Is Your Small Business Making Enough Profit?

Is Your Small Business Making Enough Profit?

Running your own company is hard. To make it worthwhile, the business needs to be profitable. But what does that mean? How much profit should a small business make?

Read on!

What is profit?

Profit is the difference between the money your business earns, your revenue, and the money your business spends, your expenses.

Revenue – Cost = Profit

If revenue is greater than your cost and expenses, you are making a profit.

If revenue is smaller than your cost and expenses, you are making a loss.

The profit that is available for you to take out of the company is also called net income.

Check out how to calculate profit and profit margins here.


The major revenue sources for businesses are

  • Revenue from selling goods
  • Revenue from selling services
  • Revenue from licensing (brands or software)
  • Revenue from financial transactions, e.g. interest.


The major types of cost are

  • Cost of goods sold (COGS, including some of the below)
  • Staff cost (salaries)
  • Cost of financing (interest rates)
  • Offices and buildings
  • Energy
  • Marketing cost

Depending on your industry, different types might be dominant.

Is your salary part of the profit

If you are serious about building a business that can survive on its own, your revenue definition needs to reflect that.

The central question to answer is this:

When calculating profit, do you including or exclude your salary as the business owner.

To explain, let’s use an example:

  • 200,000 USD in revenue
  • a salary for you of 100,000 USD and
  • 80,000 USD in other cost.


If you intend to run a sole proprietorship (with maybe some support left and right), your salary should not be part of your expenses.

Your salary is part of or equivalent with the profit of the company.

Sole Proprietor: Salary as main part of the profit

Profit = sales – all cost (except your salary)

120,000 = 200,000 – 80,000

This profit expression assumes that the money the business leaves over at the end of the month is what you live off.


You intend to build a sustainable business that can run without you? For example to sell it or to hire an external CEO? Then you have to look at profit differently.

In this case, your salary needs to be viewed as an expense like all other salaries.

Company: CEO salary as cost position

Profit = sales – all cost (incl. your salary)

20,000 = 200,000 – 180,000

You see how different the profitability is depending on how you look at it.

For the rest of this article, we’ll use the second definition, where your salary is an expense.

What influences profit

Before we look at what profit your small business should have, let’s have a look at which factors influences profit.


The first major factor that will influence your profit is the industry and business model. Some industries have low profit margins (the percentage of revenue that you keep as profit), while others have higher margins.


Of course, the size of your business will have a determining impact on your profit. If you have 100,000 vs 10 million USD in revenue will lead to different profits.

In addition, size impacts profitability. Rising overhead cost on the one side and an increased likelihood of breaking even influence your margins.


For most young and ambitious companies, growth is what reduces profit. If you’re stable, you keep your margin to yourself. If you grow, you will in most cases spend a good portion of that margin on the growth.

Examples for cost associated with growth:


Besides the above, there’s your strategic positioning, your competitive strength and the value you generate for your clients.


The better your product or service is, the more you can charge and the better your margins. The better you are at finding good deals, the better the internal rate of return of your investment firm.


Next to charging more for your product or service, you can also increase profit by spending less. If you manage to incur less cost and product stable or increasingly good results, your profits will increase as well.

Personal Alternatives

Let’s get back to our question. How much profit should a small business make?

There is no one right answer, but there are better and worse answers. Let’s approach a good answer to this the following way.


Assume your salary covers the value you generate in your day-to-day. It’s what you would earn if you were doing the same job for another company, not your own.

This means: As soon as your cashflow allows it, pay yourself a fair market value.


So if it’s not the value of your labor, what is it that the profit of your company represents?

It’s the combination of capital invested and the risk associated with it.

If you put money in the company, then this money is at risk to be lost.

The same is true for your job as the CEO. Depending on how well you run your company, you can’t be certain whether or not you still have this job tomorrow.

So basically, the risk you take as entrepreneur multiplied with the capital you put in is why your company needs to generate profit.


In addition, also your salary will be in many cases not a fair market value compared to the hours you put in. In the early years of being an entrepreneur, you will usually work more and earn less than someone in a regular job.

This is another “investment” that you company needs to turn into profit.


Coming back to the question of how much profit is enough, you have to decide how much you need to be compensated for

Example for small business profit as a combination of return on equity, risk and unpaid work.
  • The capital you have put into it (your equity)
  • The risk you take running the company
  • The unpaid or underpaid work you’ve put in


To understand which percentage in profit margin that means, we’ll have to use some additional considerations.

