Is your dental practice as profitable as the next one? Are you generating from your landscaping business as much money as the firm across town is?
Business owners are busy; the latest U.S. Survey of Entrepreneurs from the Census Bureau found that nearly 1 in 5 owners of businesses with employees worked more than 60 hours a week. In addition to handling a crush of everyday operational challenges, owners are often obsessing over how to generate sales, build customer relationships or improve their product or service.
At the same time, however, business owners should be taking the time to ask some of the questions above and look at the big picture: Is my business growing? Do I have enough cash? Am I actually making money? These questions are critical in assessing the health of a business, according to Brian Hamilton, chairman of Sageworks, a financial information company.
Knowing whether your firm is profitable is especially important, Hamilton says. “Most entrepreneurs — and I was this way as well — just figure that if you increase your top line, your sales, everything else will take care of itself,” he says. “That’s kind of like when you’re flying a plane and you think you’re right side up but you’re upside down. It’s not always true that when you get more sales you get more profit, so knowing the profit margin is important.”
Indeed, the Census Bureau’s survey found that among the 5.5 million firms with paid employees, 19 percent were losing money and 17 percent were only breaking even. Accountants and other business advisors should be able to help you calculate your company’s profit margin, and they can work with you to boost that financial metric and other metrics that are critical to ensuring you are generating enough cash flow to stay in business.
These professionals can also help you gauge how your business compares with others in the industry as it relates to financial metrics such as profitability, and they can help you identify ways to boost profitability. Benchmarking your business against peers can identify where you are outperforming and where you have room to improve. For example, if a restaurant’s net profit margin is lower than that of other restaurants, digging deeper into the numbers might prompt a renegotiation of supplier contracts or raising menu prices to keep up with others in the neighborhood.
Sageworks recently conducted a financial statement analysis of privately held companies in six industries that are common small businesses in communities across the U.S.:
- Dentist offices
- Physician offices
- Landscaping service firms
- Gas stations with convenience stores.
Through its cooperative data model, Sageworks collects and aggregates financial statements for private companies from accounting firms, banks and credit unions, and in this analysis, Sageworks examined net profit margin to determine how profitable, on average, companies in these industries are.
Net profit margin shows for every dollar of sales, how many cents in profit is available to the owner. Lenders pay special attention to this figure because it shows the firm’s potential net worth based on earnings and provides insight into how likely the business is to remain resilient in tough times.