This doesn’t require much explanation, but I did think it would be good to go into some of the questions to ask if you find yourself in this unfortunate situation.
It doesn’t take long as a consultant to run across a business owner that will say something like, “We make money, but I’m not paying myself.” In some cases, this means that they are paying themselves a salary similar to what an employee would make in that role, and if that’s the case, then yes – it’s a business! However, in the cases where the owner isn’t paying themselves a salary close to market and they aren’t taking out profits either, then that endeavor isn’t truly a business at that moment unfortunately – it's a hobby.
This may sound harsh, and I realize that the likely objection is that the owner could be investing into building something that doesn’t yet produce a profit, but that is expected to produce great returns in the future. Yes, that is an argument for calling such an endeavor a business; however, as a consultant I’ve run across far too many small businesses that have little chance of the proverbial “huge payoff” later, and yet the owner sacrifices to build them without a return. That is a very valid life choice, but none-the-less it means the endeavor is a hobby instead of a business.
So, what questions should you ask yourself if your business isn’t producing returns? Some possibilities are below:
What were my expectations for returns when I started?
Knowing what I know now, what is a reasonable return for this business?
What has to change to make it profitable? Is that possible?
Am I willing to continue to work without a return, and if so, how long? And when I do get a return, will it be enough to have justified the inputs?
Is the activity enjoyable enough to make the profits unnecessary? (Hobbies are OK by choice)
If I could go back in time, would I do this again?
I myself had a business that went through periods of losing money at one point. The first loss period was the short start-up phase, which was acceptable because we had a plan and worked through it. The second loss period was in the middle of the lifecycle and frankly was caused by laziness. Not acceptable, but correctable. Sometimes losses happen, it’s just important to have a practical plan that leads to profitability.
Operating a business can be fun regardless of the lack of returns. However, it’s important to be honest with ourselves about the potential future, lest we get stuck in the rut of unprofitability and inertia takes over.
If we can assist with assessing your business processes, please reach out to us on our Contact Page.
As always, I truly do wish you the absolute best in your business.
Mark Goldman
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