Profit is a system. It's about having a good system to generate profits, not just about selling more and reducing your costs. It's systematic. This podcast, boosting your Financial IQ, is about business, financial literacy, strategies for profitability and the principles taught at byfiqcom. My hope is that you'll apply the lessons learned and that we can work together soon in my mastery program. Enjoy the show and don't forget to subscribe. What is a good profit margin for a small business? Soon in my mastery program. Enjoy the show and don't forget to subscribe.

Probably wondered am I making enough profit? The truth is, there's no single number that will work for every business, but understanding what a good profit margin looks like can help you to measure your success and spot room for improvement. This is why I love finance. I love strategy and finance. Okay, those are my babies. But the reason why I love finance so much is because with entrepreneurship, there's no faking it. The financial statements are your report card, right, so you can claim to be an entrepreneur. You can claim to have a competitive advantage. You can claim to be successful in business. But your financial statements are going to help to tell the story. Now look, profit isn't everything. You could be scaling your business. You could be at a totally different phase, where maybe you're not profitable yet. But the whole point is is that the financials will show how the business is actually doing, and that's why I love them so much. So let's get into this. First, what is profit margin? Profit margin is the percentage of revenue that you actually get to keep after all your expenses are paid. So, in other words, you get a dollar, you pay your expenses. How much is left at the end of the day is your profit?

I did this exercise for this company once and I brought in a thousand dollars, cause they were a billion dollar company. I brought in a thousand $1 bills. The bank probably thought I was going to do like something nefarious or something right I'll leave that to your imagination. But I just went and got a ton of $1 bills and I packed this in my backpack and I flew to this company's workshop that I was putting on and I said each bill represents a million dollars. A thousand millions is a billion, right. And what I did is I said, okay, this is the amount of money coming into the business and then I took a giant chunk and I said, all right, this much goes to materials, this much goes to labor, this much goes to subcontractors, this much goes to operating expenses, et cetera. And then I walked around the room and there were like six different divisional leaders and I said, okay, you get $1, you get three, you get $1, you get four, right.

And then I went to one divisional leader who is losing money and I was like you owe me a dollar 50. And I was like just make it two bucks. You owe me two bucks. You lost 2 million bucks. And he's like ha, ha, ha ha. And everybody is like laughing. And I was like no, I'm serious.

And I stood there because I wanted to drive home this point and I was like you owe me two bucks, dude. And he reached into his wallet and he had like a five and a 10. I think he had one $1 bill. He's like I got one. Can somebody else lend me the money? And I was like, exactly, that's the whole thing, right, these other divisions are giving up their hard-earned profit. They're putting it into the pool, right, to cover your losses. And it really drove home the point of that, like out of this billion dollars that was flowing through the company, only a few dollars were left at the end of the day. So when they saw this, like the light bulbs came on. They're like, oh my gosh, we need a better strategy, we need a better system, and that's when I helped them to turn around the company.

But the whole point is that profit is what's left over. Now there are three main types of profit. Number one there's gross profit margin. That's revenue minus your cost of goods sold, also known as margin or gross margin, right, or just gross profit. But that's yeah, like I said, that's revenue, your top line, minus all the costs associated with delivering that revenue. The next type of profit is operating profit. That's your operating profit. That's gross profit minus your operating expenses. That's your OPEX right, operating expenses, opex, same thing. So it's gross profit minus OPEX. And then you have net profit margin and that's what's left over after all costs, including other income and other expense. All right. So you may be wondering what's the one most business owners focus on? That's net profit margin, because it reflects the real bottom line.

So let's talk about net profit margin and average profit margin across a few industries and we'll play a little game here. First we have professional services. What do you think the typical net profit margin is for this industry? All right, make your guess, just come up with a number in your head. Okay, if you were in the range between 15 and 20%, you are correct. So professional services typically deliver a higher net profit margin. What about real estate? Higher or lower? Higher or lower than professional services? A little bit lower 12 to 18%.

Restaurants what about restaurants? Higher or lower than professional services? Lower, actually, restaurants. Restaurants what about restaurants? Higher or lower than professional services? Lower, actually, restaurants they deliver typically between 3% and 6% returns on their revenue. Right, net profit margin returns, all right.

Retail Higher or lower than restaurants? Actually, a little bit lower. Retail is about 2% to 5% net profit. Construction about 4% to 7%.

Now I say that with a caveat. If you're a general contractor, your margin, I think, on average, is around 2% to 3%. If you're running a trade business like a plumbing company or electrical business or a landscaping business, it may be higher than that. That's why the average is 4% to 7%. That's where there's so many nuances, but that's the average for construction. E-commerce is about five to 10%, and I could go on and on and on. Here's the deal. Most small businesses, though, as a rule of thumb, fall somewhere between seven and 10%. And what I like to say is that anything above 10% is generally considered healthy. If you're hitting 20% or more, that's exceptional and it's worth celebrating. So here's why margins vary so much.

