How to Make Money in Business

New small businesses have been forming at a breakneck pace in the U.S. More than 16 million small businesses were formed between 2021 to 2023, an 85% increase versus average formations since the U.S. Census Bureau began tracking the data.

Reasons for the surge vary but most certainly include the common perceptions that business owners are their own bosses, do what they love, and control their destinies.

The waters of business ownership look inviting and lead many new, inexperienced entrepreneurs to dive in headfirst without understanding what lurks beneath. Here are some important points for would-be business owners to consider before taking the plunge.

A fundamental business principle

The cold, hard, numbers show a less inviting side of business ownership. Approximately 90% of new businesses fail over time.

Often it’s due to one of the most basic and important principles of business. A business must make money. That’s so obvious it’s ridiculous to say out loud. Yet, many new business owners fail to adequately recognize and respect this basic principle.

New business owners often get absorbed in obscure concepts like vision, passion, and mindset. It probably doesn’t help that so many self-proclaimed business experts on social media sell their own versions of those things as the secrets to success.

In extreme cases, business owners (and social media experts alike) take offense to discussions about profitability because “it’s not about the money.” It’s almost as if talking about money is beneath their high level of visionary thinking, better to leave those monotonous details to the bean counters.

Unfortunately, for extreme visionaries, that’s also a warning sign of failure. The reality is the fundamental purpose of any business is to make money. A business must make more money than it spends, otherwise it goes out of business.

That doesn’t preclude other goals or visions, but profitability must be one of the primary objectives of any real business.

How to make money

The billion dollar question is how can businesses make money? There are as many ways as there are businesses, but we’ll focus on a few universal principles that apply broadly.

Solve problems.

The most successful businesses offer products and services customers need or want and are willing to pay for. That last point is worth repeating. Customers may want many things but are only willing to pay for certain things.

Often, customers are most willing to pay for products and services that address their needs and solve their problems. For example, a busy person will pay to save time, while an idle one will pay to pass it.

Fortunately, there is no shortage of problems in the world. Just look around you and observe all the things and circumstances that cause inconvenience or pain, that waste time, money, and resources. Which problems can you provide a solution for?

It doesn’t have to be as complex as creating a new source of renewable energy. It could be as simple as ice cold lemonade on a hot summer’s day. If you can identify a problem and provide a solution, then you’ve taken the first step towards a viable business.

Understand customers.

After you identify a good product or service, some may say just “build it and they will come.” But before you start hammering away it will be useful to know who “they” are.

Who will most likely to want or need what you have to offer? Where are these customers located? Answering these basic questions to clearly identify your target market can lead to important insights for strategy.

For example, whether your ideal customers represent a narrow segment of the market or a broad swathe will affect how to position your offering. If you are targeting the 65+ retiree demographic, does it make sense to spend all your time and resources marketing on TikTok and Snapchat? Probably not.

Beyond knowing who your customers are, you must also learn to understand them, to think like them. What do they like and dislike? What is most important to them? The most successful businesses use surveys, interviews, and other tools to understand their customers.

Gathering feedback after a sale (or failed sale) is a great way to gain insight. However, you don’t need to (and shouldn’t) wait until after sales are made. The information gathering should start before you even offer your first product or service.

This will help you refine your offering for maximum success, avoid costly mistakes, and prevent negative publicity that comes with bad customer experiences.

The point is knowing who your ideal customers are, where they are, and understanding what’s important to them will help you build more effectively.

Make money.

We already established that making money is a fundamental principle of business. However, many companies that make money still fail. Often times this has to do with how much money is “made” versus how much is kept.

In other words, strong sales and revenue growth (top line) are important, but earnings growth and profitability (bottom line) are what ultimately sustain businesses. Many new businesses go down the slippery slope of chasing top-line sales growth at any cost, burning through money and creating losses in the process.

This mentality is fueled by the fact that strong sales growth gets the attention of investors. Companies like Amazon and Tesla were unprofitable for decades, but still attracted investments because they delivered outstanding sales growth. That both companies were ultimately successful reinforces the sales at any cost mentality.

However, for every Amazon and Tesla, there have been many, many more Pets.coms and Fiskers. The reality is any fool can sell one dollar for fifty cents. Revenue growth would look amazing, but the business would obviously not be sustainable.

That doesn’t mean all businesses must be profitable on day 1. On the contrary, most will not be and will operate at losses early on. However, there must be a feasible path and plan to reach sustained profitability.

It’s not rocket science. It means simply bringing in more revenue than paying out in expenses. It means pricing your products correctly, managing your costs carefully, and finding ways to streamline operations and improve efficiency to increase profit margins.

The bottom line is if you cannot find a way to make profits (not just sales), then you don’t have a sustainable business. A hobby or Ponzi scheme, maybe, but not a good business.

SUMMARY AND BOTTOM LINE

A common pitfall for new business owners is focusing too much on abstract vision statements and not enough on financial reality. Like it or not, successful and sustainable businesses must make money.

Ways to accomplish that vary by business, but important universal principles include solving problems, identifying and understanding target customers, and transforming revenue into profits.

Applying these principles will improve your chances of building a successful and sustainable business that will keep “them” coming back for more.

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HWL