During the last few weeks we have been discussing the key steps to improving your business’ profitability. There are a number of factors that affect profit margins, and a key factor is the industry you operate in, because each industry does have an average profit margin.
I recently came across a Forbes study of the 20 most profitable businesses that entrepreneurs launch. Forbes worked with Sageworks to analyze 300,000 companies’ financial statements. The financials covered the years between 2000 and 2009 to cover an entire business cycle. The study focused on small businesses, most under $10 million. Additionally, each category included at least 100 companies. Business services devastated by the financial downturn, like architectural services, were omitted to avoid skewing the results.
The most profitable businesses listed in the study were Certified Public Accountants with an average pretax margin of 17.1% and the last (#20) were Wired Communication Carriers with a margin of 10.1%. Traditional industries–like manufacturing and retail, which are hard to scale–did not even make the cut–medical-equipment makers and wineries, represent 6% pretax margins while jewelry stores were listed at 4.4%.
“Twelve of the top 20 categories involve professional services that require years of training and certification, from healing the sick to balancing financial accounts. Industries which provide need-to-have solutions rather than nice-to-have solutions tend to do better,” says Sageworks founder Brian Hamilton.
The top 20 profitable businesses are listed below:
|1. Certified Public Accountants||17.1|
|2. Offices of Chiropractors||16.0|
|3. Other Accounting Services (Bookkeeping, Billing and Tax Preparation not done by CPA)||15.5|
|4. Offices of Dentists||15.4|
|5. Tax Preparation Services||15.1|
|6. Sales Financing||15.1|
|7. Freestanding Ambulatory Surgical & Emergency Centers||14.8|
|8. Lessors of Mini-Warehouses & Self-Storage Units||12.3|
|9. Offices of Optometrists||12.2|
|10. Lessors of Nonresidential Building (except Mini-Warehouses)||11.6|
|11. Insurance Agencies & Brokerages||11.3|
|12. Offices of Physicians (except Mental Specialists)||11.2|
|13. Consumer Lending||11.1|
|14. Offices of Physical, Occupational & Speech Therapists and Audiologists||11.0|
|15. Investment Advice||11.0|
|16. Veterinary Services||10.5|
|17. Diagnostic Imaging Centers||10.5|
|18. Offices of General or Family Practitioners||10.4|
|19. Support Activities for Oil & Gas Activities||10.3|
|20. Wired Telecommunications Carriers||10.1|
This is not really too surprising since business profitability usually flows with the overall economy. In the early 1980s, “the U.S. moved from a retail economy to a service-based economy,” says James Nolen, finance professor at the McCombs School of Business at the University of Texas, Austin. “In the late 1990s, [it] moved largely to a knowledge-based economy. You can sell [those skills] at a higher rate.”
Another thing to remember about profit margins: “There’s a big difference between margin and income levels,” notes Drew White, Sageworks’ chief financial officer. In other words, a business can appear very profitable on a percentage basis but not generate great piles of money–especially if the principals are pulling out every last dollar to buy boats and summer homes.
Makes you wonder if you majored in the wrong area in college…
Diane Weklar is the CEO of the Weklar Business Institute and author of Mastering the Money Maze: 10 Secrets to Winning Business Financing, which provides practical insight for business owners and managers who need to raise capital. She can be reached at Diane@Weklar.com.