Let's Set Sail to Profit Island

Profit must be engineered into a business. Here's how to do it.

A newsletter subscriber recently asked a great question: How do you track and measure growth in a business model that is brand new to you as an owner?

My answer, in short, was profit.

But that got me thinking: what profit expectations should you have? And how should profit be used as the “North Star?”

This led me to this very broad overview of how I've seen profit "behave" during the start-up phases of our three businesses. (And a few that never got past phase 1!)

So here we are, the five profit "phases" you can expect when starting a new business:

Phase 1: Work Like a Dog to Break Even

This is the quintessential "start-up" phase. This is where you're by yourself (or maybe a small team), running around with your hair on fire. This is when your spouse is reconsidering their life decisions. This is when "Cats in the Cradle" runs through your head as you leave for work at 4:00 AM.

But, you gotta do it. You simply have to scratch, claw, grind, roll around in the gutter, and WILL THE DAMN THING to make a profit.

Imagine you're in a sea kayak, paddling towards the Island of Break Even. It's around $500,000 in revenue, you figure. You have food, water, and a volleyball with a red handprint on it. But a few months in, the pain sets in.

(Note: This phase is why starting a 2nd business from scratch is so hard. You're older. You're likely more comfortable. You likely don't HAVE to start something new. But this phase is the admission fee for entering the game.)

Phase 2: Work Like a Dog to Achieve Above-Average Profit

One morning you wake up, and your kayak has landed on the Island of Break Even. Yes! Time to take a rest? Wrong. This island is terrible. No firewood. Rabid bats. And someone is playing Adele's Rumor Has It on loop. This just won't do.

Because break-even is going out of business. Why?

Here are the things you have to pay for AFTER breaking even (i.e. these things come out of profits):

• Taxes

• Debt Payments

• Purchase of Big Assets (Vehicles, Equipment, etc.)

This is why you can break even and still have less and less money in the bank each month.

So phase 2 is about getting to "above average" profit. What is "above average?" You need to find out.

The two most significant factors are your industry (what you do) and your revenue (how much you bring in). Learning from the best in your industry is the best way to find out.

Try podcasts, conferences, or cold outreach to businesses like yours that you don’t compete with. (Like, on the other side of the country.)

Let's imagine that a 15% net profit is a good “above average” target for your industry and size.

So you set sail once again, to $1,000,000 Island. That's the revenue you forecast will get you a 15% profit. It's rough, but you make it through sheer will.

Phase 3: Expansion (Which Will Drive Profit Down)

You're now on $1,000,000 Island, and making 15%. This means you're putting $150,000 a year (AFTER you pay your salary, which is an expense of the business, right?) in your pocket. Then you're paying taxes, paying off any debt, and saving for assets you'll need down the road.

That $150,000 goes away quickly, doesn't it?

So, you decide you can get to $2,000,000. You even develop a forecast showing that $2,000,000 is a good profit island. You could earn $300,000 annually (15% of $2,000,000). That would be better, right?

Well, it will take a while to get to $2,000,000, won't it? You'll need to invest in people, processes, marketing, software, hardware, and a slew of other things to get to $2,000,000 Island.

So you set off in your sea kayak and start spending. What happens to profit? You drive it down. (Your expenses are rising faster than your revenue.)

You're 15% at $1,000,000 is now 5% at $1,500,000. Ugh. This is painful! Yes, it is. You're lost in the Bermuda Triangle.

Your options: turn back or press forward. No right or wrong answer here, folks. Simply make the call. You decide to keep paddling.

Phase 4: Getting to Your First Sustainable (For a While) Profit Island

Ah, the kayak pulls up at $2,000,000 Island. Your new team is hired and trained. Your marketing is at maximum efficiency. Your software is saving you time, not taking your time. You're using AI and offshoring to the maximum extent. Life is good!

But then you see it. In the distance. Way over there. Just a speck on the horizon. It's calling your name. The sirens are singing. It's $4,000,000 Island, and you just have to get there...

Phase 5: Repeat Phases 3-4

You get the picture, right. It can seem like a hamster wheel. Just when you get settled on an island you thought would be great, you see the next one in the distance.

"But Scott, let's just stay on this island!"

You can try, but the invisible hand of capitalism will start working your “above average” profit down. Competitors will emerge, your industry will have a fundamental shift, and the economy will do what the economy does. You can try to stay on an island, but soon enough, it catches on fire, and you'll be forced to sea. Better to intentionally plan for the next island.

And so you go back to step 3. You forecast what your next island would look like. $5,000,000? $7,000,000? You land on a number and start intentionally investing, plotting, planning, and strategizing.

Then, volleyball firmly mounted to the bow of your kayak, you set off once again.

Thanks for reading this post. I appreciate you. In return, please share this with those you know who may be interested.

Books of Note: I really like architecture and city planning. So when I came across a biography of Pierre Charles L'Enfant, the guy who designed Washington, D.C. I was sold. Turns out it was a fascinating book. My takeaway is that history is simply one fork in the road after another, with each decision sending us down an entirely different path when played out centuries later. If you're a nerd like me, you'd like this one.