How Much Does a Small Business Make in the First Year?

Are you thinking about starting a business? Have you wondered how much does a small business make in the first year? This is a reasonable question as if you are going to tie yourself to a business and all the responsibilities that come with it, you should understand what your earning potential is.

If you are looking for generic numbers that cover all types of businesses, many business owners make between $40,000 to $65,000 yearly in the first five years. However, it is not uncommon for new businesses to not turn in a product in the first year.

Remember, you are trying to recoup your startup costs while at the same time making a name and brand for your new business. This can take time.

Furthermore, how much your profit margin is and what type of overhead costs you have is dramatically different across different industries. The profit margin can also be affected by how much you can scale up.

For instance, restaurants have a very low overhead but if they do a lot of business they can order items in bulk and make deals with vendors who choose to provide service and goods to them first as they are their biggest client. So a vendor may charge less because they can count on your business.

How much does a small business make in the first year

Let’s look at a couple of different common industries to see how these numbers can come together.

How much does a small business make in the first year
How much does a small business make in the first year

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Grocery Stores

When you have a store that sells many items you will need to think about the profit margin of all items you sell and how much of each item you sell. You will also have to consider other expenses like rent, utilities, cash, payroll, and any type of licenses you need like liquor licenses.

Many people open grocery stores is because they want to serve the area. However, the actual groceries are where you make the least amount of money. Here are some rough ideas of the profit margins on different categories – see below:

  • 2.2% profit on groceries
  • 20 – 40% profit on prepared food
  • 20% profit on prepared coffee
  • 30% profit on fountain soda
  • 15 – 20% profit on tobacco products
  • up to 80% profit on alcohol products
  • 5% profit on lottery tickets
  • 15 cents per gallon on gasoline

As you can see the profit margins widely vary but if all you are selling is groceries you will not even make enough to cover your overhead.

When you in your business planning stage this is the type of information you are going to want to have to understand what percentage of sales in each category you need to first cover your overhead and then later to make a profit.

The above example is why it is difficult to tell you exactly how much is your potential for the first year of a business. However, let’s look at another more modern example – we will stick with food and instead go with owning and operating a food truck.

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Food Trucks

You can start a business of any kind so even if you are thinking of starting a food truck you still may be wondering how much does a small business makes in the first year.

A food truck can be a very profitable business model as many operators earn over $100,000 a year, some of them earn over $150,000 a year.

However, it is important to understand that where you live and the size of the area you are selling in can dramatically affect your earnings. Your earning potential in one of the top 25 cities in America will be significantly more than if you are operating in a small town.

Even if you are making a few hundred thousand or more a year this may be barely enough to cover your startup costs.

The biggest thing you will need to buy is your actual food truck. You can either buy new or used, so the price could be anywhere from $20,000 to $200,000.

This price however is only for the food truck, it would not include any specialized ovens or other specialized restaurant equipment you would need or any decorations like getting the truck professionally wrapped.

Before you buy the food truck and get all ready to go you should first look into everything else you will need. The basics will be a well-defined menu and the food and supplies to create your recipes (including condiments, napkins, and containers to serve the food in). Your truck may also be large enough that you will need to obtain a commercial driver’s license to operate it.

The bigger issue with the food truck industry is the things most people do not think about – insurance, licenses, permits, and certifications. You will need to understand the laws in the area you are providing a service and abide by them.

You will also need to find out what rules apply to where you can park your truck. These expenses can be hefty, and it heavily depends on the state and local municipality you reside in on cost.

There could be other costs associated with this business including hiring and training employees if you are not doing this on your own. Events can be a large portion of your income but being able to offer your food at an event will also come with a large upfront fee.

Finally, you would need to keep in mind every changing forecast of the food truck industry. Are they popular and a potential moneymaker? Absolutely. However, does this mean another segment of the business community is upset with their existence? Yes. Traditional restaurants, coffeehouses, and other establishments that you are competing with do not like you.

They are always constantly trying to get laws put in effect to negatively impact your business model. So this is something to consider when starting this type of business.

Overall you certainly have the potential to make good money with a good truck – with typical owners setting markup prices of 30 – 35%. However, the first year could be rough earning you a small profit or none at all depending upon your startup costs.

How much does a small business makes in the first year
How much does a small business makes in the first year

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Home Businesses – A Bakery From Your Kitchen

Many businesses are started up from a person’s home such as bakeries, jewelry making, fashion, App development, and more.

