Between Profit And Small Business

What was the most recent net profit margin of your business? Were revenue and profit projections achieved? Is your venture comfortably able to manage its accounts payable? Were you, the owner, able to provide comprehensive medical and dental insurance to yourself and any employees? Were you able to substantively fund your retirement account last year? Were you able to afford a vacation?

If the answer to two or more of those questions is no, I respectfully suggest that you evaluate the future viability of your enterprise. More than a business model tweak or a pivot, you may need to explore another kind of business altogether, one with greater profit-making potential.

Take heed—Sageworks, a financial data services company located in Raleigh, NC, analyzed the net profit margins of 16,000 small businesses that earned less than $5 million between October 1, 2016 and October 31, 2017. The average net profit across all industries in that time period was 8.4 %.

Note that the list of top performers consists almost entirely of Solopreneur-friendly service industries. Despite the challenges of selling services, especially intangible services, to either B2B or B2C clients, Sagework’s list demonstrates that it is possible to make money as a self-employed service provider.

Some industries are more Soloprenuer-friendly than others. Accountants and bookkeepers, real estate sellers, attorneys, landlords and certain healthcare practitioners are all able to operate a one-person shop quite well, perhaps with a single employee to provide administrative help.

Educational requirements and professional credentials pose a formidable barrier to entry for several of these high-yield business opportunities, most notably dentistry, chiropractic, law and accounting (CPA or certified financial analyst). In contrast, real estate sales requires only a license to do business, the right relationships and no real selling skills if you are in a hot market. If someone with a broker’s license brings you into the business, you can work under the umbrella of that person’s credentials.

I look askance at the stated prospects for attorneys, however. There have been many mergers between big law firms and as a result, many lay-offs. From a former employee of a very prestigious law firm who was let go six or seven years ago and eventually started her own boutique firm, those who venture out on their own can encounter stiff competition in certain legal specialties. Welcome to the new normal. Below are the small businesses that on average have the healthiest profit margins.

Business Net profit margin

Accounting / Bookkeeping 18.4%a

Landlords 17.9 %

Legal services 17.4 %

Management of companies 16.0 %

Real estate sales 14.9 %

Dentist’s office 14.8 %

Health practitioners (chiropractors, etc) 13.0 %

Medical & diagnostic laboratories 12.1 %

Automotive equipment rental or leasing 12.0 %

Graphic and industrial design 11.4%

Warehousing & storage 11.0 %

Management, scientific, or technical consulting 10.3 %

How To Read Financial Statement

Audit, Review, Compilation: You know the difference. With bonding companies, you need certain financial statements (FSs) at specific times. But there is one FS you don’t know about, and it can be very helpful!

Audit: This is the highest level of CPA (Certified Public Accountant) presentation. The CPA provides a cover letter stating they have checked over the numbers and believe they are accurate.

Review: This is the middle level. The CPA does some checking, but less than an audit.

Compilation: This report has a disclaimer letter. It says the FS is the presentation of management – meaning the CPA does not vouch for the numbers.

Other than CPA prepared statements, you could run into one by a Public Accountant, or a bookkeeper.

There are also Internally Prepared statements produced directly by the customer, such as with QuickBooks.

Then there is this Secret One you probably don’t know about. It can be a strategic help and will not be suggested by the accountant. It’s up to you to ask for it! We call it a “Confirmed Internal FS.”

This document is an internal FS, such as QuickBooks, but with an important upgrade. When obtaining a Confirmed Internal Report, the president or company owner is required to sign and date the company Balance Sheet (or maybe every page of the document) and write “Confirmed.” This is an affirmative statement that the FS has been scrutinized. It is a document with greater credibility, because someone is taking responsibility for it. (Read Secret #5 about the role confidence plays in bonding.)

Here is a real life example of how beneficial the Confirmed Internal FS can be. This week we are issuing a P&P bond in excess of $8 million for an applicant with a 12/31 fiscal year-end. Obviously, the CPA report is not available yet. However, before issuing the bond, we must get a read on their financial picture. How did the year turn out?

We can’t get the CPA report yet, but an internal FS is available. Can the underwriter base a decision on this document? That depends on whether the surety has the flexibility to give an approval in the absence of a CPA Audit or Review (Many underwriters are bound by strict rules that tie their hands.)

Fortunately, we were able to proceed based on the confidence that the business owner reviewed and Confirmed the financial statement. He signed his name and went on record, “You can rely on these numbers.” To us, that makes a big difference!