Much of the stuff I write about on this blog are things I’ve learned, and my entrepreneurial experiences running my business over the last 30 plus years.
And when you’re running a small business, there’s a lot to learn, and although I went to business school, many of the things I learned in school didn’t prepare me for how to run a small business.
I graduated with multiple entry and mid-level accounting courses. I understood most accounting terms, but I understood them as someone who studies a textbook.
From an accounting perspective especially, I rarely made the connection between the ratios and formulas you need to understand and study and the practical application in my small business.
In school, they prepare you as if you’re reading the income statement for a large business, not a small fledgling business like I was running. You may also be advised to use custom software development to understand the concepts better. Same with the hundreds of ratios you need to understand in order to pass your courses, so when I graduated, I DID understand the terms gross margin, net margin, and profit margin.
I did NOT understand their importance and application to my business though, in particular, gross margin and profit margin, and as a result, I didn’t track these ratios.
When you’re running a small business, you’re looking to maximize profitability, i.e. how many dollars did you put into your pocket.
It was only in my later years did I really understand, and more importantly, track these financial ratios, expressed as a percentage.
And that’s why I write this blog.
I write this blog so that I can educate other small business owners on the nuances of running a business. To help them grow revenues, maximize profitability, and ultimately, create wealth. The business I ran for 27-years, and ultimately sold to private equity for 8-figures in 2017, was extremely profitable. It wasn’t always that way, but, I developed practices over the years, starting in my 5th year in business, which helped to maximize profits, and ultimately, the dollars that ended up in my pocket.
The Average Profit Margin for a Small Business in North America
Before I dive into the profit margins, let me tell you that I created a course that will teach you how to maximize profits, and use some of the same tricks that I used in my business. How to Turn Your Small Business Into a Profit Machine in 60 Days
One of the most important ratios that a small business owner needs to track is the profit margin.
Why?
At the end of the week, month, and year, the profit margin is the number of dollars that will find its way into your pocket.
The difference between 3%, and a 17% net profit margin, on revenues of a $1 million company, is the difference between $30,000, and $170,000, or, an additional $140,000 in your pocket.*** As an aside, if you’re interested in reading about why I sold my business, you can read that here: My Journey Post Business Sale as I Sail Into a New Harbour. The Next Stage, Entrepreneur Semi-Retirement, and Life Post Business Sale
Net Profit Margin Formula:
The formula for Net Profit Margin: Net income / Revenue X 100
Using the above example, a company that made $170,000 net profit on revenues of $1 million, will look as follows:
$170,000 / $1,000,000 X 100 = 17, or 17%.
The simplified income statement looks as follows:
Income Statement
- Revenue = $1,000,000
- COGS (Cost of Goods Sold) = $500,000
- Gross Profit = $500,000
- Expenses = $330,000
- Net Profit = $170,000
Now that we’ve got that out of the way, let’s review what the average profit margin is of the average business in North America. In other words, what percentage of dollars does the average small business put in its pocket every year?
Reason-Rupe did a study in 2013. They asked 1,003 people, the general public, what they believed the average profit margin was for a small business. The response was 36%.
In actual fact, the average small business doesn’t make anywhere near 36% net profit margin. It’s much less than that.
So What Is the Average Profit Margin for a Small Business?
The average profit margin is going to vary, of course, from business to business, and from industry to industry.
In a study done by the Government of Canada, titled: SME Operating Performance, and corroborated by the US Govt Small Business Administration survey, they looked at profits by sector, and the numbers varied big time. For example,
- Agriculture and Forestry = 8.4%
- Mining = -16.9%
- Construction = 4.6%
- Manufacturing = 2%
- Wholesale and Retail Trade = 2%
- Professional and Technical Services = 6.3%
Here’s the chart below:
Frankly, the results are somewhat abysmal.
In the blog post I wrote titled: How Much Profit Does the Average Small Business Owner Make a Year? I went through the calculations and determined that the average small business owner makes approximately a 7% average profit margin per year, again, not a very good number.
So, to answer the question: What is the Average Profit Margin for a Small Business in North America? The average small business in North America makes a profit margin of approximately 7%.
So, the next and logical question is:
How Do You Increase Profit Margins for Your Small Business:
I wrote a blog post titled: 19 Easy Ways to Increase Profit Margins for Your Small Business
In the blog post, I reviewed a number of creative ways that any business can improve their profit margins, and in turn, improve their profitability. Remember, if your business’s revenue (net income) is $1 million, and your EBITDA margin is 7%, as per the example I provided above, for every additional percentage you raise your EBITDA margin, your business’s profitability increases by $10,000.
