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Benchmarking Small Business Revenues and Profits

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Picture of ruler used for benchmarking small business revenues and profitsBenchmarking small business revenues and profits often delivers big insights into a firm’s health and prospects.

Benchmarking revenues, for example, gives the business owner a sense of his typical competitor’s size–and what’s possible if the business is especially well managed.

Additionally, benchmarking profits gives the business owner a window into the rewards of working to grow a business.

In this post, therefore, I’m going to point out a simple way to start you off on benchmarking small business revenues and profits.

Then I’m going to share three follow-up comments to help you make the benchmarking process better and less hazardous.

Note: I’m going to use the example of a CPA firm. But you can easily transfer what I talk about to benchmarking comparable firms in your industry.

Data for Benchmarking Small Business

To begin benchmarking small business revenues and profits, you need data about both your firm and the industry.

Obviously, you get data about your firm from your accounting system.

What you might be surprised to know is that you can get rich data about your industry from the U.S. Census Bureau at this web page (click here) from the US 6 digit NAICS Excel workbook (which you may be able to download directly using this link). And this data can help you begin to compare your firm to its peers–at least in terms of size.

Note: If the above link doesn’t work, use the web page link provided above and then look for the Excel workbook that provides information by 6 digit NAICS code.

Sizing Your Competition

The U.S. Census Bureau doesn’t provide you with exact numbers on average revenues of firms in an industry. But you can get useful data for comparing the size of your firm to its industry peers. And then, as I’m going to show, you can often massage that data to come up with crude but still very useful estimates of your peers’ revenues.

For example,  the Census Bureau provides the number of CPA firms, the number of their employees, and the total payroll for the different sizes of firms. The table below summarizes this information for CPA offices, but you can get similar data for your industry:

Firm Size  Number of Firms Total Employment Total Payroll  in thousands
4 or fewer employees 37,018 64,858 $2,845,400
5 to 9 employees 10,307 66,930 $3,129,877
10 to 19 employees 4,284 56,285 $3,252,960
20 to 99 employees 1993 72,632 $5,272,331
100 to 499 employees 226 37,671 $3,115,427
500 or more employees 71 148 $14,319,099

On its own, the preceding table’s information provides useful perspective for CPA firm owners by giving an overview of what typical CPA firm sizes are in terms of employees. Nearly 70%  of firms employ 4 or fewer people. Nearly 90% of firms employ 9 or fewer people.

What’s more, you can take the data from the preceding table, massage it a little bit and pretty quickly calculate additional data about firm sizes, which means you’re soon benchmarking small business revenues and profits.

For example, you can divide the number of employees by the number of firms and come up with a mean average number of employees. In the smallest size category, you can divide 64,858 employees by the 37,018 firms and calculate a mean average employee of 1.75 employees per firms. The table below shows the averages for each size category:

Firm Size  Number of Firms Employee Headcount
4 or fewer employees 37,018 1.75
5 to 9 employees 10,307 6.49
10 to 19 employees 4,284 13.14
20 to 99 employees 1993 36.44
100 to 499 employees 226 166.89
500 or more employees 71 2090.23

Estimating Competitor Revenues

Further, if you know general industry statistics, you can sometimes develop average revenues estimates. For example, CPA firms on average pay about 40% of their revenues out as payroll. This means you can estimate average revenues for firms in each category by dividing the total payroll by .4 and then dividing that value by the number of firms in the category.

To calculate the mean average revenues for CPA firms with between 0 and 4 employees, for example. divide the total payroll of $2,845,400,000 for the smallest category of firms (from the first table shown in this blog post), by .4, and then by the number of firms in the category which is 37,018.

This calculation returns the value $192,163 as the average revenue for firms with 4 or fewer employees. And the table that follows does the math I just discussed for each of the sizes of CPA firms that the Census Bureau data describes.

Firm Size  Number of Firms Est. Mean Revenue
4 or fewer employees 37,018 $192,163
5 to 9 employees 10,307 $759,163
10 to 19 employees 4,284 $1,898,319
20 to 99 employees 1993 $6,613,561
100 to 499 employees 226 $34,462,688
500 or more employees 71 $504,193,627

The approach just described gives you the mean revenue, obviously. That’s not the best measure of the average firm revenues.

But look at what a little bit of fiddling with Census Bureau data does. You can quickly see the common sizes of firms in your industry, come up with typical staffing levels, and even develop rough average revenue estimates for firms within each size category.

Getting Lost in the Data

Let me quickly throw out three final quick points for benchmarking small business revenues and profits…

First, those mean averages need to handled with care. Really, as noted, you and I would prefer to work with medians as the “average” we’re using.

Say you are looking at just ten CPA firms as listed in the able below:

Firm Name  Number of Employees
Abrahamson 1
Brown 1
Carter 1
Dedrick 1
Ernst 1
Forrester 1
Green 2
Hughes 2
Ingraham 3
Johnson 4

You would for the above values calculate a mean equal to 1.7 employees, suggesting the “average” firm has nearly 2 employees.

But that’s not accurate a picture, right? In this little example, sixty percent of the firms employ a single person.  And the median number of employees equals 1.

By the way, the same imperfection exists with respect to revenue averages, too. A typical, smallest category firm probably generates far less than that $192,163 figure shown in the earlier table.

Second, a tip: Look for opportunities to combine the public data available from the Census Bureau with proprietary data available from other sources. These combinations may give you additional powerful insights not available from a single source.

To again use the example of CPA firms, with just a bit of additional data as well as the values shown in the preceding tables, I can come up with rather good estimates of the profits that CPA firm owners earn in each of the size categories. The additional data I need, by the way, is the typical revenue a CPA firm partner sells in different sized firms and then the typical profit margins for firms of different sizes. But once I have this other data, boom, I’m off to the races.

Note: I don’t know what industry you’re operating in, obviously. But in my industry, I can get (and actually already have) these additional helpful bits from the American Institute of Certified Public Accountants and Texas Society of Certified Public Accountants “Management of an Accounting Practice” Survey and the Rosenberg Survey. These surveys both provide a goldmine of useful information and represent a “must buy” purchase (at least once) for CPA firm owners. With a little luck, your industry will provide you with some equivalent surveys.

A third and final comment about benchmarking small business revenues and profits: You need to be alert to reality that great variability exists within the ranges reported on by the Census Bureau and also in proprietary data sources.

To take the example of that first, smallest category of CPA firms, for example, an average CPA firm in the smallest category might make, say, $80,000 in profits for a year. (This is probably a good guess since another industry rule of thumb is that a CPA firm generates bottomline profits, often, of 40%.) But within that smallest category, actual owner profits jump all over the place. Many owners are going to be making less and some far more. Your industry’s data surely will have the same wild, variability.

Additional Blog Posts You Might Like

Benchmarking for Better Financial Results

 

Has a Jedi Knight Ever Visited Your Small Business?

How to Grow a Small Business

Using the Delphi Method for Small Business Problem Solving

 

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About Yury Zvyagolskiy

Yury Zvyagolskiy
In almost all American movies there is a bad guy who is usually Russian and his name is Yury. If the bad guy is not from Russia, his last name usually starts with Z. So here I am - Yury Z. My specialty is personal effectiveness. I am an expert in goal achievement, personal effectiveness, relationships and effective thinking.

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