For the capital you invested, we have to look at the return on equity. It tells you how much profit is generated for each dollar of your own money in the company.

Let’s assume you have invested 50,000 USD as equity in the company and generate a profit of 10,000 per year. Then your return on equity is 10,000 divided by 50,000 = 20%.

The capital part is easy to calculate: The S&P500 generate roughly a 10% return. So if you’re company “just” produces 10% return on equity, you might as well stop running the business and invest in the stock market.

You can also increase you return on equity by using debt financing. This so-called leverage effect boosts return on equity as long as your company’s profitability is greater than the interest rate of the debt.

If you do the math on return on equity in your company, you will most likely realize that this is not a relevant number. If you have been successfully operating for a few years, your company has likely grown. It will probably easily generate a decent return on the equity you’ve put in years ago.


Now that we know how much money your invested capital needs to earn (at least 10% per year), here comes the more personal question:

How much additional profit do you have to make the risk and the extra work worthwhile.

Let’s say you have 50,000 USD invested in your business. You pay yourself a salary that is okay.

The return on equity of 5,000 USD per year is probably not enough to make you work long hours and worry about employees, vendors, tax, legal, customers etc.

How much does your business have to generate on top of that to make the risk and extra work worth it. Another 5,000? Another 50,000? Another 100,000?

If the answer to that question is realistic depends on your company size and the other factors above.


If you run your own business, you will in many cases look for a certain amount of profit rather than a percentage.

And that is a feasible way of looking at it.

Set an absolute profit goal, and then design revenue and profitability around it.

In contrast, setting profit goals as profitability is the right choice if you plan to sell your company. The potential buyer will be looking for a stable profitability that is at least on par with industry standards. Or lower, but justifiably so due to high growth.


Another variable to factor in are your goals. What do you want to achieve with your company? Do you want to sell it at a point? Do you want to exit at a point and just hold it as an asset?

Depending on what your goals are, the profit you can realistically expect will vary.


Lastly, when thinking about profit, you’ll have to factor in volatility.

Does your business experience unexpected drops in revenue and profit? Or is your business subject to a strong seasonality?

Seasonal monthly vs average profits of an ice cream parlor

In both cases, your profit in good months needs to be even higher. It needs to be able to balance slower months for you to still arrive at a good average profit.

Think about your local ice cream parlor – they’ll have to make large profits during summer to balance the slower or non-existent winter season.

Average Profits

Now that we explored different views on your profit, let’s look at what a normal profit is.

We’ll express these as profitability numbers, as absolute profit largely depend on revenue.


NYU Stern release regular profitability numbers for various industries. Here are some highlights (net margin after tax):

  • Advertising: 10.0 %
  • Business and consumer services: 8.2 %
  • Computer Services: 6.0 %
  • Food Wholesalers: 1.8 %
  • Healthcare Information Technology: 17.4 %
  • Retail (online): 5.7 %
  • Software (averaged, please see link for details): 17.1 %
  • Total Market: 10.9 %

So what are your profit goals? And how do you compare to your industry? Let us know in the comments.


246 thoughts on “Is Your Small Business Making Enough Profit?

  1. It is appropriate time to make a few plans for the longer term and it is time to be happy.
    I’ve read this submit and if I may just I want to suggest you few attention-grabbing issues or suggestions.

    Maybe you could write subsequent articles relating to this article.
    I wish to learn more things about it!

  2. Hi! Someone in my Facebook group shared this website with us so I came to look it
    over. I’m definitely loving the information. I’m bookmarking and will be tweeting this to my
    followers! Excellent blog and excellent design and style.

  3. I believe that avoiding highly processed foods could be the first step in order to lose weight. They could taste beneficial, but processed foods possess very little nutritional value, making you take in more to have enough vigor to get throughout the day. In case you are constantly having these foods, changing to grain and other complex carbohydrates will let you have more vigor while feeding on less. Thanks alot : ) for your blog post.

  4. I am sure this post has touched all the internet visitors,
    its really really pleasant post on building up new website.

  5. Valuable information. Lucky me I discovered your web site accidentally, and I’m shocked why this twist of fate didn’t happened in advance! I bookmarked it.

  6. Its like you learn my thoughts! You appear to
    know a lot approximately this, like you wrote the book in it or something.
    I feel that you just could do with a few % to force the message
    home a little bit, but instead of that, that is great blog.
    A fantastic read. I’ll certainly be back.

