Small Business Profitability: How Much Profit Should Your Business Make?

Whether you’re operating a new business, or have been managing your small business for years, your profit margin is one of the most important financial metrics to determine the success of your business. We'll help you identify a good profit margin, how it’s calculated, and how you can boost profitability. 

How do you calculate a profit margin?

A business’s profit margin represents the portion of your sales that leads to profit after expenses are accounted for. To calculate this net profit margin, subtract expenses from total sales and divide that number by the business’s total revenue. For example, if your business brought in $100,000 but you had expenses of $75,000, your net profit margin would be 25%. 

What is a good profit margin for a small business? 

While large companies and corporations report these numbers for investors and shareholders, it is equally important to have a sense of your profit margin when you are running a small business. This percentage will help you gain a sense of the health of your business, while also enabling you to set future goals and forecasts. Many small business owners understandably want to know what is a reasonable profit margin for a small business? The answer to this, like many other financial questions, is: it depends. 

The main factor to keep in mind when determining a suitable profit margin for your business is your industry. Services like business consulting, finance, law, or accounting tend to have higher profit margins since there is less overhead (i.e., equipment and inventory) than the food service, hospitality, or retail industries, for example. This doesn’t make any industry better or worse than another, it just means you need to be aware that you are comparing your business results with similar companies if you're looking for comparable profit margins. In general, a 10%-20% average profit margin for small businesses is considered reasonable—but don’t forget to account for economic conditions, industry, and geographic location. 

What factors can improve profit margins for small businesses?

If you are a small business owner and you’re looking for ways to boost your profit margins, there are many potential areas for improvement that can have this effect. Here are four areas to consider: 

1. Reduce waste: This is a tactic that targets lowering your expenses by eliminating dead inventory, or wasted materials, in the production process. As part of this, you may also want to ensure that you are optimizing the way you are making use of labor costs to avoid overtime, excess downtime, or too many people on the clock at once.
2. Adjust pricing: As the cost of goods rises, you need to make sure you adjust your prices accordingly where it makes sense for your business and your customers. Many of your individual items need to be profitable in order to have a strong overall profit margin. Make sure you are not undercharging.
3. Negotiate with vendors: If you receive goods or services from vendors, have a conversation to find out if there are options to purchase in bulk to save money. You may consider switching vendors if you can find favorable pricing elsewhere.
4. Ensure you are getting paid on time and in full: To ensure your sales and revenue are pulling their weight in the profit equation, prioritize getting paid on time. Automating your invoicing process with a platform like Modern Receivable can give you a partner to help navigate this process. 

To learn more about how our automated invoicing program is revolutionizing the way small businesses operate, learn more or reach out to an expert member of our team.