Why are the first three years in business the most important?
It’s a fair enough question, but one that’s borne out by the experience of countless new business owners.
Unless you have bought a going concern, you can expect your business will take about three years before it is established and begins to return a profit.
Your business plan—with a break-even analysis and sales projections—should tell a similar story.
When you begin a new business, you start without the three essentials of:
- brand recognition
- trust, and
- a client base.
The number of sales you need to reach break-even will generally take around 18 months to achieve.
A lot of hype associated with the start-up industry has led some entrepreneurs to believe it’s a case of overnight success or bust.
But conventional wisdom is that the evolution of your business goes something like this:
- Year 1: You will lose money as you establish and find a market
- Year 2: You should reach break-even and build your client base
- Year 3: Welcome to profit.
You need to plan for access to enough capital to carry you through around 18 months of unprofitability.
It can be tough watching money drain from your account. But keep the faith with a ready supply of patience and commitment.
Let’s break down why it will generally take your business three years to find its feet.
In non-financial terms, some describe the focus of the first three years as:
- Year 1: become known
- Year 2: become liked
- Year 3: become trusted.
Year by year – what to expect
Expect to lose money, but your focus should be on establishing a client base and generating leads. The first year will usually be your most expensive year in business as you will not only be finding a market for your product or service, you will also be faced with a range of one-off start-up expenses.
You may have to invest in equipment, vehicles, establishing a website, perhaps you are even buying your business premises.
It is vital to keep an eye on your metrics to check your costs and sales are tracking as planned.
Your second year in business should begin with a thorough revision of your business plan and financial forecasts. If all is going to plan you should achieve breakeven sometime this year. If not, look for where the problem lies – pricing, costs or market share. Focus on ensuring the clients you do have are satisfied. Look to boost margins by negotiating better deals with suppliers and contractors.
Your business should be turning a profit. Customers picked up in the first and second years may be starting to generate referrals to bolster your own work in generating leads.