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Is Your Profit Margin Actually Good? How to Benchmark Your Business · Profit Points Podcast

• 0:00
  SPEAKER_00: Hey, glad you're here.
• 0:01
  SPEAKER_00: This is Profit Points, and I'm Megan Schwann, your accounting sidekick and certified profit first professional and fix the snips advisor.
• 0:09
  SPEAKER_00: If you're a small business owner who wants to actually understand what is happening in your business financially, not just survive it, but genuinely get it, you're in the right place.
• 0:20
  SPEAKER_00: Every episode covers one concept, uses real numbers, and ends with something you can actually do.
• 0:26
  SPEAKER_00: That's the deal.
• 0:27
  SPEAKER_00: Let's talk about today's topic.
• 0:31
  SPEAKER_00: I want to ask you something.
• 0:33
  SPEAKER_00: When you look at your profit margin, whatever it is right now, do you actually know if that number is good?
• 0:41
  SPEAKER_00: Not good in a vague, feels okay kind of way.
• 0:44
  SPEAKER_00: Good compared to something real.
• 0:47
  SPEAKER_00: A benchmark, a target that is specific to your type of business.
• 0:52
  SPEAKER_00: Most business owners do not have that reference point.
• 0:55
  SPEAKER_00: So they either worry about a number that is perfectly normal or they feel comfortable with a number that should be keeping them up at night.
• 1:02
  SPEAKER_00: Today I want to give you a reference point.
• 1:05
  SPEAKER_00: I'm Megan Schwan, your accounting sidekick, and this is the Profit Points Podcast.
• 1:10
  SPEAKER_00: Today, we are going to talk through how to have that reference point, what your profit margin needs to look like, and what you should be aware of as a business owner.
• 1:21
  SPEAKER_00: I work with business owners who feel like they're doing well because their business is growing and they're paying their bills.
• 1:28
  SPEAKER_00: But when we actually calculate their profit margin, it's 6%.
• 1:33
  SPEAKER_00: And 6% in a service business is really fragile.
• 1:38
  SPEAKER_00: Means that one slow month, one lost client, one unexpected expense, and that margin is gone entirely.
• 1:47
  SPEAKER_00: They weren't doing badly because they were making bad decisions.
• 1:50
  SPEAKER_00: They were doing badly because they didn't have a target to build toward.
• 1:55
  SPEAKER_00: They didn't know what quote unquote good looked like.
• 1:58
  SPEAKER_00: So they had no way of knowing that they weren't there yet.
• 2:02
  SPEAKER_00: On the other end, I've had clients come to me apologizing for their numbers, convinced that they were underperforming.
• 2:09
  SPEAKER_00: And when we looked at their margin, it was 38%.
• 2:13
  SPEAKER_00: They were thriving by any reasonable measure.
• 2:17
  SPEAKER_00: They just had no context to recognize it.
• 2:20
  SPEAKER_00: Benchmarks solve both problems.
• 2:22
  SPEAKER_00: They give you something to build toward and something to celebrate when you get there.
• 2:27
  SPEAKER_00: And who doesn't like celebrating?
• 2:30
  SPEAKER_00: So today on the profit point is profit benchmarking.
• 2:34
  SPEAKER_00: Let me give you some general guidelines.
• 2:36
  SPEAKER_00: And I want to be clear that these are general, not universal.
• 2:41
  SPEAKER_00: Every business is different, and your specific industry, structure, and stage in business will influence what is realistic for you.
• 2:49
  SPEAKER_00: The point though is that you need to figure out what that is and what it needs to look like for you.
• 2:55
  SPEAKER_00: Sometimes your benchmark is comparing yourself to what you did six months to a year ago, right?
• 3:01
  SPEAKER_00: Beating yourself and what your metrics have been.
• 3:04
  SPEAKER_00: But generally speaking, for service-based businesses, coaches, consultants, accountants, virtual assistants, designers, market agency owners, a healthy net profit margin is generally in the 20 to 35% range.
• 3:18
  SPEAKER_00: If you're below 15%, you have room to improve and should be asking why.
• 3:23
  SPEAKER_00: Why does this need to be improved?
• 3:25
  SPEAKER_00: Why does it look this way?
• 3:27
  SPEAKER_00: Why is that percentage the way that it is?
• 3:30
  SPEAKER_00: If you're consistently above 35%, you're performing pretty well and should either be reinvesting strategically or ensuring you're paying yourself appropriately, because sometimes a very high margin means that the owner is actually underpaying herself.
• 3:48
  SPEAKER_00: So always looking at all the all the areas.
• 3:52
  SPEAKER_00: For product-based businesses, margins are typically lower because you have cost of goods sold.
• 3:57
  SPEAKER_00: A healthy net margin for a product business might be something like 10 to 20%, depending heavily on the product category and whether it's physical or digital.
• 4:08
  SPEAKER_00: For retail specifically, even 5% to 10% net is considered normal in certain categories.
• 4:14
  SPEAKER_00: Again, you want to take a look at what this looks like for you.
• 4:17
  SPEAKER_00: The gross margin before operating expenses is usually 40 to 60%, and is the number to watch for healthy pricing, health, for health, your business health, and for pricing decisions.
• 4:30
  SPEAKER_00: I broke that down in another episode.
• 4:33
  SPEAKER_00: So if you want to learn more, contact me or go back and look for the episode about margins.
• 4:39
  SPEAKER_00: For food and restaurant businesses, margins are notoriously thin, often 3% to 9% net.
• 4:45
  SPEAKER_00: This is a high cost, high labor model of business where operational efficiency matters enormously.
