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ok I have a few questions and I am sure this is pretty vague and will need more information to get number thrown out there for an average percent.
If the owner is involved full time in running the business, then there is no such thing as profit margin. In this case it's just called an owner's draw, and I would expect it to be in the range of $100k to $200k, or 20% of gross sales.
If the owner/shareholder is not actively involved in running the business, then yes, there is net profit, and I would expect it to be in the range of 5% of gross sales, or $25k to $50k.
But I think you will find very few small businesses that do custom anything where the owner is at arms length and just collects profit margin.
ok. Well I was thinking in terms more of for growth to be able to add on or upgrade equipment and so on.
Owner pay and distributions are different than profit. Im no accountant and I dont play one on tv but 5% is a terrible net profit on a business. After mine and my wifes wages for the work we do in the business I am looking for a 10-15% net profit and I have friends that say 20% is what they want or it isnt worth doing. A few more.details of what you are looking for would be more helpful to the question
How about achieivng Positive cash flow with no or negative taxable profit.
after everything is paid for at the end of the year and 2 owners take their salaries is how we look at profit. 2013 we did 15-16% and 2014 was up to just over 19%. The increased percentage was also on top of an increase in sales of approx $500k. Led to a very healthy profit in our opinion. This year percentages are down bit but total sales are higher than a year ago so not worried. We are a 14 person millwork/residential cabinet shop
Our #'s are similar to Jody's. But this is a highly variable business, year to year. The # we use for calculating pricing is 14% profit on sales of 2.4 million. It is impossible to come up with a consistent $ profit # because a until all fixed costs for the year are covered there is no profit. Once those costs are covered profit margins increase quickly. Cash flow becomes tricky as you try to increase sales. By investing in new equipment you become a gambler. Are you covered if sales nose dive?
Borrowing money based on cash flow, sales, sales projections, and most importantly the ROI for the life of the machine is a risk reward analysis. At the point that the machine is returning more income than your money will earn elsewhere is not gambling, its a business strategy.
If you accelerate the depreciation and reduce your tax liability while financing the machine using dollars that have a lesser value each year you are increasing cash flow and reducing tax liability
Alan, I've never been able to generate an accurate ROI for a new machine. It relies on guessing how much work we will generate for that machine's increased capabilities. I've been through wildly varying work flows. Serious cash flows, 2009/10! Bankrupt customers, Customers that went to Mexico because I couldn't match the price.
Those things are beyond my control. I'm well aware of the tax, depreciation, cheaper $'s etc. I'm also aware of the risks that can not be calculated into ROI. I'd be gambling on whether any of those risk factors would occur.
Larger shops may have more maneuvering room, deeper pockets than I've got. After the recession died off and work picked up, I was very low on $. I went to the same bank I had been using for 30 years. I wanted to renew my line of credit. They asked for the last 3 years CPA audits. Then turned me down because we were showing significant looses & as an aside from one of their employees, small companies were too risky. All bills paid, no outstanding loans. Work was picking up and I needed operating $.
It is gambling if you can't compute the odds!