MacBook Air in all its luxurious, silent, thin, sexy glory still cannot import “The Best of Pat Benatar” without the aid of a peripheral half the size and weight of the laptop itself — is an account with Amazon AWS where a medium instance whirs away for only $40/mo, just two clicks away from rebirthing as an XXL should you need “scale,” plus $0.67/mo for the S3 storage for web app uploads, plus $0.072/mo of S3 storage to back up the Pat Benatar mp3s.

So all you needed to do is sell one $49/mo account — which you did — and you’re profitable!

I know that’s what you mean, but when you say “I’m profitable” to someone with a modicum of experience it’s a turnoff, because it’s actually bullshit. And when someone’s streaming bullshit at 720i, it means they’re either a full-blown bullshit artiste or they’re merely ignorant; in neither case do I want to hear more.

The first and biggest error is thinking you can ignore your own salary. Sure your time is worth $1000/hr, but no you do not have to cover that to be dubbed “profitable.” But you do need at least a ramen-profitable definition of valuing your time. If your business makes $3000/mo after direct expenses, but isn’t paying you, and you still have a full-time day job to keep up with the mortgage on your under-water house, then you’re not profitable.

Why not? Because the business cannot sustain even one person to run itself, which means that $3000 is not “extra money which can be plowed back into the business or distributed for an awesome vacation.”  It’s just made-up leftovers because you’re not acknowledge the actual costs of a startup, which include time and you having to work a second job.

In that case what have you proved? That if you slam yourself to the limit of endurance and ability, you can earn less money than Dell would give you for creating 1/34th of BIOS version 8.4.3.5?

That’s not a “profitable business.”

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.”

The other error is that it’s a misuse of what’s normally connoted by the phrase “profitable business.” When someone says they’ve been in business for two years and they turned profitable last month, what that really means (if it’s a healthy, growing business) is that they are sustainably profitable, able to indeed “plow the rest back into the company” with a quantity of cash that could visibly move the needle on top-line revenue, or could significantly reduce further risk, or would allow for investment in a long-term project, or could be a down payment on a superstar, or something similarly valuable.

When your business throws off $1500/mo (without salaries), that’s not the case. If you’ve been at this for a year, clearly next month won’t be $5000, which means even in the sense that it’s “kicking off cash” it’s not sustainable in the long-term, not defensible in the market, not supporting even one human being in that effort, etc..

Therefore, in the normal sense of the phrase “profitable business,” it’s not.

So now that I’ve perhaps unfairly ridiculed you, let’s just recognize what’s really going on, because it’s wonderful and amazing and fantastic and exciting:

You’re building a business! Sure it’s just begun, sure it might need a kick in the ass, sure it might be struggling, sure sure sure, so what? You and every other little new business. You and every other bootstrapper who by very definition doesn’t explode out of the blocks because you’re doing it part-time and with no cash. This is exactly what you’d expect it would do, even if you’re actually the next 37signals.

That’s exactly what my company WP Engine looked like for the first 9 months. Now we’re making millions of dollars, employ 20 people, growing at 15%/mo, etc..  But we started just like that — slowly, and not profitable.

Same with my previous company Smart Bear — it took 2.5 years before I could even hire one employee, and even then it was 1/4 of the salary he deserved (and later ended up making).  Eventually we, too, made millions of dollars a year — in profit! — but not for years.

In other words, there’s nothing strange or bad here. It’s just not “profitable from day one.” Stop saying that.

Dispense with the feather-fluffing and get to what is — the strengths you have, the challenges you want to overcome, the resources at your disposal.

And then set your mind and goals on making that sucker profitable for real!

P.S. Need help figuring out how to do that? Go here to learn about the Smart Bear Live podcast where I’ll help you one-on-one, or email me to see whether I can turn your question into a blog post.

 

  • Mike

    Awesome post.. wondering why it took so long for someone to accurately rant about this.

  • http://whodknow.com/ Ted Pearlman

    This is what you get for helping us kids.

    • http://blog.asmartbear.com Jason Cohen

      Hey don’t get me wrong, I did the same thing.  :-)

      But this way you won’t come off sounding like I used to!

  • http://blog.justinchen.net/ Justin C

    Since the term “profitable” does have the “ramen profitable” connotation, have you come across a better way to describe a business that is truly profitable? 

    • http://blog.asmartbear.com Jason Cohen

      Maybe “sustainably profitable?”

      • http://whodknow.com/ Ted Pearlman

        How about “Fucking profitable.”

    • Adam Smith0912

       EBITA?

