I knew I wanted to own my own business when I was 13 years old. In fact, I started my first business, which was an “advertising business,” at the age of 15.
I put “advertising business” in quotes because it wasn’t much of a business. I suspect the total revenue from my first venture didn’t amount to more than a few thousand dollars, but I was hooked, nonetheless.
The Average Small Business Profit, and The Average Net Income For Small Businesses in 2023
There’s something that has always appealed to me about being my own boss and forging my own destiny. In my mind, I’ve always equated it with the thought of traveling or driving quickly on a motorcycle on a quiet highway with the song “Born to Be Wild” playing in the background. Not to forget the fact that I won’t be working 9 to 5, trying to climb the corporate ladder.
I’ve since gone on to start a number of businesses over the years, all with varying degrees of success.
Ironically, if you had asked me why I wanted to start my own business when I was younger, my answer back then would likely have been the same answer as I would give today:
The freedom to choose my destiny and reap the rewards of my hard work.
Ultimately, and in the end, profit follows … Or does it?
What Profit Margins Does a Small Business Make?
There appears to be a wide disconnect between what a small business owner actually makes, and what the general public believes a small business owner makes. The company Reason-Rupe did a poll in 2013 and asked over 1,000 people what they thought the profit margin was for a small business. The results are surprising.
The general public believes that a small business makes up to 36% profit margin when in actuality, the number isn’t even remotely close to 36%.
I’m sure you’ve heard the statistic that over 50% of new businesses fail within the first 5 years of starting. Inside that terrible statistic, there are a number of questions, like why did the company fail and why did the small business ever got started in the first place.
My plan isn’t to tackle the answers to the two above questions, as I’ve addressed those in other blog posts, like here. But if the general public believes there’s such a high-profit margin, do individuals enter small businesses thinking that it’s easy and filled with wealth and riches?
Is the typical entrepreneur completely disillusioned enough into believing that they’ll make a 36% profit margin when they enter the business, only to realize that it’s a lot harder and not nearly as profitable as they first imagined?
I suspect so, and the high business failure rate would likely support that.
So if the typical small business owner doesn’t make a 36% profit margin, then how much do they make? Unfortunately, not enough! And worse, most small business owners don’t know how to generate profits in their business (small plug – I created a 90-minute course content – How to Turn Your Small Business Into a Profit Machine in 60 Days.
For starters, small business comprises a very large percentage of the overall workforce in North America. You should take into account that there are a lot of them working in the education niche providing various essay writing services, tutoring, assignments, homework providers, etc.
According to a study by the US Small Business Administration, in 2015 US, small businesses employed 58.9 million people or 47.5% of the private workforce. For clarification purposes, a small business is defined as a company with 100 or fewer employees.
From a different SBA survey, 80% of the 28.1 million small businesses in the United States do not have employees.
What Is the Average Revenue of a Small Business?
The average revenue for tech startups may be a bit different. In a study of 234 tech startups, ProjectionHub found that the average revenue for a tech startup was approximately $500,000 annually in the first 2 years in business.
The average small business revenue with no employees is $44,000 per year, and the average revenue of a small business with employees is $4.9 million in 2021.
I extracted the data into the following chart:
The above, average small business revenue, addresses the revenue question. The next question is what is the average profit margin.
To an article titled SME Operating Performance on the Government of Canada website, margins for a small business operating between 2004 and 2012 were 7%.
You will notice a big variance from the chart in the small business net profit margin ranging from as low as 1.5% to as high as 7%. The information obviously varies from year to year based on economic conditions, but a 7% net profit operating margin is a high watermark.
That number, 7%, isn’t very good.
For clarification purposes, the number is how much revenue a company keeps as profit after deducting all costs of doing business, taxes included.
Using a 7% profit margin, which appears to be at the high end, here’s what the average profit looks like for the North American business:
How Much Profit Does the Average Small Business Make a Year?
Given that 80% of the small businesses don’t have any employees, and the average business owner has $44,000 in revenues, it looks like the average 1-person business makes slightly over $3,000 a year.
When settling a deal with any kind of business, there’s a high chance of risk, misunderstanding, and confusion taking a spot in the situation. To reinforce your company from those kinds of consequences, conduct every transaction with efficient business agreements.
Even if I were to double the 7% number, we’re still only looking at $6,000 a year in profits, which isn’t exactly a banner number. That is not the average small business profit since that only addresses a one-person company.
If you take the weighted average of all of the businesses in each size category, you’re looking at slightly over $50,000 per year. Of course, I’ve made some assumptions, the most important assumption being that the average small business profit margin is 7%.
