So, are small businesses profitable? Let’s start by saying that the point of starting a company is to make a profit, right? That being said, we can look at statistics. According to this article, 65% of business owners reported being profitable at the time of the survey.
Another thing to keep in mind is that half of the businesses are less than 5 years old, according to the same article. For some businesses, it takes some time before they start making profits, since there are extra starting costs in some fields of business.
We also have had somewhat difficult past few years for all of us, and especially for small businesses. It of course depends on the industry the business is in, but overall, I would say most of the businesses have had at least some impact from recent events around the world.
Another thing to keep in mind when looking at profitability numbers is survival rates for new businesses. According to this study, half of the businesses survive longer than 5 years. If we looked at older businesses older than 5 years, we might see higher profitability than 65% of the businesses.
When is a business profitable?
Business is profitable when, after all the expenses, business still has more in its bank account than before starting. This can be measured annually, quarterly or from the start of the business.
Even if a business on paper was not profitable, but the owner still manages to pull out a good salary, it might still be worth it. Being profitable as a business is different than being a failing business. A business might simply be “not profitable” due to tax planning.
Most of the times, it is pretty easy to say if the business is profitable or not after looking at their financials.
If a lemonade stand sells lemonade for 5 dollars a cup, manufacturing costs are 2 dollars a cup, lemonade stand startup costs are 20 dollars, and you do not take any salary for yourself, you should sell 7 cups of lemonade to be profitable. Everything after that makes you more money, but 7 cups is the breakeven point.
What is a good profit margin?
A good profit margin varies a lot in different industries. In the restaurant and food business the margins can be lower, but the turnover is a lot bigger. On the other hand, IT, and online businesses, the profit margins can be very high, even over 50%.
Let’s look at the numbers a little bit. Let’s take a restaurant that has a 5% profit margin and an online business that has a 50% profit margin. In order for the restaurant to make as much profit as the online business, they have to sell 10 times the amount that the online business sells.
Usually this is not a problem. Restaurants often have very high turnovers and because of this, they manage to be profitable even with smaller profit margins.
It is varying a lot depending on the industry and the company we are looking at. Best benchmark to find out if your business has a good profit margin is to compare it to similar-sized businesses in the same industry as you.
Most profitable businesses
Most profitable businesses can be hard to measure, but we can calculate it two ways.
The first way is to see which businesses have the highest profit margins. I think if you want to have a high profit margin, you should shoot for the online or service business, where you don’t need any physical inventory.
More about online businesses in this post.
Another way to measure this is by how much profit does the company make. This can justify lower profit margins if turnover is high enough. Just like in the restaurant and IT business example above.
Final words
So, are all small businesses profitable? No, all businesses are not profitable. Startups for example, can go years without making any profit, due to their high growth goals and expenses.
Generally speaking, most of the businesses are still making a profit. And even if on the books the business was not making a profit, it could still be a profitable business for its owner.
Other business-related posts can be found here.
Hopefully you learned something new today, have a nice day.