    • gordon smith

       EBITR?  Earnings before Interest, Taxes and Ramen noodles?

  • http://twitter.com/dewind Justin DeWind

    This was the first thing that came to my mind after reading this article.

  • GlennLEU

    I think that one of the key things that startups need to consider is having a wise business model that makes money. Way too many sites out there think that they’ll be the next Facebook and suddenly have enough traffic to support a business based on Ads. That’s a foolish way to approach it and one of the biggest issues that any startup always has. The other big issue that most startups have is to find ways to get more users. Especially with no funding, no real connections, its harder for smaller minimum viable products to hit the blogosphere running and get attention there. I think that’s why so many smaller companies are flocking more towards social media. Between various types of Facebook ads, asking your friends to promote you and share your links, and the dozens of companies listed at http://www.buyfacebookfansreviews.com among other options, there’s a numerous amount of ways to approach getting more social traffic and I think we’re just at the beginning of this social age. But if your business model is solid and you have paying customers, you have a lot better chance of surviving long-enough to find enough paying customers to actually create a viable business. That is severely underrated amongst a lot of startup founders who haven’t been through it before and don’t understand the basic business end of this IMO.

  • Joedev123

    I don’t agree that your business has to pay you enough to live on to call it profitable.  I’ve never heard that.

    I know several business owners (non-tech) who take no salary (for now), are living off of savings, yet I think they can say with credibility that their businesses are profitable.  Their businesses make more income than they spend on rent, salaries, and inventory.  They would rather put the money that could be their salary into the business.  Why should that decision make then “not profitable” in your eyes?

    • http://blog.asmartbear.com Jason Cohen

      I specifically said in the post that if you’re living off the business, I believe it’s “profitable” no matter how much money that is, because it’s sustainable.

      But if you also have a full-time job, or if you’re eating away your savings, it’s not supporting you and not sustainable (yet), and therefore not accurate to say it’s “profitable.”

  • http://twitter.com/stevegolab steve golab

    Honestly I think you are splitting hairs.  If you are not taking a salary, and the business is profiting as a result, then the business is technically profitable. Don’t be fooled!

  • Tyler King

    I think it depends a lot on who you’re talking to. My customers regularly ask if my business is profitable. What they really mean is, “what are the chances of you going bankrupt and locking me out of my account?” Back when I had to work a second job to pay the bills, I didn’t feel like I was lying to say we were profitable, because what that really indicates to the customer is that we’re financially stable. Sure, I was wasting time on another project, but the company wasn’t burning cash and the situation was completely sustainable.

    If you’re talking to an investor or a curious friend, then I completely agree that it’s best to factor in your salary.

  • Jonathan

    There *is* a way to start profitable (or sustainably profitable) from day 1. I did it. :)

    Start a services business billing hourly and use the profits (after taking out salaries) to build your product.

    Many years later we are now a successful software company (another tough term to define!) and are entirely self funded.

    • Lemi

      Sounds good!

      May I ask what you really mean by ‘services business’?

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  • jeffatrackaid

    Great post.

    I see this in all small businesses not just tech companies.  I suspect it is more rampant in tech due to the low startup costs and somehow being “profitable” means being “successful”.   I owned another company before this one – it was profitable but hardly successful.

    A tip I recommend is to keep two P&L sheets:

    First is the *real* one – where you may not be paying your self  (or others) properly.  The one you show to your bank, investors, potential co-founders, etc.

    Second is the real one — the one where you properly account for  your time. 

    I find many founders fail to account for their time.  Once you have an all-in accounting of your time, investments and lost opportunities, you find are not, have never been and may never be profitable.

  • Impatient

    You never specify in the post how much time the founder is spending on the business. If the business is making $3k, and the owner has a full-time job, and *spends no time at all on the side business*, then that’s a pretty profitable venture. Incidentally, I own a business like this.

    Sorry, you can’t make up your own definitions. Profitable is profitable. People can smell the BS of “We’ve been profitable from Day 1″ from a mile away, so don’t worry about those guys.

  • http://videorascal.com/explainervideo/ Andrew Page

    I have to admit that I’ve claimed ‘profitability’ before when it wasn’t necessarily the case. If you can’t live off of the business than you’re just not profitable.

  • suiji

     Great post! Actually we should stop claiming that our business profitable because we all just need to do it and make it real.

  • Nick

    Amazing article! Was debating the recently with my co-founder at http://www.SuperSimpleSurvey.com and can relate. As it stands, we currently both have full time jobs and consider our service to be covering costs, but not till the point that it can cover both our salaries and some change would’ve we consider it to be profitable!