  7. I have been browsing online more than 3 hours today, yet I never found any interesting article like yours.
    It is pretty worth enough for me. In my opinion, if all site owners and bloggers made good content as you did, the web
    will be much more useful than ever before.

  8. Hi there! This post couldn’t be written any better! Looking at
    this article reminds me of my previous roommate! He continually kept talking about this.

    I will forward this post to him. Pretty sure he will have a very good read.
    Thank you for sharing!

  9. I’ll immediately clutch your rss as I can not to find your e-mail subscription link or e-newsletter service.
    Do you’ve any? Please allow me understand in order that I could subscribe.


  10. I’ve been surfing online more than 3 hours today, yet I never found any interesting article like yours.
    It’s pretty worth enough for me. In my view, if all site owners
    and bloggers made good content as you did, the net will be a lot more useful than ever before.

  11. It is perfect time to make some plans for the future and it is time
    to be happy. I have read this post and if I could I want to
    suggest you few interesting things or advice. Maybe you can write next articles referring to this article.
    I want to read more things about it!

  12. Thank you for the auspicious writeup. It in fact was a amusement account it.
    Look advanced to more added agreeable from you! By the way, how
    can we communicate?

  13. Wow, wonderful blog structure! How lengthy have you ever been blogging for?

    you made running a blog glance easy. The total glance of
    your website is great, as smartly as the content!

  14. It’s in fact very complex in this full of activity life to
    listen news on Television, so I just use the web for that purpose,
    and take the latest information.

  15. I seriously love your website.. Very nice colors
    & theme. Did you make this amazing site yourself? Please reply back as I’m hoping to create my very own blog and would
    like to learn where you got this from or just what the theme is named.
    Appreciate it!

  16. Are you searching for a stamp maker? Our organization creates custom stamps for a range of purposes. We use the latest technology to ensure each stamp is accurate and of excellent quality. Choose from a wide range of sizes and designs, or send us your artwork for a custom stamp. We offer stamp maker quick processing and outstanding customer service. Let us assist you create the perfect stamp.
    [url=]stamp maker[/url][url][/url]

  17. Thanks for your helpful post. In recent times, I have been able to understand that the symptoms of mesothelioma cancer are caused by the particular build up of fluid regarding the lining in the lung and the chest muscles cavity. The illness may start from the chest place and propagate to other limbs. Other symptoms of pleural mesothelioma include weight loss, severe inhaling trouble, vomiting, difficulty ingesting, and infection of the face and neck areas. It should be noted that some people living with the disease usually do not experience virtually any serious indications at all.

  18. I love what you guys are usually up too. This type of clever work
    and exposure! Keep up the superb works guys I’ve
    incorporated you guys to my personal blogroll.

  19. I am sure this paragraph has touched all the internet
    users, its really really fastidious paragraph on building up new website.

  20. You’ve made some good points there. I checked on the
    internet to find out more about the issue and found most people will go along with your views on this site.

  21. Hi, I do think this is a great web site. I stumbledupon it
    😉 I’m going to come back yet again since i have book marked
    it. Money and freedom is the greatest way to change, may you
    be rich and continue to help other people.

  22. Howdy, i read your blog occasionally and i own a similar
    one and i was just curious if you get a lot of spam responses?
    If so how do you reduce it, any plugin or anything you can suggest?
    I get so much lately it’s driving me crazy so any assistance is very much appreciated.

  23. I’ve been browsing online more than 2 hours today,
    yet I never found any interesting article like yours.

    It’s pretty worth enough for me. In my opinion, if all site owners and
    bloggers made good content as you did, the net will be much more useful than ever before.

  24. I’ve been surfing on-line greater than three hours
    as of late, yet I never found any fascinating article
    like yours. It’s pretty value sufficient for me. In my opinion, if all web owners and bloggers made
    good content as you did, the internet will be much more helpful than ever before.

  25. It is perfect time to make some plans for the future and
    it is time to be happy. I’ve read this post and if
    I could I want to suggest you few interesting things or suggestions.

    Perhaps you could write next articles referring to
    this article. I desire to read even more things about it!

Leave a Reply

Your email address will not be published. Required fields are marked *

Asamby Consulting

We help you make sure everybody in your company knows what their role is, has the right processes and the best tools to deliver great outcomes consistently. Add a layer of excellent strategy execution and situative leadership and the success is yours.


© 2023 Asamby Consulting

Designed and developed by Power Funnels 

This is a staging enviroment