Today, I want to give you a few ideas for the MOST profitable small business that you could start. I will also warn you about the two least profitable small businesses that you could start. For the purposes of this article, when I talk about a small business, I am referring to a business that is operated by one person or owned by a married couple. As I write this, I am going to try really hard not to sound like an incredibly boring accountant or a bean counter. Yet, I still have to talk about income, expenses and profit margins if I want to be able to help you start a small business that can be profitable.
Bottom Line Up Front:
Based on 2014 tax returns, offices of physicians that specialize in mental health had the highest profit margins. The professional, scientific and technical service sector’s businesses had the highest overall profit margins. Animal breeders and commodity exchange businesses occupied the other end of the profit margin spectrum. Collectively, those types of businesses owners operated under large negative profits margins and sustained losses.
That said, there are small business owners that are profitable in a overall unprofitable fields. There are also owners that lose money even though they own a type of business that is generally profitable. It all depends upon the owners’ ability to earn money and the owner’s ability to spend less than the company is earning.
I have supported my claims about the most profitable and least profitable small businesses by using the most juicy, real, business data that I could find. I am using data from people’s tax returns. Specifically, I am using the Internal Revenue Service (IRS) statistics’s that were released in the fall of 2016. These statistics were derived from sole proprietors Schedule C business tax returns. In other words, I used data from the business tax returns that single people or married couples filed for the 2014 tax year.
This is the most current income tax information available as of this date. At this point, I have not been able to find similar IRS data relating to sole proprietor’s farm business income. Regardless, as a small farmer myself, I can confidently say that a farm or ranch business would not make the list of the most profitable types of businesses anyway.
Understanding Profit: 101
Since I come from an accounting background, I am the type of person that strives to remind people that are thinking of starting a business to ALWAYS keep the money situation in mind. If you run out of money, you will not be able to to provide your potential customers with your great product or service. Therefore, the ability to earn a profit is EXTREMELY important.
Although this article is going to talk about the most profitable types of small businesses that you can start; there ARE people with small businesses that lose money in these categories. Likewise, some the types of businesses that have lots of people losing money also have some business owners that are making a profit.
Ultimately, the amount of profit that a business earns is dependent on the businesses’ income being greater than it’s expenses.
Sales – Expenses = Profit
For example, let’s assume that we are looking at the expenses of someone that sells really nice, high quality, licensed college football T-Shirts online.
Sales (100 T-Shirt sales @ $20 each) $2,000
Cost of T-Shirts $1,000
Phone & Internet Service 150
Rent Payment 500
Office Supplies (printer ink) 50
Total Expenses (1,920)
Net Profit $80
I just made up numbers, so these are NOT real numbers. As you can see in the example above, the expenses add up quickly. One way to start and maintain a profitable business is to keep your expenses as low as possible. Did you notice the inventory and shipping costs in the example above? This may sound obvious but the inventory, shipping and handling costs are a major expense category that reduces your profit if you are selling products.
Now consider this example. Lets say that we have a bookkeeper that charges $100 to do monthly book keeping for small companies.
Sales (20 book keeping sales @ $100 each) $2,000
Phone & Internet Service 150
Rent Payment 500
Office Supplies (Printer Ink) 50
Total Expenses (800)
Net Profit $1,200
At 20 sales each, the bookkeeper is going to be much more profitable than the person selling the T Shirts because the book keeper does not have to purchase or make the inventory that will be sold.
Small businesses that have the highest profits margins are those that are selling time in the form of a service rather than products.
Small Businesses That Generate the Most Sales
The following chart shows which business sectors generated the most dollars in sales. Notice that the most sales were generated by the construction industry, then the retail industry. The professional, scientific and technical services industry generated the third highest amount of revenue. See the chart below.
The Most Profitable Small Business Sector
Do you remember what I was saying about the cost of inventory? Both the construction and retail industries require inventory to sell and/or building materials. The professional, scientific and technical services industry maintains minimal inventory of things to sell. Maybe paper and some nice folders to put reports in??? As you might be able to guess by now, small businesses within the professional, scientific and technical services industry are the most profitable.
I reviewed the last 5 years worth of available IRS tax return data (2010 to 2014). Businesses within the Professional, Scientific and Technical Services sector have consistently reported the highest percentage of profits. See chart below for the 2014 data.
What types of businesses fall within the Professional, Scientific and Technical Services sector?
Certified public accountant (CPAs)
Bookkeeping and other non CPA accounting services
Specialized A/E design services
Computer systems design services
Scientific research and development services
Advertising and related services
Market research and public opinion polling
PROFIT MARGIN: 101
What is the profit margin? The profit margin tells you how much you actually make, as a percent, of each sale after the expenses have been covered.
It is calculated by dividing your net income by the net sales. (NI/NS)
For example, in 2014, the IRS data mentioned above showed:
Food and Beverage Store sector:
Net Sales Reported – $26,996,012,000
Net Income- $848,128,000
Profit Margin = 3.14% which was calculated by ($848,128,000 / $26,996,012,000)
The profit margin allows you to make different comparisons. For example, you can compare this years results to last year’s results. You can compare your business to industry averages.
Profit Margins for Small Businesses within the Professional, Scientific and Technical Services
Or as in this case, I can compare one industries profitability to another. Overall, the small businesses that are in the professional, scientific and technical services sector have very high profit margins. The average profit margins ranged from 28% to 53%. The advertising and related services type of small businesses averaged 28% profit margins. The consultants were on the high end with 53%. Unfortunately, I was unable to figure out which consultants made the most since the IRS had them lumped together in one group.
Out of all of the small business industry sectors, there was only field in the data that had a higher profit margin than consultants. In 2014, was physicians that specialized in mental health. Their 62% profit margin was the highest.
The Least Profitable Small Business
Are you wondering what type of small businesses have the lowest profit margin? Only 31 percent of the 45,000 small nonfarm businesses engaged in animal production, to include cats and dogs, reported a profit to the IRS in 2014. Animal producers are operating with a negative 37.8% profit margin! The average small business owner engaged in animal production has an average 10,000 loss.
The group of small business owners that lost the most money per person on average were people that were trying to operate a securities and commodity exchange business. This is a comparatively small group of business owners. Only 1,441 people reported operating this type of business. They lost an average of $44,000 each. Ouch. They have a -16.5% average profit margin. Since 1,052 people in that business did report a profit, the people that lost money lost significantly more than $44,000 to have pulled the average that low. If you are thinking about going into the securities and commodity exchange business – be careful.
Small businesses that have the highest profits margins are those that are selling time in the form of a service rather than products. Ultimately, the amount of profit that a business earns is dependent on the how the owner manages the cash flow. To be profitable, the businesses’ income has to be greater than it’s expenses.
If you have any questions or would like to add your thoughts, leave a comment or send an email. I will try to respond within 24 hours.
About the author:
Sondra loves to help potential small business owners turn their dreams into reality by providing encouragement and a realistic analysis of the situation. In order to do so, she draws upon 20 years of diverse experience that has included titles such internal auditor, special projects auditor, CPA, business coordinator, finance coordinator, real estate broker, small business owner, farmer and online entrepreneur. By the way, Sondra thinks that hogs, as in the kind that go oink oink, are cute.