When starting, it’s natural for small business owners to compare their enterprise to other businesses to get an idea of their success and market research.
One way this is done is by comparing the average profit of their business in relation to the industry as a whole, which can be used as a thermometer of sorts to indicate whether a company is lagging behind.
Keeping an average profit margin in mind to judge how well your business venture is doing may be the right call, but not everyone knows how to do it properly, so you may need the help of . Hiring a professional may have other positives, such as sales advice and feedback on .
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So, to help you justly evaluate your enterprise’s success, here is everything you need to know about the average profit of a small business.
If we are going to define the average profit of a Small Business, logic dictates that we should clarify what classifies a company under this terminology in the first place.
The American Society for Quality defines a Small Business as “A privately owned corporation, partnership, or sole proprietorship that has fewer employees and less annual revenue than a corporation or regular-sized business.” Although precisely what classifies as “fewer employees” may vary depending on the laws of where you live, to qualify for an American small business government loan, a company needs to employ a max of 500 people and make no more than 7 million dollars a year. In reality, your average American small business has 20 employees and produces around 2 million dollars yearly.
Another factor that affects the income of a small business is the industry where the company operates. As one may expect, some industries are more profitable than others, and if a drive is on the low, you can expect even its small businesses to be affected.
So there is no point in taking a look at how restaurants are doing if you own a small bookstore, you are competing in different fields and playing by different rules.
For example, according to the Bureau of Labor Statistics, math and computer-related industries make a yearly average of $67,970, while florists tend to make around $27,610.
Your business’s income may also vary largely depending on your location, as some areas are more costly than others. There is also the matter of local demands for specific products or services.
If you want to know exactly how that affects your small business, the BLShase published a guide that lays out wage information by state, industry, and occupation.
Since things like city size influence pricing, production cost, and other similar factors, having a similar guide may provide you the necessary insight on whether your business is in an ideal area.
Owners Draw VS Salary
An unexpected factor about a small business’s average profit lies in whether the business receives a “Draw” or a fixed salary. An owner’s draw is a certain percentage of the company profit that the owner takes for himself as payment, while a wage, as you may have expected, is a fixed amount that remains unaltered no matter the profit.
Both Payment systems have their pros and cons when it comes to how it affects profit. An owner’s draw could take a significant part of the company’s money if there was a large profit, which will affect your yearly average. Meanwhile, a fixed salary is excellent for preserving your company’s profits, but only if you can extract it without too much damage to the overall balance.
Cost of Sold Goods
One of the most significant things to affect the profit a small business makes is the cost of the product they sell or the service they provide. Suppose your business is focused on the selling of a product. In that case, there are usually two possibilities: Either you bought these goods from a wholesaler, or your company produced them on its own.
In the second option, the cost of the materials used in producing said goods can also be included in the price of sold goods (COGS for short). This also applies to rented equipment or even costs regarding advertising.
Gross Profit Margin and Net Profit Margin
Another important distinction is the difference between the profit margin and net profit of your company. After all, there is a remarkable difference in saying that your company had a gain of 10% and that it profited 1 million dollars.
According to Investopedia, “Profit margin is one of the commonly used profitability ratios to gauge the degree to which a company or a business activity makes money. It represents what percentage of sales has turned into profits.”
Meanwhile, Net Profit refers to the actual amount your company has earned after all expenses like wages, taxes, bills, and so on have been taken into account.