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The Average Time to Reach Profitability in a Start Up Company

It is impossible to define an average time to profitability for a start-up company because different start-ups will measure profitability in different ways. In conventional terms, it can take two to five years. The entrepreneur can take an income from a company even while it is making a loss on paper, while investors can profit if they are paid back a fixed interest rate on their investment regardless of how the company is doing.

What are the milestones in a start up?

Milestones are all about moving from one stage of risk to the next. As a person plans for a fundraising strategy, it should be ensured that there is ample time to fundraise so that one is in control of which milestone the start up hits when. The fundraising strategy chosen should use these milestones to the start up’s benefit and one must not get caught between these and stranded for cash. The art of picking milestones is trying to determine which ones are the key ones to focus on.

As a rule of thumb, these are the most important ones:

Human Resources – Hiring key people who makes the right impact on the organization.

Product – Delivering the product in the market – Product launches vs. version releases

Market – Market for the product you deliver, one should build something that people want.

Funding – Maybe some money being committed to a round that the investor in question can lead or participate in.

Other examples of milestones :

  • Proof that one can work together as a team, usually historical evidence
  • Proof that one can build something, i.e. working prototype
  • Proof that the initial team is able to attract talent. Every start up will eventually need a functioning management team consisting of CEO, CTO, COO and possibly some others depending on what one is building.
  • Proof that ecosystem agrees with the ideas – bringing respected industry advisors or partnerships on board .
  • Proof that one can manage finances – cash-flow positive operation
  • Proof that one can scale.

How to calculate start up costs ?

Many people underestimate start up costs and start in a haphazard, unplanned way. Estimating realistic start up costs is a key element of a financial plan.

What are startup costs?

Start up costs are expenses an owner incurs and assets one needs before the business can be launched.

  • Start up expenses: These are expenses that happen before one launches and start bringing in any revenue eg. expenses for legal work, brochures, location site selection and improvements, and other expenses. Start up expenses also include expenses such as rent and payroll that start before launch and continue from then on.
  • Start up assets: Typical start up assets are cash (in the form of the money in the bank when the company starts), starting inventory and current or long-term assets such as equipment, office furniture, vehicles, and so on.

Cash balance on starting date

Cash requirement is an estimate of how much money the start up needs to have in its account when it starts. In general, the cash balance on starting date is the money raised as investments or loans minus the cash spend on expenses and assets. Many entrepreneurs decide they want to raise more cash than they need so they’ll have money left over for contingencies.

For a better estimate of what is needed as starting cash balance, one should calculate the deficit spending he/she will probably incur during the early months of the business, after launch, from launch until a monthly break-even state is reached in which revenues are equal to spending.

Timing matters / Pre-launch versus normal operations

With the definition of starting costs, the launch date is the defining point. Rent and payroll expenses before launch are considered start up expenses. The same expenses after launch are considered operating or ongoing expenses. And many companies also incur some payroll expenses before launch because they need to hire people to train before launch, develop their website, stock shelves, and so forth.

The same defining point affects assets as well. For example, amounts in inventory purchased before launch and available at launch are included in starting assets. Inventory purchased after launch will affect cash flow, and the balance sheet; but isn’t considered part of the starting costs.

How to generate revenue for start ups? / Start up Revenue model

One of the most important things one can do to ensure the financial health of the start up is to create a revenue model.

Startup Revenue Model is a frame work to generate revenue for start up. While a business model majorly shows the work flow of start up, revenue model gives clear idea about which revenue source to pursue, what value to offer, how to price the value, and who pays for the value. Financial projections are generally based on the two types of approach –

Top-down Forecasting – In this forecasting the market size is first estimated and the targeted market volume is decided based on the anticipated penetration rate. This figure is then frame wired how to reach from zero to the total potential revenue.

Bottom-up Forecasting – In this forecasting, first the achievable market volume is identified and then based on the expected growth, total revenue is decided.

Both of the above mentioned financial forecasting approach needs to be balanced with revenue model to remain realistic as well as aggressive.

Top Seven key considerations for developing the revenue model

1. Choosing a revenue model approach that is best for the company and background.

2. The revenue model should communicate the uniqueness of the start up.

3. Identify potential investors strategically based on the revenue model.

4. Project out into the foreseeable future.

5. Understand that the revenue model is always evolving.

6. Identify the key variables for the company.

7. Mitigate for variables.

Debalina Roy Chowdhury

Dilzer Consultants

Sources

https://articles.bplans.com/estimating-realistic-start-up-costs/

https://seedcamp.com/resources/setting-appropriate-milestones-in-an-early-stage-startup/

https://earlygrowthfinancialservices.com/developing-your-startup-revenue-model-in-7-steps/

https://www.quora.com/What-is-the-best-revenue-model-in-India-for-startups

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