A recent data release by Sageworks shows private company profitability surging by 52% versus recent averages.
Typical US private companies have experienced a net profit margin of 6.3% for the four years of 2013-2016. That means for every $100,000 of revenue, these companies net $6,300 to the bottom line, after taxes.
Net profit margins have been creeping up overall, as the growing economy has been good for business. Average net profit margins began at 5.7% in 2013 and rose to 6.9% over the next three years.
Then in the most recent year net profit margins soared to 9.6% on average. That’s a big jump!
What Does This Mean For Your Business?
If your business has been around for a while, and getting more profitable over time, you may want to pause before popping the champagne.
That’s because higher than normal profitability is not permanent. We’ve had a very long period of economic growth overall in the US. And that long period of growth won’t go on forever.
The recent run of economic growth is longer than “normal” for the last 70 years. As of this writing (late March 2018) we are now nearly tied for the second longest economic expansion for post World War II.
|Mar 1991 – Mar 2001||120|
|Feb 1961 – