You might have hoped your new small business would take off and generate profit quickly. But, in reality, new businesses take time and experimentation to get right. You need to know how to make a small business profitable from the jump or, at least, get there quickly. And, break-even analysis will help you figure out how long it will take to see a return on your investment. 

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How to Make a Small Business Profitable while you Navigate Ambiguity 😵‍💫

As you start and grow your business, you likely have a million questions racing through your mind – that’s normal. 

Some of those questions are big and existential: Who is my customer? What am I selling and why? Who am I, for that matter? 

And, some of those questions are about tactics: Which website software do I want? What should my logo look like?  

Honestly, it’s hard to know where to begin because there are so many possible paths in front of you. 

When you’re starting anything for the first time, curiosity is extremely helpful, but there’s a limit. 

You have to know which questions to act on – which ones get your full attention, and which ones you strategically save for later. 

Asking all of these questions also makes sense given where you’re at in the journey – it’s the beginning. 

Beginnings are ambiguous. 

Definitionally, that means it’s hard to know which way is up. So, if it ever feels like you’re lost in space, it’s because you kind of are – it’s part of the process of finding your way forward. 

Psst… that’s another great reason why you might want my FREE Business Financial Health Checklist.

| FREE CHECKLIST: You Absolutely Need This Simple Business Financial Health Checklist

With all of that in mind, there’s one question that might matter more than most: 

“Can I learn how to make a small business profitable?”

Well, good news, with the right mindset the answer is, of course: yes, you can learn how to make a small business profitable! 

| RELATED: How to Manage Money in Business Always Starts with a Mindset Boost

More practically, however, I’m going to show you how to make a small business profitable – that’s the focus of this article. 

Using some basic math and a simple formula, you can easily answer questions like:  

• How profitable will I be and when? 
• How much do I have to sell to make the investment worthwhile?
• How many clients/customers do I need to sustain to see a meaningful return on my investment? 

That formula is called the Break-Even Point and it will help you learn how to make a small business profitable.

Before we get there, a quick reminder about why profitability is critical.

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how to make a small business profitable & Why it’s Urgent 💸

In Silicon Valley, a tech-startup funded by a big investor might go years before making a profit. Those investors can take big swings and afford big losses.  

But, for a small business owner, operating at the local-level in their community, that’s not sustainable or desirable.

Maybe you’re investing your life savings or taking a loan or you just can’t afford to have your business drain your financial resources. 

So, how long can a business survive without profit? Well, considering that most small businesses fail within their first 2 years, not very long. 

That’s why learning how to make a small business profitable needs to be one of your top priorities as a small business owner. 

And, that’s why the sequencing of where you put your attention really matters – because the clock is ticking. 

Side note, profitability is a common financial growing pain for new small business owners, which is why it’s a key metric you’ll learn about in my Small Business Money Management Email Course.

| COURSES: 4 Amazingly Simple Email Courses For Small Business Owners

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Learn How to Make a Profitable Business Model 🌱

Now, back to the question of how to make a small business profitable. 

You need to calculate the Break-Even Point for your business.   

The Break-Even Point is used to forecast profitability in the future

It’s about looking ahead and making a projection about what’s to come based on the variables related to a unit of sale, like cost and price.

Therefore, keep in mind: 

• You can use it for an existing business in operation or for a hypothetical business plan. 
• You can – and this is really important – always change your variables. We’ll come back to this idea later. 

Here’s the formula for the Break-Even Point (BEP)

Note: This is true for both products and services, but you get to decide the unit of measure: 

• For example, if you bake cookies, maybe each unit is 1 dozen cookies because that’s your minimum order. 
• Or, if you’re an acupuncturist, maybe it’s 1 treatment or appointment. 
• Use what makes sense for your business. 

Here’s a graph to help you visualize what this really looks like: 

to learn how to make a small business profitable you need to Know these key terms

Revenue Per Unit is the sale price of your product or service. 

Fixed Cost and Variable Cost are components of the Total Cost of your product or service. 

Let’s define them briefly: 

Fixed Costs do not fluctuate – they are stable and do not change, no matter how much of a product or service is produced or provided. This might be equipment or training or retail space. 

In the context of the Break-Even Point, Total Fixed Cost is the sum of everything you’ve spent (or plan to spend) just to get the business up and running.  

Variable Costs fluctuate based on the quantity produced or provided. This might be the cost of raw materials – you need to buy more if you produce more, for example. 

The Variable Cost Per Unit, therefore, is the current cost of making or providing just one unit.

Remember, you choose the unit (see above). 

By the way, digging into what drives your Fixed and Variable Costs can help ensure every sale in your business is profitable. 

| RELATED: How to Lower Business Expenses & Increase Profitability with 1 Essential Idea

Graphically, Total Fixed Cost creates a floor, with Variable Cost sitting on top of that floor. Then, the Break-Even Point is where Revenue intersects with Variable Cost 

Critically, profitability can only be achieved above that line.

Of course, profitability doesn’t happen overnight – sometimes you need to tinker and experiment to really figure it out.

| RELATED: You Need to See Your New Business as a Laboratory

Let’s walk through some examples of how to apply the Break-Even Point. 

Heads up: we’re about to get into the math of it all. And, it’s a story-problem. 

Take it one step at a time, you’ve got this!

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How to Make a Profit in Business Example 01: Products 🤔

For the first case study on how to make a small business profitable, we’ll look at products. We’ll get to a services example next.

Let’s say you sell hand-blown glass vases at a local vendor market.

