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April 14, 2025 13 mins

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What is a good profit margin for a small business? In this episode of Boosting Your Financial IQ, Steve unpacks the truth behind profit margins—what they really mean, why they vary across industries, and how to know if your business is healthy.

With practical examples, real stories, and actionable strategies, Steve helps you move beyond just chasing revenue to building a business that consistently creates profit by design. 

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Episode Transcript

Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Profit is a system.
It's about having a good systemto generate profits, not just
about selling more and reducingyour costs.
It's systematic.
This podcast, boosting yourFinancial IQ, is about business,
financial literacy, strategiesfor profitability and the
principles taught at byfiqcom.
My hope is that you'll applythe lessons learned and that we
can work together soon in mymastery program.

(00:21):
Enjoy the show and don't forgetto subscribe.
What is a good profit marginfor a small business?

(00:46):
Soon in my mastery program.
Enjoy the show and don't forgetto subscribe.
Probably wondered am I makingenough profit?
The truth is, there's no singlenumber that will work for every
business, but understandingwhat a good profit margin looks
like can help you to measureyour 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 lovefinance so much is because with
entrepreneurship, there's nofaking it.
The financial statements areyour report card, right, so you

(01:08):
can claim to be an entrepreneur.
You can claim to have acompetitive advantage.
You can claim to be successfulin business.
But your financial statementsare going to help to tell the
story.
Now look, profit isn'teverything.
You could be scaling yourbusiness.
You could be at a totallydifferent phase, where maybe
you're not profitable yet.
But the whole point is is thatthe financials will show how the

(01:30):
business is actually doing, andthat's why I love them so much.
So let's get into this.
First, what is profit margin?
Profit margin is the percentageof revenue that you actually
get to keep after all yourexpenses are paid.
So, in other words, you get adollar, you pay your expenses.
How much is left at the end ofthe day is your profit?

(01:50):
I did this exercise for thiscompany once and I brought in a
thousand dollars, cause theywere a billion dollar company.
I brought in a thousand $1bills.
The bank probably thought I wasgoing to do like something
nefarious or something rightI'll leave that to your
imagination.
But I just went and got a tonof $1 bills and I packed this in
my backpack and I flew to thiscompany's workshop that I was

(02:12):
putting on and I said each billrepresents a million dollars.
A thousand millions is abillion, right.
And what I did is I said, okay,this is the amount of money
coming into the business andthen I took a giant chunk and I
said, all right, this much goesto materials, this much goes to
labor, this much goes tosubcontractors, this much goes
to operating expenses, et cetera.
And then I walked around theroom and there were like six

(02:35):
different divisional leaders andI said, okay, you get $1, you
get three, you get $1, you getfour, right.
And then I went to onedivisional leader who is losing
money and I was like you owe mea dollar 50.
And I was like just make it twobucks.
You owe me two bucks.
You lost 2 million bucks.
And he's like ha, ha, ha ha.
And everybody is like laughing.

(02:56):
And I was like no, I'm serious.
And I stood there because Iwanted to drive home this point
and I was like you owe me twobucks, dude.
And he reached into his walletand 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 themoney?
And I was like, exactly, that'sthe whole thing, right, these
other divisions are giving uptheir hard-earned profit.

(03:17):
They're putting it into thepool, right, to cover your
losses.
And it really drove home thepoint of that, like out of this
billion dollars that was flowingthrough the company, only a few
dollars were left at the end ofthe day.
So when they saw this, like thelight bulbs came on.
They're like, oh my gosh, weneed a better strategy, we need
a better system, and that's whenI helped them to turn around

(03:38):
the company.
But the whole point is thatprofit is what's left over.
Now there are three main typesof profit.
Number one there's gross profitmargin.
That's revenue minus your costof 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 associatedwith delivering that revenue.

(03:59):
The next type of profit isoperating profit.
That's your operating profit.
That's gross profit minus youroperating expenses.
That's your OPEX right,operating expenses, opex, same
thing.
So it's gross profit minus OPEX.
And then you have net profitmargin and that's what's left
over after all costs, includingother income and other expense.

(04:21):
All right.
So you may be wondering what'sthe one most business owners
focus on?
That's net profit margin,because it reflects the real
bottom line.
So let's talk about net profitmargin and average profit margin
across a few industries andwe'll play a little game here.
First we have professionalservices.
What do you think the typicalnet profit margin is for this

(04:43):
industry?
All right, make your guess,just come up with a number in
your head.
Okay, if you were in the rangebetween 15 and 20%, you are
correct.
So professional servicestypically deliver a higher net
profit margin.
What about real estate?
Higher or lower?
Higher or lower thanprofessional services?
A little bit lower 12 to 18%.

(05:05):
Restaurants what aboutrestaurants?
Higher or lower thanprofessional services?
Lower, actually, restaurants.
Restaurants what aboutrestaurants?
Higher or lower thanprofessional services?
Lower, actually, restaurantsthey deliver typically between
3% and 6% returns on theirrevenue.
Right, net profit marginreturns, all right.
Retail Higher or lower thanrestaurants?
Actually, a little bit lower.
Retail is about 2% to 5% netprofit.

(05:27):
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 tradebusiness like a plumbing company
or electrical business or alandscaping business, it may be
higher than that.
That's why the average is 4% to7%.
That's where there's so manynuances, but that's the average
for construction.