In the blog post, I listed a number of ways to improve profit margins, for example:
- You can raise the prices of your products. Raising prices will depend on the price elasticity of demand for your product, but, it is an option to consider.
- You can stop offering product discounts
- Negotiate better terms with your suppliers. This is potentially an easy one. I renegotiated terms with one of my suppliers a couple of years ago, and managed to save my company over $180,000 in savings. You can bet that definitely increased my EBITDA margin percentage.
Before you go, here’s another blog post on profitability I think you might enjoy: How Much Profit Does the Average Small Business Owner Make a Year?
Good luck with your business and wealth-creating journey.
Glossary Terms: Margin Versus Markup
A quick explanation:
Here’s what these terms mean that I have frequently used in my blog post:
What is Margin? Margin is the percentage of dollars that end up in your pocket, income, as a percentage of overall revenue.
What is Markup? Markup is the amount added to the cost of a product. So, for example, if a product cost $100, and the sale price is $150, then the markup is $50, and when noted as a percentage, the markup is 100 X Profit / Cost, or, in the above example, 100 X $50 / $100, or 50%.
Margin Markup Table: In order to assess the amount of profit margin your small business is making, it’s important that you track the profit margins on a per-product basis, and for that, you can put your products into a margin markup table, which would look as follows:
Good luck with your small business and wealth-creating journey.
If you enjoyed this post, you might also enjoy this one: Profit Isn’t a Disease. It’s the By-Product of a Well-Run Company. If You’re Not Yet Profitable, Fix It or Get a Job.
And this one: How Do You Know When It’s Time to Sell Your Business? It’s Not All About the Money.
8 Most Profitable Small Business Ideas in North America
The number of small businesses has drastically increased by 32.5 million in the U.S., which makes for 99.9% of businesses in the country.
There is, still, a lot of space for small businesses in the country to make up for the economic damage caused by COVID-19. So, here are the high-profit businesses that I usually suggest to friends and readers:
Tax Preparation and Financial Planning
Taxes are not something everyone is taught in school. So, if you have spent time and money learning that skill, you can provide your services to others.
Accounting, financial planning, and tax preparation are a demand for almost all individuals and businesses, which makes this a highly profitable business idea.
The more command you have on your skill and knowledge, the more profit you will be able to earn.
Retirement and Pension Plan
The measured growth of the retirement and pension plan industry in the U.S. is about 2.1%. You can provide your services by creating retirement plans for companies or individuals.
These days, more people are becoming self-employed, requiring someone to create a retirement plan for them.
So, why not cash your skills and create different retirement plans, whether traditional, 401(k), Simple IRA, SEP IRA, or Keogh.
Real Estate Property Leasing
Real estate is always a profitable industry to invest in but often can be quite difficult to start. However, if you have a real estate license, you can invest in real estate property and upsell it on a lease.
It can provide a steady income for people who want to keep it as a side business. However, you can further grow your real estate business by reinvesting the profit and enhancing your portfolio.
Dental Services
Dental checkups are necessary to keep your oral hygiene in check. If you have a dental license, then starting a dental clinic can be quite profitable. You can start by renting a small yet hygienic space to set up your clinic.
You will need to invest in the advanced equipment and dental clinic setup that you can cover up with the 14.8% profit margin.
Teaching a Skill
Another small business idea is to create a course that you have expertise in. Most people are willing to pay a good amount to learn a particular skill. This business usually requires a small investment, which includes a space to conduct your classes, and educational equipment.
However, in this digital era, conducting classes has become even easier. You can advertise your course and earn through it for years to come.
Professional Flipping Services
Most people are into vintage or second-hand items to reduce waste and get their hands on high-quality stuff at an affordable price. Professional furniture flipping is one of the most top trending small businesses in North America.
You can also flip tools, clothes, and accessories to sell them at a better price on online marketplaces like eBay, Etsy, etc.
Food Business
Starting a food business requires a lot of planning, supplies, license, and expertise. It is not a small investment, but it all pays off as it is one of the fastest-growing industries in North America.
It has a 3 to 5% average profit margin that can rise up to 15%, depending on different factors. You can start small by opening an online food shop and later on turn it into a physical eatery with unique options on the menu.
The key to success in this business is to stand out. You don’t want to start another fried chicken business. There are plenty of well-established and trusted options for that.
Warehouse and Storage Space
Another business idea with a high-profit margin is renting a warehouse of storage space. This is best for people who own a piece of land but do not want to spend on the luxury construction of a house, so building a simple warehouse is the best option.
You can rent that storage space to other small or medium-sized businesses to store their stock. Just make sure to get maintenance checks done on your warehouse every now and then.
You should also consider subscribing to my blog. I publish one article a week on small business and wealth creation. You can subscribe here.
Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.
