How to increase profit in a business?

Ever wonder how profitable your business should be? In this video, Steve breaks down the average profit margins for small businesses—and how those numbers vary across different industries.

You’ll get a clear look at what’s considered healthy, how your business stacks up, and what it means for your overall strategy. One industry’s margins might surprise you—and give you new insight into how to improve your own.

Whether you’re ahead of the curve or trying to catch up, this is the info every business owner needs to know.

TRANSCRIPT:

If you're wondering what the average profitability is for a business, you've come to the right place because I'm going to show that to you. I'm also going to reveal a few examples of profitability by industry, and then I will shock you by uncovering one of the worst industries from a profitability perspective. And the reason why I say shock you is because everything you've learned from when you were young, at least I know for me, is going to go out the window because you're going to be like, what the heck? I didn't know this industry had such low profitability.

Let's go ahead and jump in though. In order to understand profitability and to get on the same page, we need to walk through the income statement together. First, we have revenue.

This is the top line. This represents all the income generated from selling products and services. Next, we have cost of goods sold or COGS for short.

This represents all the costs associated with fulfilling this revenue, and may include items such as material cost, direct labor, and other direct and indirect costs associated, like I said, with getting the product or service into the hands of your customers. All right, so we have revenue minus cost of goods sold. We end up with gross profit, but this is not the bottom line.

This just shows us how profitable are we after setting a certain price, doing a certain amount of volume, and fulfilling the product or service, right? So underneath gross profit, we have OPX. This represents overhead of a company, right? It may include items such as sales and marketing, general and administrative costs, like occupancy costs, office and IT, professional fees, salaries and wages, et cetera, right? They all roll up under OPX. If we take gross profit minus OPX, we arrive at operating profit.

This represents the amount of profit a company generates through normal operations, through its core operations. But we also have other income, such as interest income, gains from selling pieces of equipment, et cetera. And we have other expense, which oftentimes includes interest expense and losses on the sale of pieces of equipment, amongst other things, right? But the point is that this other line item represents income or expense that's not core to the business.

We take operating profit minus other income and other expense. We arrive at income before taxes, also known oftentimes as net income. But this could be confusing because some entities like LLCs or rest corporations, the entity itself doesn't pay taxes like C corporations.

So it could be a little misleading to say net income because you don't know whether or not it includes taxes. So I just say income before taxes. And that's what we're talking about here is this income before taxes, because the numbers I'm about to give you are for small to mid-sized businesses.

And most small to mid-sized businesses, they are structured as LLCs or S corps. And therefore, they don't pay taxes in the United States. Instead, the income flows through to the owners of the business.

Enough on that. All right. Nonetheless, this is what we're talking about right here, OK? All right.

The average profitability for a business, I'm just going to cut right to the chase. Is 7 to 10 percent. Now, if you're watching this video and you're like, oh, no, we're at like 3 percent.

All right. Don't worry. That's fine.

No shame. All right. No guilt should be had.

It's not your fault. Oftentimes, you're trying to run a business, but maybe numbers and strategy are not your thing. That's fine.

Just don't stay here, OK? So if you're at 3 percent, you can get here. But this is the average profitability of a business. All right.

Let's play some trivia and go through some of the industries out there. First, we have construction. And I will ask, is it lower or higher than the average? And if you just answered it is lower, you're correct.

Because average profitability for construction is 4 to 6 percent. OK. Let's do another one.

We have SAS, software as a service slash tech. And is their average profitability higher or lower than the average? If you said higher, you are right. On average, 10 to 20 percent.

1. So that's good. It's good to be in a tech related business.

Next, we have food and beverage. And here, I'm talking specifically about restaurants. Lower or higher? If you said lower, good.

Is it lower than construction? What do you think? It's actually lower than construction. 3 to 6 percent on average. All right.

So just slightly lower. Next, we have manufacturing. I'm just going to abbreviate.

Lower or higher? Depends. 5 to 10 percent. All right.

That's what manufacturing typically hits at. And then we have retail. This is the last one before I shock you with the lowest one.

1. So bear with me here. Retail.

Lower or higher? It's actually lower. Do you think it's lower than construction? If you said yes, you are right because it is actually 2 to 5 percent. Retail is tough, right? So here's the deal.

When I'm working with companies and I'm helping them with their strategy, the market you focus on is going to dictate your returns to a large degree. Right. So you could put yourself into an industry with very low margins like retail.

And even if you kick butt, even if you're best in class, your profit margin is probably going to be a lot lower than if you just position yourself in a different industry. So that's important to understand. Now, not everybody is concerned about profitability.

Hey, and that's fine. I know a lot of successful people who operate in any of these industries, even if the margins are lower. So it doesn't mean anything.

I just wanted to point out this is the average profitability of the industry, and it's going to have a strong influence on your bottom line. If you're below any of these numbers, you can get help. You could turn things around.

There are a few levers you could pull. We have a lot of resources on our website at coltivar.com, especially one, which is a calculator, right? So you could go to coltivar.com, go to tools, and we have a break-even calculator. You just enter a few numbers.

It'll tell you exactly how much revenue you need to do in order to break even. You can also enter in the amount of profit you desire, and it'll tell you how much revenue you need to do. Super simple to use.

You can uncover these numbers in just a matter of seconds, right? That's the value that we deliver to people out there in the world. Absolutely free, okay? All right. You want to know what the worst industry is? This is sad face.

We'll do it in red, but it's actually hospitals. It's not like an industry. I guess it's a segment of an industry.

Hospitals, they earn on average between one and three percent. The reason why it's so shocking is because I remember as a kid, it was like in school, people would always say, I want to become a doctor because I want to make a lot of money and be successful. It doesn't mean doctors don't make a lot of money.

It just means that this whole industry, healthcare, especially in the United States, is on the decline. The problem with these types of businesses, and this is why I don't consult companies in the healthcare space typically, is because they're capped with their pricing. They can charge more, but they're only going to be reimbursed a certain amount from insurance companies.

And therefore, you're squeezed at the top as your cost rise, and it's not a super attractive business. Plus, I don't like spending time in hospitals. My mom was in the hospital a few months ago.

Oh my gosh, it's terrible. I was walking through the halls and I'm like, oh my gosh, their fixed costs are so high. There's so much waste, so much inefficiency, and no wonder why so many hospitals across the United States especially are struggling, are going bankrupt, are being merged, divested of.

I mean, there's a lot of issues happening here. Actually, the worst industry, and this is just a bonus, I'll draw you a picture and see if you can tell me what it is. This is going to be a terrible picture here.

Okay, can you see what that is? All right, here's some windows. And in front, there's a cat flying the plane. Why is a cat flying the plane? I don't know.

I don't really have an obsession with cats, but I just like to draw cats. This kitty is flying the plane. That's scary.

Everybody's scared. But on average, the airline industry earns negative two to two percent returns. Terrible, right? High fixed costs, a lot of competition, et cetera.

This is actually a really bad industry. But this one was the shocking one for me. All right, I hope you enjoyed that.

If you ever want help with your business, if you want to talk more about numbers, you can always connect with us at coltivar.com. And until the next video, take care of yourself. Cheers.