What makes a tiny business profitable?

In solopreneurship or microbusiness, it’s easy to imagine that every dollar that comes in is “profit.”

Take out the meager fees we pay to web hosts, PayPal, and the odd tech service, there’s still plenty left over to play with. And play we do.

But what does it mean to truly become profitable as a microbusiness owner or solo service provider?

In my own business and those of my clients, this is one place where traditional business teaching falls short of our unique circumstances. What follows below is not something you’re going to find in business books but it’s of utmost importance for understanding the way your business functions:

Being profitable means earning enough money to cover all of your obligations, both personal & business, with some left over to invest as you please.

Click to tweet it, yo!

Becoming profitable should be the goal of every business but the numbers and percentages are always different.

The key to knowing when you are profitable is to understand your obligations.

Megan and I often join forces to talk about actually making money in a passion-driven business. I talk about the psychological and philosophical side of earning more. Then she swoops in with cold hard facts and a proven formula. I’ll let you guess which side of the presentation garners a bigger response.

Hint: numbers & formulas win. every. time.

Megan’s pricing formula is for a product based business, natch. She’s a jewelry designer. She has certain costs for materials & upkeep, much easier to quantify.

Megan’s formula also contains two pieces that often trip people up: labor & profit.

Yes, two different figures. One for labor. One for profit. Separate. Different. Got it?

The time she puts into each piece is not profit. That time is an obligation that must be accounted for with an hourly rate. The hourly rate she figures is often 8-12 times the hourly rate most people figure for themselves.

Hint: if you’re accounting for an hourly wage that is lower or equal to the minimum wage in your state, you’re doing it wrong.

Intellectually, you know this makes sense for Megan and the type of business she runs. But what about your business? If you create or design physical products, this model works for you as well (but keep reading – there’s more!). If you are a service provider, content marketer, or digital product creator, it is much more difficult use this type of pricing strategy to generate a known quantity of profit.

So then what is profit?

Profit comes after accounting for all of your obligations, both personal and business, and having money left over to invest as you please.

Oh crap, she said it again. It must be important! Click to tweet it, yo!

When you don’t have to use part of every sale to reinvest in materials to make new products to sell, it is easy to see every dollar as profit. To see every dollar as flexible.

Your dollars are not flexible. They are accounted for the moment they enter your PayPal account. But do you know where they’re going?

Those dollars might end up paying your web host, your email service provider, your teleconferencing service, your PayPal fees, or your assistant. Those dollars also pay your mortgage, your grocery bill, your taxes, and your electric utility – that’s your labor, essentially.

You also have obligations to your own charitable giving, education, self-care, and – yes – fun.

When considering your own financial obligations, I think it’s important to look at the big picture not just the bare bones. That’s when you really start to get an idea of abundance.

And when you can really start to develop a profit strategy.

How can you earn enough to cover your obligations and have money left over to invest as you please?

There are no easy answers to this question. But you can’t create a strategy until you know your obligations. You can’t understand or plan for profit until you know where the rest of the money is going.

Why consider profit only after meeting personal & business obligations?

Because it’s important that you have that surplus. It’s important that you have the freedom to decide what the very best use of extra money is outside of the obligations (no matter how pleasurable) you face on a daily basis.

Being a profitable business owner means having the freedom, control, and vision to use your surplus money as a tool for growth, be it personal, business, or societal.

***

Understanding profit and your ability to use it for good is all apart of making money beautifully, making earning an art. I’m hosting an intensive, intentional, and intimate workshop on creating a business that serves you. Click here to find out more & sign up for FREE exclusive pre-event training.

Continue the conversation...

13 comments on “What makes a tiny business profitable?

  1. Laura Simms says:

    “How can you earn enough to cover your obligations and have money left over to invest as you please?” I love the idea of obligations and pleasure, or “as I please” being part of the profit equation. I rarely look beyond the obligation part. Thanks, Tara!

    • tara gentile says:

      SO important to look at business beyond the NEEDS. If you can’t have fun with the money you’re earning, it gets old fast. The problem really comes when we think about all the things we’re going to do with our money in the future.

      How is that different from working a day job again?

      Build fun into the profit equation now. Build in growth. Build in travel. Build in adventure.

      Thanks, Laura!

      • Hi, Tara.

        We make a software that keeps small businesses and individual businesses profitable, and we always tell our customers to do the same you just told here.

        This is the most common mistake people do when they work on their pricing or define sales target or generally calculate the profit. And that’s why they stay mostly unprofitable or what we say it here “Profitable but Unhappy”.