If you can start selling from your home before making large investments in storefronts and employees, you can see whether your business has a chance to succeed before investing a lot of capital.

One of the most popular start at home businesses is a home-based bakery, so we are going to look at this option more in-depth.

Here is the thing – most things we do in this country are heavily regulated by the state we live in. States have different laws.

Some states allow home bakeries, some do not allow them at all. Some states require significant changes to your kitchen layout (like additional sinks) and others put limitations on what you can sell (like no items that require refrigeration).

So if you are interested in starting a home bakery the first thing you will need to do is look into the laws the govern your state on this type of business.

There is a large chance that even if your state allows home bakeries you will need to modify your residential kitchen into a commercial kitchen.

Once you find out exactly what needs to be done you will need to do the work and have it inspected. This could cost a few thousand to tens of thousands depending on the current state of your kitchen and the rules of the state in which you reside.

If you live in an area where you can start a home bakery and can afford to set up at home including any changes to your home, inspections, licensing, and permits then you can move on to what you can sell and how to do so.

You could have a niche bakery like gluten-free or healthy alternatives, or you could specialize in a specific dessert like cakes or tarts. All these details determine how much markup you can have.

For instance, if you specialize in cake making you may only need cake boxes as a way to store and sell the cake – but if you have multiple items for sale you may need multiple sized bags and boxes which could remove the ability to save through bulk purchases.

To sell your product you will also need to market it. This could be a variety of things such as creating a website, social media, a sign in front of your home, doing events like school bake sales or craft shows, or taking out an ad in your local newspaper. Depending on the type of marketing you do, the costs could also add up.

You might want to start with a few options such as specific flavored cakes or specific theme cakes. Again, this will allow you to purchase supplies in bulk and save money. You will need to understand exactly how much it will cost to create a product, so you understand how much to charge to make a profit.

Depending on how many orders you get or how much time you can put into this type of business most home bakers start by making a few hundred to a few thousand a months. If your business continues to be successful at some point you will want to expand to a physical location where you can scale up your products and your profits.

However, understand at that point you will now have rent, utilities, additional insurance, and fees as well as potential employees’ salary to consider.

This is why people like to start small when possible. Typically, after costs, a bakery may only make $20,000 to $60,000 in revenue a year if you are only depending upon customers.

However, if you have a niche like wedding cakes or catering to businesses your potential earnings can be significantly higher.

How does a small business make in the first year
How does a small business make in the first year

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Internet Businesses – Designing For POD Websites

POD is print-on-demand. Are you looking to start a business, but you do not have a lot of time or money? We get it.

Some of the best businesses out there have been started by people utilizing nights, weekends, and getting up an hour or two early every day. If you have a passion for something or a need for a little extra cash, you will make the time.

The POD business model is a small business or side gig that you can turn into real cash over the long haul. It takes time and effort, but not much of a startup fee.

Here are the basics of how this works. You will need some kind of design program (photoshop, picmonkey, Canva) and be able to design products. If you are using images or drawings you will need to own them (either create them yourself or buy the rights to them).

Print-on-demand companies give you a blank canvas to start with – like a blank t-shirt or coffee mug – and then you upload your design and put it on the market for sale.

Depending on the site you use there will either be a set commission rate or you can choose your own within specific parameters.

Like everything else on the internet your sales and profit will heavily depend on many factors such as the tags you select, marketing you did for a product or specific item, if your item went viral, etc.

The more items you have and the more marketing you do – the better your chances will be to make money. If your item is popular enough to be in the top 5 of a specific category, you could make hundreds to thousands depending on how long it maintains its popularity.

Although the POD model is certainly not the quickest way to make cash, it is a good long-term strategy even if you are only spending a few minutes a day on it. Your long-term income could easily increase over time once you learn how to tag properly and how to market effectively. This has a very low start-up cost, so it is quite possible that you can make a profit within the first year.

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Takeaway

You can probably see now the question of how much does a small business make in the first year is not an easy one to find an answer for as you need to understand more about the type of business, the startup costs, the marketing budget, and the location.

Generally, most small businesses do not make a lot, if anything in the first year. This is the time to recoup startup costs and start branding. Once you make a name for yourself and get a customer base you will be set up to make more money over the long term.