To start, we’ll keep it simple…

The studio space and equipment you rent to produce your vases is $1,200/month. 

You sell your vases for $100 each. 

Assume that it costs $40 per vase, including any raw materials.

So, to recap our variables: 

• Total Fixed Cost = $1,200.00
• Variable Cost Per Unit = $40.00
• Revenue Per Unit – $100.00 

Applying the formula, the Break-Even Point is 20 vases: 

Break-Even Point: $1200 / ($100 – $40) = 20 vases

You need to sell 20 vases each month just to break-even with your costs. 

• If you sell less than 20, you’re losing money (operating at a loss). 
• If you sell more than 20, you’re earning a profit. 

Next, let’s layer in some complexity…

Let’s say the entry fee to exhibit at that local vendor market is $200 this month. 

All other things being equal, our variables change to: 

• Total Fixed Cost = $1,400.00
• Variable Cost Per Unit = $40.00
• Revenue Per Unit – $100.00 

Applying the formula, the Break-Even Point increases to 24 vases: 

Break-Even Point: $1400 / ($100 – $40) = 24 vases 

Hint: Always round up since you’ll never sell a piece of a product. 😛

Now you need to sell 24 vases each month just to break-even with your costs. 

• If you sell less than 24, you’re losing money (operating at a loss). 
• If you sell more than 24, you’re earning a profit. 

Finally, let’s get curious and change one more variable…

Perhaps, you say to yourself, 24 vases is a lot – more than I might be able to sell this month. 

Well, you might consider adjusting your prices next to make up for the difference. 

| RELATED: How to Set Prices For Your Small Business You Can Feel Confident About in 5 Steps

Let’s say you change your price to $110 per vase – it’s a modest change that many of your customers might not even notice. 

All other things being equal, our variables change to: 

• Total Fixed Cost = $1,400.00
• Variable Cost Per Unit = $40.00
• Revenue Per Unit – $110.00 

Applying the formula, the Break-Even Point goes back down to 20 vases: 

Break-Even Point: $1400 / ($110 – $40) = 20 vases 

Now you only need to sell 20 vases each month to break-even with your costs. 

Let’s recap a few points: 

• When costs go up and prices stay the same, the Break-Even Point goes up – you have to work harder just to break-even. 
• When you change your prices alongside increases in costs, the Break-Even Point has the potential to stay the same or at least not present as steep of a change. 
• And, if you increase your prices and costs stay the same, you might even lower your Break-Even Point further. 

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How to Make a Profit in Business Example 02: Services 😇

Next, let’s consider how to make a small business profitable for a service-based company.

It’s the same math, but we’ll see it from a different perspective and adjust some other variables. 

Let’s say you run a home-cleaning service.

To start, we’ll keep it simple… (again)

You paid $840 for new equipment, like buckets, rags, a good vacuum, a mop, and basic cleaning supplies. 

Critically, in order to start your business, you paid for everything out of pocket before anyone hired you to clean their home. 

You don’t have any monthly recurring costs other than those up front, one-time expenses. 

You do, however, need to buy an average of $30 in new cleaning supplies for every home you clean. 

You charge $150 per home cleaning. 

So, to recap our variables: 

• Total Fixed Cost = $840.00
• Variable Cost Per Unit = $30.00
• Revenue Per Unit – $150.00 

Applying the formula, the Break-Even Point is 7 homes:

Break-Even Point: $840 / ($150 – $30) = 7 homes

You need to clean 7 homes just to break-even with your costs. 

• If you clean less than 7, you’re losing money (operating at a loss). 
• If you clean more than 7, you’re earning a profit. 

Next, let’s layer in some complexity…

Let’s say you want to increase your profit margins per home cleaning. 

You have 3 options. You can increase prices, decrease your variable costs, or do both. 

Hint: If you change your prices, you may need to manage customer expectations. But, if you change your costs, your customers may not even need to know about it.

Let’s say you decide to buy more generic brands when you restock your cleaning supplies, bringing the new cost to $20 per home. 

All other things being equal, our variables change to: 

• Total Fixed Cost = $840.00
• Variable Cost Per Unit = $20.00
• Revenue Per Unit – $150.00 

Applying the formula, the Break-Even Point is still 7 homes: 

Break-Even Point: $840 / ($150 – $20) = 7 homes (rounded up from 6.46)

It turns out, this cost change was not enough to impact your Break-Even Point.

You still have to clear the same hurdle to break-even. Though, after you break-even, it does mean each house cleaning will be $10 more profitable. 

As you can see, learning how to make a small business profitable is a bit of trail and error.

And, when it comes to the break-even point, you may need to run the analysis a few times.

After you’ve done the math and feel good about what you need to target, it’s time to shift to execution. Effective execution towards a goal is an essential entrepreneurial skill every new small business owner needs. That’s why execution is one of three skills you can build with my workbook:

| WORKBOOK: How to Run a Business Successfully with These 3 Essential Entrepreneurial Skills

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You Need to Know How to Make a Small Business Profitable – Start Here 🤓

Learning how to make a small business profitable requires experimentation. 

You’re going to need to try some things and see how they impact your financial performance. 

And, critically, sometimes when you try, you might get it wrong. That’s okay! 

Simply adjust your variables and run another experiment. Keep going!

Embrace the mess and accept that it won’t be a straight line.

Know that with every experiment, you will gain clarity – significantly more clarity, in fact, than just sitting and thinking about it. 

Get out there, see what happens, and learn from every experiment you run (which is skill 1:1 coaching can help strengthen).