I created a fun survey recently to shine a light on profitability in business (and the perception of profitability in business).
A dashboard with the profitability survey results is shown above. You can enlarge the report by clicking in the bottom right corner. And you can move to each of the 3 pages by clicking near the bottom center of the report. You can also click here to see an enlarged version of the dashboard.
Profitability is one of my favorite subjects. (Well, cash flow is probably my real favorite… but strong profitability is the key driver of a healthy cash flow… so profits get my attention too.) 😊
In the survey I asked:
As a rough guess, what percent profit on each dollar of sales do you think the average company makes after expenses and after income taxes?”
It was a super-fast, 5-Second Survey to get your view on profitability in business. You can take the survey real fast here.
The Perception of Business Profitability
I read an article recently that said the general public believes that the average company has a 36% profit margin. The article was referring to a random sample of American adults who were asked the question:
Just a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?”
WOW! 36% profitability after income taxes isn’t even close to reality.
On the one hand, it isn’t too big a surprise that the general public believes profitability in business is much higher than it really is. In some ways it fits with the view that is popular that business is filled with “greedy capitalists” that are making money hand over fist.
On the other hand, my experience has taught me that even business owners don’t really know how profitable their business is. Or how profitable their business should be.
So, I decided to ask a very similar question of people who are part of my free membership group at FinancialRhythm.com. These are a mix of business owners and finance professionals who have read my books and follow my blog. They own and manage businesses or support and advise business owners.
In a separate survey, I asked the same short question but used a service at Survey Monkey to send the survey to a general audience in the U.S. I wanted to compare survey results between a group of mostly business people and a more general, non-business audience.
Profitability Survey Results
The results are shown in the dashboard at the top of this post.
The image below is a screenshot from the dashboard. It shows a summary of the survey results for Financial Rhythm members.
71% of the responders chose the 1% to 10% category as their estimate for average company profitability after income taxes.
Responders were almost evenly split between business owners or someone running the business and accounting and financial professionals.
In order to arrive at a single percentage of estimated profitability, I created a (sort of) weighted average response using the mid-point of each range and the number of responses to each range.
The result was on average, Financial Rhythm website members estimated the profitability (after income taxes) of the average company in the US to be 10%.
The image below shows a summary of the survey results for the general public.
Only 22% of the general public responders chose the 1% to 10% category as their estimate for average company profitability after income taxes. 37% chose the 11% to 20% category.
Only 10% of the general public responders were business owners. 74% were “other” meaning they do not own or operate a business and they were not accounting or financial professionals.
I calculated the same weighted average response using the mid-point of each range and the number of responses to each range.
The result was on average, the general public estimated the profitability (after income taxes) of the average company in the US to be 18%.
Survey Results Comparison
The image below shows a comparison of the survey results from Financial Rhythm members and the general public.
The general public believes business profitability is much higher than business owners and their advisors. 18% vs. 10%. That’s a big difference. Although not near as big a difference as the survey I mentioned that showed an estimated 36% profitability.
The actual average profitability among U.S. companies in 2017 is 8% profit after tax.
Check out this dashboard I created of actual Profitability Margins by Industry across almost 100 industries and over 7,000 companies in the U.S.
I will share a post soon where I show you some specific companies that everyone is familiar with and what their profitability margins are. I think you will find it very interesting to see what other companies are making as a percent of sales.
I hope it will help you determine whether your profitability levels are where they should be. One tool that might help you is the 5-Minute Profitability Assessment. The purpose of the 5-minute profitability assessment is to help you quickly determine if your business is as profitable as it should be.
The profitability assessment is an important part of the 10-step process for making your business financially strong. It will help you breathe financial life into your business if you believe your business is not as financially sound, or as profitable, as it should be.
Driving Profitability Higher
The profits you generate in your business, expressed as a percentage of revenues (sales), is a very important metric. A business that does not consistently produce strong profitability is a business headed for the graveyard.
As my business failure rates dashboard shows, almost half of all businesses never make it to their 5-year anniversary. Only 35% survive to their 10-year anniversary.
Above average profitability is vital because it helps you generate the cash (the money) you will need to:
- Reinvest in the business
- Create the capital to grow
- Pay down debt
- Earn a higher return on your investment
- Create financial freedom for you and your investors
- … and make running the business fun – and rewarding!
I hope your financial improvement plans include action items related to driving revenues higher and expenses lower (and on ways to keep expenses from rising too fast).
Profitability rocks! 😊
Philip Campbell is a CPA, financial consultant, and author of the book A Quick Start Guide to Financial Forecasting: Discover the Secret to Driving Growth, Profitability, and Cash Flow and the book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore. He is also the author of a number of online courses including Understanding Your Cash Flow – In Less Than 10 Minutes. His books, articles, blog and online courses provide an easy-to-understand, step-by-step guide for entrepreneurs and business owners who want to create financial health, wealth, and freedom in business.
Philip’s 30 year career includes the acquisition or sale of 33 companies (and counting) and an IPO on the New York Stock Exchange.
This book provides a straightforward, easy-to-understand guide to one of the most powerful financial tools in business: a reliable financial forecast. It will transform the financial future of your company and help you make better, faster, smarter financial decisions.
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