• 4:53
  SPEAKER_00: If you're in food service and you're at 12%, you're doing exceptionally well by all normal standards.
• 5:00
  SPEAKER_00: Now, where do these benchmarks come from?
• 5:03
  SPEAKER_00: For the most accurate benchmarks for your specific industry and revenue range, your best resources are usually industry associations.
• 5:11
  SPEAKER_00: The IRS has SOI data, which publishes average returns by industry, and platforms such as RMA annual statement studies, which provide detailed financial ratios by business type, are some places that you can look.
• 5:24
  SPEAKER_00: If you're working with an accountant who specializes in your industry, like we do at Sidekick, they'll also have a good sense of what's normal and what's not for businesses at your stage.
• 5:37
  SPEAKER_00: Either way, once you have that benchmark, you can start using it.
• 5:43
  SPEAKER_00: How do you start using it?
• 5:44
  SPEAKER_00: Well, I'm so glad you asked.
• 5:46
  SPEAKER_00: Step one is to clo calculate where you are now.
• 5:50
  SPEAKER_00: Take your net profit divided by your revenue and multiply that by 100.
• 5:54
  SPEAKER_00: And then you can go to step two.
• 5:56
  SPEAKER_00: Step two is to compare to your target benchmark.
• 6:00
  SPEAKER_00: Step three is to identify the gap.
• 6:02
  SPEAKER_00: If you're at 12% and your target is 25%, you have a 13-point gap.
• 6:09
  SPEAKER_00: That gap is your roadmap.
• 6:11
  SPEAKER_00: The question becomes is the gap coming from expenses that are too high?
• 6:16
  SPEAKER_00: Pricing that's too low, revenue that's not consistent enough.
• 6:20
  SPEAKER_00: Usually, in most cases, it's some kind of combination of all of those things.
• 6:25
  SPEAKER_00: And then you can identify the primary driver, and that lets you make the most targeted action.
• 6:32
  SPEAKER_00: So this week, because we always have a target action, look up the average profit margin for your specific industry.
• 6:41
  SPEAKER_00: You can search average profit margins for X, Y, and Z, small business, right in Google, and most likely you'll find some kind of good data that comes up with that.
• 6:51
  SPEAKER_00: You can also ask your AI tool, but ask them to give you source documents or source of where they're getting those numbers from so that you're making sure that they're not just making something up.
• 7:03
  SPEAKER_00: And then compare it to your own margin from this last month.
• 7:06
  SPEAKER_00: Find the target, compare it to it.
• 7:08
  SPEAKER_00: And then I want you to note the note the gap.
• 7:11
  SPEAKER_00: Is it positive or is it negative?
• 7:13
  SPEAKER_00: And then write down one theory for what's driving it.
• 7:18
  SPEAKER_00: You know your business best.
• 7:20
  SPEAKER_00: You know what's happening.
• 7:21
  SPEAKER_00: Do you know what hasn't been working?
• 7:23
  SPEAKER_00: You know in your residual mind and in your subconscious, a lot of times, there's always something that's usually pressing and prodding, anyways.
• 7:34
  SPEAKER_00: So this gives you an opportunity to maybe test some of those theories, to maybe write them out, to put them on paper, to make them real, some things that maybe you've already been rolling over in your head.
• 7:44
  SPEAKER_00: You can't hit a target unless you see it.
• 7:47
  SPEAKER_00: Profit benchmarking gives you a reference point, something to aim for, something to measure against, something to celebrate when you meet and exceed it.
• 7:57
  SPEAKER_00: Your business deserves that kind of clarity.
• 8:00
  SPEAKER_00: You deserve that kind of clarity.
• 8:02
  SPEAKER_00: It's much easier to run a business, to know what's happening, to feel confident, to feel motivated, to feel calm when you at least know why things are happening.
• 8:15
  SPEAKER_00: And once you have it, once you have these benchmarks, once you can identify some of those whys, it will give you the path forward and it'll be a lot more obvious so that you can make those shifts and changes as needed a lot quicker.
• 8:29
  SPEAKER_00: If you want help figuring out what healthy looks like for your business specifically and a plan to get there, I'm here for you.
• 8:36
  SPEAKER_00: Let's talk.
• 8:37
  SPEAKER_00: This is the kind of work we do with our Profit First Implementation and Coaching Services.
• 8:41
  SPEAKER_00: We dig deep into the numbers and help you figure out where to start and what to fix next.
• 8:47
  SPEAKER_00: Book a strategy call with me at Psychick Accounting.
• 8:50
  SPEAKER_00: You can go to chatwithmeg.com and that takes you to my website where you can learn more about us as a business, our services, and book that call.
• 8:58
  SPEAKER_00: Let me know in the comments what industry you're in, and I'll try to get you a general benchmark for where you are at in business and what your industry is to at least get you started in the right direction.
• 9:09
  SPEAKER_00: All right.
• 9:10
  SPEAKER_00: Until next time, make sure you pay attention to your business.
• 9:14
  SPEAKER_00: You got this, and you're your best advocate.
• 9:17
  SPEAKER_00: Talk to you soon.
• 9:18
  SPEAKER_00: All right, that's your episode this time.
• 9:20
  SPEAKER_00: Don't forget your action step.
• 9:22
  SPEAKER_00: I want you to actually do it, not just add it to the list.
• 9:26
  SPEAKER_00: If this episode was helpful, share it with a fellow business owner who needs to hear it.
• 9:30
  SPEAKER_00: And if you're ready to go deeper on your specific numbers, book a strategy call with Sidekick Accounting.
• 9:36
  SPEAKER_00: Go to chatwithmeg.com, and I'll see you next time on Profit Points.