Delivered September 13, 2019. Contributor: Teresa W.
To understand the profitability of small businesses in the United States, as well as factors that determine how much profit a small business makes, and how much debt a small business acquires.
Small Business Profitability
A 2018 study by Business Knowhow found that approximately 66% of small business owners make less than $100,000 per year.
Since most small businesses are not required to file annual reports, determining the actual profit small businesses is difficult. However, the Business Knowhow study utiiized the household income of small businesses owners as an indicator to profitibility, as in most small business, the company's profits pass through to the owner.
According to the study, 35% had household incomes between $50,000-$99,999 and 31% had household incomes over $100,000.
For comparison, a study by Payscale reported that the average income in 2018 for a small business owner was $58,889.
Factors that Determine Profitibility
Sales of the company must provide enough to cover the exisiting expenses of the company in order to have a positive profit margin.
Pricing must be strategic in order to compete with larger enterprises while at the same time maximizing profits.
Expenses can impact the profitibility of a business. The lower the expenses and costs of overhead, the greater the profitibility.
Labor can impact profitibility also. Small businesses should control labor costs through maintaining wages and ensuring appropriate staffing for current needs.
Inventory/Services mix can have an affect on sales and, therefore, profitability. Many small businesses have limited services or small inventory mixes. Services or products that do not sell can drain the company's profit. Routine analysis should be done to determine how a service can be changed or eliminated or the product mix can be adjusted, can help increase company profitibility.
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