You will notice that the profit level really only becomes somewhat significant when the business has between 20 to 99 employees, at which point, the average profit margin is $498,680.
Growing a small business to the north of 20 employees requires a very different entrepreneurial skillset than the startup skillset, which is why so few businesses ever surpass the $1 million mark.
Even at $1 million in revenue, the profits on average are only $70,000 a year, which is barely above the average employee’s salary level. According to the book, Scaling Up by Verne Harnish, 94% of businesses have less than $1 million in revenues.
Amount of Profit Based on the Number of Employees
Using the above information, and extracting data from another study done by both the US Small Business Association and the Government of Canada, here is the percentage of businesses that fall into each category:
The bottom line (no pun intended) is that the average small business profit for the typical business owner is barely making enough profit to make it worth running a business. They would be better off just getting a job.
To Summarize, and answer the question, what type of profit does the average small business make a year, or, how much do small business owners make, broken down into the categories, you’re looking at:
- 1 employee = $3,800 profit/year
- 2 to 4 employees = $27,090 profit/year
- 5 to 9 employees = $76,600 profit/year
- 10 to 19 employees = $151,480 profit/year
- 20 to 99 employees = $459,680 profit/year
- 100 to 499 employees = $2,854,250 profit/year
If you’re thinking of starting a small business because you’re hoping to hit the “get rich quick jackpot”, you might want to consider a different profession like SEO consulting.
The largest cohort of small businesses falls into the one-employee category, and they make less than $10,000, on average, profit per year.
I see two primary small business challenges:
Challenge 1: taking the leap from a single sole-proprietor shop to a larger scale
Challenge 2: improving profit margins
These two challenges are unique, of course, and need to be tackled separately. The scaling challenge is far more complex than improving profit margins. Or put another way, improving profit margins is easier to fix than improving revenues.
Given the Stress and Lack of Profits, Is It Worth Running a Small Business?
And that’s the holy grail of questions.
Why run a small business when the chances of success are so slim?
Why run a small business when most business owners would be better off just getting a job?
And these questions bring me back to what I wrote about at the beginning of this post:
There’s something that has always appealed to me about being my own boss and forging my own destiny. In my mind, I’ve always equated it with the thought of driving quickly on a motorcycle on a quiet highway with the song “Born to Be Wild” playing in the background.
- The freedom of choice.
- The freedom to forge one’s destiny.
- The chance of making it big.
- The appeal of large profits and wealth – you might be interested in this related article: How to Become a Decamillionaire, Grow your Net Worth to $10 Million, and Join the 1% Club
In the end, is it all worth it?
Absolutely. And I would do it all over again if I could.
Regarding the question of how much do small business owners make, the answer is unfortunately not enough. Now, the next question is:
How Much Does a Successful Business Owner Make?
The bigger profits start once you pass the $5 to $7 million dollar revenue mark with a 15% and greater EBITDA profit margin. PayScale’s 2017 data shows that the total earnings of a small business can range from $30,000 – $182,000 per year.
That would net a minimum of $750,000 into the small business owner’s pocket (not including taxes). If your small business can consistently make that a year, for many years, and can manage to save and invest at least 50% a year, then you can create massive wealth.
However, the average income may also vary depending on the region, type of industry, and experience of the business owner.
How Many Employees Does a Small Business Have on Average
The number of employees on average is roughly 18 based on the weighted average from the numbers in the Excel table below.
More and more small businesses are being established in the U.S. alone each year. In 2019, the number of small businesses in the U.S. was 30.7 million, which makes for 99.9% of businesses in the United States.
Since we have already talked about the average, if we consider the statistics as a whole, there are 59.9 million people employed in small businesses. This makes up 47.3% of the workforce in the U.S.
This shows that small businesses are not really small as they have taken over most of the business world in the United States alone.
What is the Average Net Income for Small Businesses?
If we consider that the average EBITDA profit margin is 7%, and the average business has revenue of $1 million per year, then the average net income for small businesses is $70,000 per year.
Even Though the average income by the state may vary due to geographical differences, educational differences, and experience, the average income is somewhere around what I mentioned above.
Factors like the season, trends, and lack of material can majorly affect sales, resulting in the fluctuation of the Net Income of a business. With these factors in mind, small businesses have a huge responsibility to find alternatives so they can keep their sales going.
Growing your small business can take time and you won’t always make quick money, but it’s certainly worth it. The reason why 42% of small businesses fail is because of the lack of market demand. So, make sure to do your research properly and be consistent with what you do.
So, if you want to be your own boss, start right now with all the necessary information. It will slowly but surely give the results you need.
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.
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.