        When we calculate profit we just add needs, but we actually feel profitable when we could do what we wanted to do. A great insight I got when I interviewed our customers asked questions indirectly.

        I asked them two questions that just changed the way we were building our software.

        1. When was the last time you felt you were profitable?

        2. Why was that?

        And the 2nd question always took us to an answer similar to, “Because I wanted to buy or do X,Y,Z (often not a necessity), and we could do that :)”

        49% of our customers who became profitable after using our product, didn’t found it a lot difficult to earn those extra money. It was as if that they were just refusing the real profit.

        It feels good when you bring such great advice to people. This is the 1st time I’ve been to your site and your posts are just amazing. I would love to meet you one day. And refer couple of our clients to your site.

        Regards

  2. Kylie says:

    I’m always grateful for the way you urge us small businesses to really and truly care for ourselves financially. But I think this is my favorite post you’ve written. I feel — deep, deep down — that being able to invest in myself, my business, my favorite cause, must be part of my business model. And this reminds me that it’s not crazy to believe that.

    • tara gentile says:

      Thank goodness it’s not crazy, right?!

      If those things aren’t part of your business model, you’ll never attain them. You’ll always struggle to “get by.” You must identify what you desire to be able to work towards a business that can sustain it – and then grow it to new heights!

      I so appreciate your comment, Kylie!

  3. Kate Gatski says:

    great post. perfect time of year for it. it’s profit time baby. this is a great time of year to burn rubber and make profit for future enterprises. we’re fortunate to have lots of other things we want to do – (which require significant investments) our artisan cheese business for eg. it keeps us motivated to do exactly what you’re talking about.
    great work Tara!! as usual, right on target – thank You!

    • tara gentile says:

      Mmmm… artisan cheese… now you’ve made me hungry, Kate! So excited to hear about your “significant investments!”

  4. Holly says:

    You know I LOVE this topic! And I SO agree with what you are saying. To take it a step further, I think it is important to differentiate just a little. To make sense to my accounting brain, I need to add a layer in the budget.

    I look at is as rather than budgeting my personal obligations in to my business budget, I am budgeting in my personal WAGE. When I determine what that wage must be, I consider my personal obligations. But, my business isn’t paying my personal obligations, it is paying me and then I am paying the personal stuff. I know it is just a matter of semantics and the end result is the same, but for accounting purposes it is important to keep the difference in mind. :)

    I so appreciate that you are passionate about this topic!!! Love it!

    • tara gentile says:

      Holly! That’s for that perspective! What’s tricky about that – for me & for many others – is that “wage” is a loaded topic in and of itself. What wage should I be earning? What wage do I deserve? If people knew how much I made per hour would they balk?

      Wage, in my opinion, is also part of a scarcity mindset. There’s only ever “so much.” So much per hour, per week, per month. I try to run my business from a perspective of always having access to more.

      I certainly don’t disagree with you – but just wanted to point out the difficulties the creative (i.e. Starving Artist) brain has with the idea of “wage!”

      • Holly says:

        Point well taken! That does make sense (when I’m pushed to think outside my black & white accounting box, LOL!) Maybe we could call them Equity Payments or something?! Like I said, it is just semantics :)

    • Tina Robbins says:

      It is a tricky perspective. I worry about muddying the waters with thinking about the business covering my personal obligations. It feels so much cleaner to think about paying myself a salary or wage or commission or whatever.

      But I don’t want to be in the scarcity mindset either.

  5. Ellie Di says:

    For my business to be profitable, I need to make less than the poverty line in America. But I’m still trying to figure out how to do that. I’m surprised to find my view of profit is actually the same as yours, so I feel like I’m a bit head of the game! It’s just getting to the point of bare-minimum profit that’s giving me fits.

  6. Linda says:

    I struggle with the labor/product pricing. I clicked on Megan’s jewelry site, and was taken aback slightly by the cost of the jewelry. My clay pendants take a dozen steps to make and about a week’s time due to drying time, etc. I’ve done the math, and should be charging at least double what I’m charging for them. But… when I compare the market, no one else is charging that much. So…. if I go as high as the numbers/advice say I should, I would be twice as expensive as my competition. Plus… I am a veritable “unknown”. Do you think that when it comes to artistic pieces, a beginner can’t charge the same amount as someone well-known, with a following, who’s work is in demand?

    Thanks. Love the info you share!

    ~Linda