Can your survive on just 15 percent of the revenue your company generates? If you own a small business in the current climate it looks like you may need to do just that. Ok……I’ll admit……..fake news. But bear with me for a minute. It’s not the new tax code that could separate you from 85 percent of your revenue, it’s your expenses. Entrepreneur magazine recently published a statistic placing average small business net profit margins around 15 percent. This included medical and law practices. Still think that revenue is the most useful and accurate income number to use as a personal goal?
Not sure how to compare revenue and net profit? Revenue (sometimes called gross receipts) is the total amount of money that comes in from sales. When you have anything “net” it means something has been subtracted from it. You have to subtract all of your cost of goods and business expenses to get down to net profit (your bottom line). What the Entrepreneurs statistic shows is that most small businesses burn about 85 percent of their income before it gets to their pockets. Some is absolutely necessary to operate your business, depending on what you do (you may have to buy things to sell or buy materials to manufacture them). Some are useful for increasing business and causing revenue to come in in the first place (like advertising and marketing expenses).
What small business owners must understand is that revenue is just not a good representation of how much money you make. People say “I had a million dollar year last year.” but that says very little about how much actually ended up in their pocket. What matters is how much gets lost in the gauntlet of expenses and whether or not all those expenses (at their current levels) really need to be their. Ask yourself three questions:
Is this expense an absolute necessity of running my business? (If you answered yes, can you imagine a way of doing your business where it’s not?)
Does the thing represented by this expense contribute more to my bottom line than it takes away? (If you can’t answer that question, think about how scary that is!)
Am I measuring and tracking this expense so that I get the maximum tax deduction for my necessary expenses?
If you don’t keep an eye on your expenses and understand how they impact your net profit, they can turn into a cash vacuum that even the IRS can’t compete with.