*Evergreen's Design/Fabrication Network has been developed to bolster business acumen and create community among businesses engaged in but not limited to the following fields: woodworking, metalworking, set and prop building, carpentry, furniture and accessory design and fabrication, fashion and art fabrication. The network will offer free workshops and resources in the months to come on a variety of topics.
Last week, I facilitated a Small Business Finance Workshop for Evergreen Exchange’s new Design + Fabrication network.* This workshop was focused on the Chart of Accounts – an important accounting concept to understand if you want to keep meticulously organized and accurate books. From there, we looked at how the Chart of Accounts make up the Income Statement and Balance Sheet, and what each statement can tell us about our business.
Our attention turned to the Income Statement. Truthfully, reviewing the numbers on your Income Statement is great, but reviewing your margins is a more powerful practice. And, as any “Shark” will tell you, it’s all about the margins!
A question came up that not only resulted in a deeper group discussion, but got me wanting to do more research.
What is a good net income margin for businesses to achieve?
Ask 10 different people this question, and you’ll get 10 different answers. Or, one unified answer would be the ubiquitous, “It depends...” The answer varies widely depending on time in business, industry, depreciation expense, equity investments (which typically want to see scale), tax strategies, owners’ draws and other required operational investments for growth (ie: developing an e-commerce website).
My anecdotal response what that the gold-standard is 20%. I’ve worked with a lot of small businesses, the majority with net margins under 10%. So, I reached out to some of my peers in small business lending and consulting, and here’s a snapshot of the average net income of business’s they work with.
And here’s what they said would be an ideal net margin target to strive for:
Since margins ultimately depend on industry, I recalled SageWorks, a financial information company, manages a proprietary database of financial statement information for privately held companies and releases reports on the most profitable industries in the U.S. This particular matrix shows the most profitable small business industries (focused on annual sales under $5mm). The interesting thing to note here is that the majority of these businesses are service-oriented. Manufacturing a product takes a lot more, creativity effort and trial/error that eats into profits.
The bottom line: Your net margins depend on a variety of factors. And yes, you pay taxes on your Net Income and may want to keep it as low as possible to avoid a big tax payment to Uncle Sam, but having a healthy margin is important for several reasons:
Lenders use your net income as a basis to evaluate your ability to run a healthy company and repay debt.
Net margin is often the basis used for business valuations. So, if you’re looking to sell, don’t sell yourself short in the short-term.
A healthy net margin is critical to build your cash reserves for a rainy day or put a down payment on a building you’ve always wanted!