(05:47):
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 thatanything above 10% is generally
considered healthy.
If you're hitting 20% or more,that's exceptional and it's

(06:08):
worth celebrating.
So here's why margins vary somuch.
There are a few reasons why onebusiness may have tighter
margins than another.
First, their business model.
Service-based businessesusually have higher margins than
product-based ones or industrycost.
Some sectors like food orfashion have higher overhead or
inventory costs.
Experience and efficiency maybe another factor.

(06:30):
New businesses might strugglewith margins at first, but over
time if they can improve theirsystems, then that can help them
to boost profits.
And location may also have animpact on margins, because high
rents or local taxes candefinitely impact your bottom
line.
So let's talk about how tocalculate your net profit margin

(06:50):
.
So your net profit margin isactually pretty simple to
calculate.
Pull your income statement,look at the very bottom line.
You'll find net profit.
It may have some differentnaming convention, but it'll say
net something, net profittypically.
Take net profit, divide that byyour revenue and then multiply
that by 100, and then you'll geta percentage.
So let me give you an example.

(07:12):
Let's say your revenue is$100,000 and your net profit,
after all expenses, is 12,000bucks.
Then your net profit marginwould be 12,000 bucks divided by
that 100 grand, and that'd giveyou 12%.
Okay, so that's a solid margin.
Now let's talk about quicklyhow to improve your profit
margin.

(07:33):
So, if you want to boost yourprofit margin, here are a few
practical ideas.
Number one raise prices.
This is probably the best leverout of them all, but you have
to do it in a way where yourperceived value exceeds your
price.
All right, that's the key.
Now maybe your pricing is offand you're below market.
You could just raise yourprices without considering that

(07:55):
as much.
But you don't want to lose aton of customers because the
perceived value isn't there.
But if you're delivering somuch value to your customers,
then you could justify anincrease in your pricing.
That'll have the biggest impacton the bottom line.
Cut unnecessary expenses.
Right, that's another thing youcould do.
Just cut the fat, reducecomplexity, implement technology

(08:17):
, 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 mylandscape 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 Ididn't want to go in and beat

(08:38):
up my suppliers, I just wantedfair pricing.
Obviously I didn't want to paymore than the market commanded
right, that would be dumb.
But I also wasn't going to gointo a supplier and say, hey,
this sprinkler head right here,you need to drop your price by
25 cents or I'm taking mybusiness elsewhere.
The reason why I didn't beat upmy suppliers because one day I
knew I'd have to call them upand say, hey look, I'm on this

(08:59):
job site in this remote part,this little town.
I I'm on this job site in thisremote part, this little town.
I can't send my guys.
Is there any way you coulddeliver pipe to me?
And I did have to do thatoftentimes.
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, butwhen your suppliers know that
you're working in unison withthem, they're going to be

(09:21):
willing to serve you better.
All right, now, sometimes itdoesn't matter and you're just
treated like a number.
And that's where that perceivedvalue.
They're not delivering thevalue to you.
So you could beat them up onprice, I guess.
But just be careful whennegotiating supplier deals.
Okay, you can streamline youroperations we talked about that
reducing complexity,implementing technology, ai, et
cetera.
You could focus on high marginproducts or services and growing

(09:45):
those to increase the top line,because that will inevitably
impact your bottom line.
Or you can improve customerretention.
So, even small tweaks in theseareas and there are so many
different things you could focuson in other strategies these
are just the core ones, butsmall improvements will make a
major impact on your net profit.
So here's the bottom line.

(10:06):
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 smilingat the same time.
So here's the bottom line foryou.
A good profit margin depends onyour 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, allright, just know that you can't

(10:27):
stay here.
You have to, like, fix thingsin your business and profit is a
system.
Right, it's about having a goodsystem to generate profits, not
just about selling more andreducing your costs.
It's systematic.
I talk about this in otherepisodes.
The key is to regularly trackyour margins and then look for
ways to grow them withoutsacrificing quality or service.

(10:47):
That's why you need a strategyand that's why I believe
strategy and finance togetherdrive so much value.
But that's what I wanted to do,is I wanted to share with you
in this episode and leave youwith this On average, just think
7% to 10% for net profitmargins.
10 is the baseline.
If you're doing 10, you'redoing all right.
20 is exceptional.

(11:07):
If anything above 20 with netprofits, that's really good.
Here's the caveat If you're abusiness owner and you're not
paying yourself a W-2 wage, likein the United States, you're
not an employee of the businessand you're not paying yourself a
salary and that's runningthrough the company's payroll
and you're just takingdistributions For example,
you're an LLC.

(11:27):
You'll know what I'm talkingabout if this is you.
But if you're not payingyourself and it's not hitting
your P&L, your profit and lossstatement or you're not paying
yourself a fair rate for example, you're paying yourself 50
grand but it would cost ahundred grand to replace you
with somebody else with similarskills and capabilities then you
may be looking at your netprofit margin, thinking you're

(11:48):
doing better than you actuallyare.
I have a company that I workwith and they have like an 18%
net profit margin, but that'sbecause they don't pay
themselves a fair salary.
They just pay themselves enoughto get benefits and cover some
taxes and whatnot, but they'reunderpaying themselves compared
to the market.
So you have to normalize yoursalary as the business owner and

(12:08):
then look at your net profit todetermine whether or not you
have a good margin.
That's just a little caveatthat I wanted to share with you.
All right, that's it.
That's what I have prepared foryou today.
I hope you have a wonderfulweek and until next episode,
take care.
Cheers.
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