What is a good profit margin for my industry?

Photo by Noah Gremmert on Unsplash

Many business owners Google “average profit margin for [industry]” — but it rarely helps them make better decisions.  By definition, the best AND the worst performing businesses are rolled into the number Google coughs up.  I don't know about you, but, I don’t care to compare my business to the worst businesses in my chosen space. 

Neither should you.

Let’s start with this:  why settle for “average”?

I don’t like to feel average.  It’s ok if you do.  But for some of us, we have higher expectations of ourselves and our businesses.

Industry Averages Are a Starting Line — Not a Finish Line

Go ahead and Google “average profit margin for [industry]” and see what it says.  For my industry, fractional CFO consultancies, it is reported that the average profit margin is 10%, and top performers are achieving 25 to 30% or higher.

My profit margin so far this year?  I am currently at 18%.  As you can see, I am better than average, but not yet in the top performer band.  I don’t know about you but that stings a little.

Great!  I’ll use it as motivation to set my next quarter targets.  I still need a very important starting point:  my business’ break-even point.

Your Break-Even Point Tells the Real Story

When I work with clients, one of the first metrics I calculate is break-even point.  Most business owners have a “sense” of what that number is but are usually surprised when I tell them what the number really is for their business.  They were likely looking at the bank statement to get that number.  That doesn’t work.

To determine the break-even point, you need to calculate fixed costs and variable costs.

• Fixed costs are expenses that do not change regardless of sales volume, such as rent, salaries, and administrative payroll.  Most of my expenses are fixed, but businesses that make products have direct costs to make or buy the product. 

• Variable costs fluctuate with the level of service provided, like direct labor involved in client projects.

• For a service-based business like my CFO consultancy, I calculate the break-even point in sales dollars using the formula: Break-even point (sales dollars) = fixed costs ÷ contribution margin.

• The contribution margin is the difference between the sales price per service and its variable cost. 

The break-even point for my business is $15,700 a month.  That is what I need to make to cover my expenses.  It does not allow for profit, but it does include my salary. Using the target of 25% desired profit margin (I want to be in that TOP performer band!), I now know I need to charge customers AT LEAST $19,625 a month.  I multiplied my break-even $15,7000 by 1.25 = $19,625.

Once you know your break-even point and your desired profit margin, you can set your own sales target.

Why Margins Without Momentum Are Useless

I help my clients understand these numbers and they are generally eye-opening.  I had this conversation with a business owner this week and she realized that she was not even breaking even in her business.  That was the bad news.  The good news is that she now has a very clear number she needs to attain to hit her break-even point and then her desired profit margin.  Googling the average profit margin for her business would not have yielded any clarity for her.  She needed to know HER numbers.

She was $3000 short each month and she was not taking a salary. 

Gulp. 

After the shock wore off, I gently challenged her to take a few days to put her brain to work on how to make an additional $3,000 a month.

Baby steps.

Momentum will start to set in as she and I put a plan in place to add that $3,000 a month to her top line.  I KNOW that once she has attained that number, she will have the momentum to exceed that $3,000 and slowly she will make enough to add a salary to her fixed expenses.

[Note:  as my client makes above the break-even, her profit could demand that she start to pay tax.  I would suggest that she gradually increase her salary until she reaches a reasonable level, considering the industry she is in.  She won’t start paying tax until she exceeds break-even plus her salary.  We will then take into consideration tax planning.]

Don't just nod. Get curious.

If you want to understand your numbers a little better,  download my free Profit Assessment to see where you really stand.  Click on the link and enter your email address.  A Profit Assessment template will be sent to you.

www.dianamiret.com