There are a few reasons why one business may have tighter margins than another. First, their business model. Service-based businesses usually have higher margins than product-based ones or industry cost. Some sectors like food or fashion have higher overhead or inventory costs. Experience and efficiency may be another factor. New businesses might struggle with margins at first, but over time if they can improve their systems, then that can help them to boost profits. And location may also have an impact on margins, because high rents or local taxes can definitely impact your bottom line.

So let's talk about how to calculate your net profit margin. So your net profit margin is actually pretty simple to calculate. Pull your income statement, look at the very bottom line. You'll find net profit. It may have some different naming convention, but it'll say net something, net profit typically. Take net profit, divide that by your revenue and then multiply that by 100, and then you'll get a percentage. So let me give you an example. Let's say your revenue is $100,000 and your net profit, after all expenses, is 12,000 bucks. Then your net profit margin would be 12,000 bucks divided by that 100 grand, and that'd give you 12%. Okay, so that's a solid margin. Now let's talk about quickly how to improve your profit margin.

So, if you want to boost your profit margin, here are a few practical ideas. Number one raise prices. This is probably the best lever out of them all, but you have to do it in a way where your perceived value exceeds your price. All right, that's the key. Now maybe your pricing is off and you're below market. You could just raise your prices without considering that as much. But you don't want to lose a ton of customers because the perceived value isn't there. But if you're delivering so much value to your customers, then you could justify an increase in your pricing. That'll have the biggest impact on the bottom line. Cut unnecessary expenses. Right, that's another thing you could do. Just cut the fat, reduce complexity, implement technology, streamline, leverage, ai, whatever it may be, but reduce the cost of delivery. Negotiate better supplier deals, with a caveat.

So back in the day when I had my landscape company, we spent a lot of money with our suppliers, with our nurseries, with our irrigation suppliers, et cetera, with landscape materials. We were spending a ton of money. So I had this philosophy that I didn't want to go in and beat up my suppliers, I just wanted fair pricing. Obviously I didn't want to pay more than the market commanded right, that would be dumb. But I also wasn't going to go into a supplier and say, hey, this sprinkler head right here, you need to drop your price by 25 cents or I'm taking my business elsewhere.

The reason why I didn't beat up my suppliers because one day I knew I'd have to call them up and say, hey look, I'm on this job site in this remote part, this little town. I I'm on this job site in this remote part, this little town. I can't send my guys. Is there any way you could deliver pipe to me? And I did have to do that oftentimes. And guess what? If you beat up your suppliers, you're going to leave a bad taste in their mouth. They're going to be like, yeah, sure, we'll be right on that tomorrow or the next day, but when your suppliers know that you're working in unison with them, they're going to be willing to serve you better. All right, now, sometimes it doesn't matter and you're just treated like a number. And that's where that perceived value. They're not delivering the value to you. So you could beat them up on price, I guess. But just be careful when negotiating supplier deals.

Okay, you can streamline your operations we talked about that reducing complexity, implementing technology, ai, et cetera. You could focus on high margin products or services and growing those to increase the top line, because that will inevitably impact your bottom line. Or you can improve customer retention. So, even small tweaks in these areas and there are so many different things you could focus on in other strategies these are just the core ones, but small improvements will make a major impact on your net profit. So here's the bottom line. No pun intended. See, my kids hate my dad jokes. They're like dad, come on, you're so dumb. But then they're like smiling at the same time. So here's the bottom line for you.

A good profit margin depends on your industry, but most small businesses. They aim for 10% or more. So if you're less than that, don't worry, don't shame yourself, don't feel bad, all right, just know that you can't stay here. You have to, like, fix things in your business and profit is a system. Right, it's about having a good system to generate profits, not just about selling more and reducing your costs. It's systematic.

I talk about this in other episodes. The key is to regularly track your margins and then look for ways to grow them without sacrificing quality or service. That's why you need a strategy and that's why I believe strategy and finance together drive so much value. But that's what I wanted to do, is I wanted to share with you in this episode and leave you with this On average, just think 7% to 10% for net profit margins. 10 is the baseline. If you're doing 10, you're doing all right. 20 is exceptional. If anything above 20 with net profits, that's really good. Here's the caveat If you're a business owner and you're not paying yourself a W-2 wage, like in the United States, you're not an employee of the business and you're not paying yourself a salary and that's running through the company's payroll and you're just taking distributions For example, you're an LLC.

You'll know what I'm talking about if this is you. But if you're not paying yourself and it's not hitting your P&L, your profit and loss statement or you're not paying yourself a fair rate for example, you're paying yourself 50 grand but it would cost a hundred grand to replace you with somebody else with similar skills and capabilities then you may be looking at your net profit margin, thinking you're doing better than you actually are. I have a company that I work with and they have like an 18% net profit margin, but that's because they don't pay themselves a fair salary. They just pay themselves enough to get benefits and cover some taxes and whatnot, but they're underpaying themselves compared to the market. So you have to normalize your salary as the business owner and then look at your net profit to determine whether or not you have a good margin. That's just a little caveat that I wanted to share with you. All right, that's it. That's what I have prepared for you today. I hope you have a wonderful week and until next episode, take care. Cheers.