What is a healthy profit margin for small business?

last week we talked about a ratio that I  consider to be one of the most important   indicators for profitability in a business and  that was the labor efficiency ratio so if you   haven't watched that video make sure you go back  and watch that one but this week I want to talk   about another hard and fast rule that I think  is really important and that is what should your   profit percentage be in your small business there  are lots of different people who have different   rules out there and different targets but I will  tell you from what I've seen working with small   businesses and specifically with service-based  small businesses because that's mostly who we   work with here at Clara CFO and who we've been  helping over the years we've helped all sorts   of different types of businesses but specifically  service based businesses I want to give you some   rules around profit so if that sounds good please  stay tuned if you aren't already subscribed to the   Channel please go ahead and subscribe you know if  everybody was subscribed who watch these videos I   would have I wouldn't have to say this during my  videos so go ahead and subscribe and it'll help   me get to the point a lot faster okay thank you  profit percentage so depending on the different   businesses and different Industries there will  be different profit percentages so there is sort   of that overarching well it depends you know  answer that does happen but I kind of want to   scrap that it depends and I want to give you  guys a Target and something that you should   be shooting for so as a small business owner  you should be making at a minimum 15% profit   in your business and when I say percent profit  I'm literally saying go to the very bottom of   your profit and loss where it says if you're in  an accounting system and it says net income take   that number and divide it by your Top Line number  your total revenue so profit divided by Revenue   equals your profit percentage this is before  any taxes are taken out okay so at a minimum   your business should be at 15% profit margin now  why do we say 15% because really there are lots   of businesses and especially big businesses and  when you get into public companies a lot of them   are at a loss they don't have a profit percentage  they have a loss percentage that they're keeping   track of but the truth is is that that those  are businesses that are operating on cash that   is coming in from investors and small businesses  cannot operate without cash for very long they   have to be profitable and you know we can borrow  money we can have cash coming in from that but the   only way to pay off borrowed money is to start  producing positive cash flow which comes from   creating a profit so you are at risk of the IRS  considering your business a hobby if it does not   produce a profit in three out of five years okay  so if your business is continually producing a   loss year over year over year you do run the risk  of the IRS saying hey like you need to you need   to move along here and do something different  because they're just thinking that you're like   finding ways to spend money that you know you  can write off as a tax deduction and you know   we won't get into all of that but the point is  is that businesses ideally should be producing   positive cash flow and they should be producing  a profit so 15% is the minimum now I would also   say that is backed up by my friend great crab tree  I'm going to sound like I'm a profit for like okay   whatever so um yes a profet of profit but I am  also a evangelist I will use the word evangelist   for Greg CRBT tre's books but I am because I I  agree with him when when Greg talks I'm like yes   that's exactly what I see in practice and what  I see is that often times businesses that are   operating at 5% or margin or less are really  really struggling and he talks about in this   book that 10% profit is the new Break Even because  really that's really not ton of cash to really be   doing much with you're kind of you're not really  in any place where you're producing enough cash to   really be moving the needle forward so you really  need to be at 15% or more in order to be in that   really good healthy place as a business owner now  I would say and I would argue and I'd be happy to   have this conversation with Greg directly that  most of our service-based businesses especially   if they are operating virtually and don't have  very high overhead for actual physical locations   that most of us can be at a 20% % profit margin  with a little bit of work we can get to 20% so we   actually use the target of 20% profit margin for  our B2B service companies that we work with when   we're talking to them and we're making decisions  and we're planning budgets and when we are making   financial decisions we're really targeting that  20% profit margin now what we find is when we do   implement the labor efficiency ratio if we really  can get to that Target of two or more which is the   last video again go and watch that video if you  haven't already if you can get to that the 20%   margin is very realistic actually in that video I  used an example of a consulting company that was   at a 21% profit margin and they had an ler of 1.94  so sometimes you don't even have to get to one   point or to get to two in your labor efficiency  ratio in order to reach that 20% profit margin   okay so these are two numbers that we use the ler  and then the profit margin and I'm just saying the   L is calculated higher up on the p&l than the  profit margin that's why my hands are going all   over the place but those two numbers can really  help us measure profitability for the business   and help us identify where the problems are so  let's say if you had an ler of two and you took   into account on the nuances that I talk about in  that video and you had all the appropriate costs   incorporated but then your profit margin was 10%  we would need to look at operating expenses that's   where we would say something is off here maybe  you're spending way too much on Market marting   maybe your travel and food budget is just out of  control because the owner is putting every single   thing they do with their family into the business  you know there might be lots of other things that   are siphoning off cash in the business that are  affecting your profit margin so these two things   used in conjunction can really help tell us a lot  about the p&l okay so definitely want you to be   closer to 20% if you are a service-based company  now there are going to be industries that operate   lower margins however you need to think about  as a small business owner what can you tolerate   what can you tolerate as a business owner can you  tolerate a 3% margin year over year over year over   year if you're only making you $2 to $300,000  in your business no you probably can't like you   can't really it doesn't make sense for you to be  doing all the work of owning a business if you're   just making a teeny tiny little bit of cash flow  you know so you need to think about these things   because they do matter and you do need to make  sense they need to make sense for your life so   pay attention to your profit margin is what  I'm saying if your profit margin is too low   couple things you can think about raising prices  looking at all your expenses and cutting expenses   that can be your direct costs directly you know  cost of goods sold that can be your labor costs   that can be your operating expenses you need to  look at every single line in your p&l and look   at cutting costs and every single spot a couple  other things you can do is you can increase volume   so with when it comes to increasing Revenue which  is your Topline number you can increase prices or   you can increase volume those two things now  with increase volume can also come increased   costs so you need to understand how your business  model Works to understand if that's actually going   to make a difference I've worked with companies  that they think that just like adding more and   selling more and selling more will do the trick  to get them out of their profit problems but it   doesn't actually always work that way so you need  to understand your business model to understand if   that's actually going to improve your business  business by doing that and if it will actually   improve your percentage profit at the end of  the day okay tell me what you think I'm open to   your thoughts tell me if you have done these two  calculations labor efficiency ratio and profit and   put them in the comment section below if you're  comfortable I would love to see some people's real   numbers after you've done this and you know if  you don't even feel comfortable doing that email   me the email is hello clarac cfo.com email us your  labor efficiency ratio and your profit percentage   and if you're not understanding why your labor  efficiency ratio might be good or your and but   your profit percentage is not make sure you watch  the labor efficiency video and then think about   all the things that I mentioned there and then I'm  happy to answer some questions there if we want to   try to go through a few scenarios that might be  a great idea for a video so feel free to email me   I'd love to hear from you guys so okay that is my  opinion on profit percentages and I'd love to hear   your thoughts as well thank you so much for being  here and if you found this video helpful please go   ahead and give it a thumbs up I would very much  appreciate it all right bye [Music] everybody

Channel: Clara CFO Group

Views: 1,629

Keywords: profit kpi, kpi for small business, profit percentage target, profit target indicator, target profitability, profitability, improve profit margin, profit margin, profit margin explained, profit margin improvement, 20% profit, 15% profit, improve profit, improve profitability, how much profit is enough, positive cash flow, how much income is enough, improve cash flow, increase cash flow, cash flow kpi, ceo kpi, healthy profit margin

Id: Icxmyt_HFJ4

Length: 9min 14sec (554 seconds)

Published: Thu Mar 14 2024