This isn’t a trick question, but I expect most people won’t know the correct answer: What is the profit margin for an average business in the U.S.?
Many Americans think companies make massive profits, mostly because the products or services they sell cost so much. They think owners might keep 50 percent or more for themselves, after all expenses are paid — or 50 cents of every dollar in sales. All owners are rich, right?
In reality, American companies make an average of about 10-percent profit, or 10 cents of every dollar they take in. That’s according to multiple government and private studies. Larger corporations might make more, but Ford Motor Company’s 2018 net profit was 8.8 percent, while General Motors had a 6.02- percent net profit last year. Even Amazon’s net profit was under 5 percent in 2018.
Many small businesses in the U.S. lose money for their first few years in operation. That’s why many don’t last — they run out of funds to stay open. One study found that 90 percent of all U.S. businesses with sales under $1 million have 10-percent profit margins or less. That doesn’t leave much room for error.
Experts say a corporate profit goal should be 20 percent of sales, after all materials and equipment are bought and all workers are paid. However, owners have to take business taxes out of that amount, which brings that profit closer to the 10 percent figure again.
The biggest risks are taken by manufacturing companies. They must buy, rent or lease buildings and equipment, buy raw materials, then hire and train staff members to produce the needed products. Making just one or two mistakes in any of these areas can result in unprofitability, and might eliminate their entire profit margin. Remember the auto company bankruptcies of 2009?
Think of a doughnut shop: owners need to find a building, get equipment, hire and train staff and then buy the raw ingredients to make the doughnuts, often seven days each week. An error in any of those areas — maybe hiring too much staff or setting prices too low — can result in disaster.
Service companies — think accountants, lawyers, barbers, lawn care businesses, tutors and dry cleaners — usually don’t create items, but fix or improve them. These can be less costly to open, but they are the first to lose business if the economy declines.
There’s no magic answer or solution to making enough profit in the business world. Success takes a sometimes lucky combination of needed products or services, made by caring people with good leadership, sold at prices that are fair yet provide enough profit to keep a company alive.
Opinions offered in this column are the author’s alone and do not necessarily reflect the opinion of the Tri-County Times or its staff. Email Mark Rummel at email@example.com.