Every small business owner must focus on their business dreams, goals, and the essential struggle to secure an average small business profit. As Jason Fried, Founder and CEO of Basecamp stated, “A business without a path to profit isn’t a business, it’s a hobby.” And speaking even more bluntly, Hendrith Vanlon Smith, Jr., CEO of Mayflower-Plymouth said, “In business, profitability is a non-negotiable. If a business isn’t profitable, it’s worthless.”
Why is A Small Business Profit So Important?
Earning a profit is vital because profitability will determine whether a business can secure financing, attract investors, pay for its operations, invest in future opportunities, and grow. Earning a profit enables a company to open new locations, target new markets, enter new territories, expand operations, and develop a continuous cycle of growth. Thus, profitability is an important measure of success.
Yet, getting to a position of profitability is not an accident. It requires a lot of planning and deliberate effort. Studies have shown that it often takes two or three years for a small business to become profitable.
What is the Average Small Business Profit?
According to the Small Business Administration, there are over 32 million small businesses in the U.S. 81 percent of them have no employees. The average profits of those small businesses are around $53,000 per year. The other 19 percent of small businesses do have employees, and those firms generate an average of $6 million in profits each year. As expected, firms that have been in business longer tend to make more profits than new businesses because they have had more time to increase their customer base and create a stronger revenue stream.
A company’s net profit margin, a measure of profits as a percentage of revenues, is a good way to examine profitability. Small business profit figures vary by industry and by the size and nature of a business. As reported by the Corporate Finance Institute, the average net profit for small businesses is about 10 percent. Here are some examples reported by New York University—note the wide range of actual profit margins reported in the study:
- Banks: 31.31% to 32.61%
- Financial Services: 8.87% to 32.33%
- Software: -10.36% to 29.04%
- Real Estate: -3.17 to 21.77%
- Healthcare: 2.42% to 16.64%
- Homebuilding: 12.73%
- Restaurants; 12.63%
- Insurance: 8.87% to 12.64%
- Retail1.11%to 9.63%
Ways to Increase Small Business Profit
Here are six ways that a small business owner can increase the small business profit of his/her enterprise:
First, institute strong accounting practices that document all revenues and expenses and control both sides of the ledger.
Second, examine all operating procedures and find ways to generate more sales while also reducing expenses. Strategies for increasing sales can include more cross-selling, stronger promotional activity, and implementing customer loyalty programs.
Third, streamline all management costs. Find ways to make your employees as efficient as possible. Use your financial data to examine management activities and administrative time.
Fourth, find ways to make everyone a salesperson. Get employees as motivated and invested as possible to sell your business’s products and services. Strongly encourage referrals.
Fifth, boost your marketing approaches. Invest more effectively in digital marketing. Increase your visibility and business reputation.
Sixth, maximize your cash flow.
Get Expert Accounting and Financial Assistance
Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.