I learned a painful lesson the first three years after starting Patrick Accounting. My revenue was going up significantly; however, I made the same amount of money in my third year as I did in my first year.
If you are like most business owners, part of the appeal of starting and running your own business is the potential to make a nice income via a profitable business. Yet you realize that creating a healthy profit is more challenging than you would like it to be.
I often get the question from our clients: “how much money should my business make?” This question really boils down to, “how much money should I make?”
And the answer is … drum roll … it depends.
There’s not an easy answer on how much money you should make because each industry is different and each business is unique.
Many different factors influence how profitable your business is, including the industry you are in.
There are some industries such as retail with profit margins around 2% whereas service-based industries such as attorneys have higher profit margins in the neighborhood of 17%.
So while there’s not a universal answer that applies to everyone, there is a way for you to set some profit goals so that your business—and you—make more money.
First, figure out what your current profit margin is.
For now, we’ll stick with net profit which is total revenue minus total expenses divided by total revenue. You should be able to pull this number from your financial statements. Start by looking at your margin for each of the last two years for your benchmark.
Next, determine what a good margin looks like in your industry.
NYU has provided a list of margins by industry (use “net margin”) you can use for reference. Are you over or under your industry average? Either way, there’s always an opportunity to increase your profit margin.
Now, set your goal.
What are you trying to achieve in the next 3, 6, and 12 months?
Next, talk to your accountant or bookkeeper.
You’ll want someone else on your team who can help you work toward greater profitability. They should be able to help you with reporting and tracking.
Finally, make your plan.
Greater profit (and income) does not happen on accident. It requires focused effort and hard work.
Here are some specific tips for increasing your profit:
- Cut expenses. Yes, I know, this is obvious, but it’s easy to miss opportunities.
- Grow sales. Look for ways to generate new sales from existing clients. Send out an email. Make some calls. Also look for ways to win new customers. Maybe you need to get out to some networking events or run an ad campaign.
- Get this free guide on generating more profit. Our team created this guide that provides seven ways to increase your business profit. Download and implement it to start seeing results.
- Shift your perspective on profit. I am a big fan of Profit First which puts profit ahead of expenses. This blog post explains Profit First in more detail. To have the most significant impact on profit, sometimes we have to change our belief about profit.
- Get some accountability. Share your profit goal with close peers, your business coach, and definitely with your bookkeeper and accountant.
Thankfully, I’ve learned a lot since my first three years in business. Which is why our team focuses on helping business owners run more profitable businesses while we take care of the books. Get in touch with us if you have questions about making your business more profitable. We would love to help!
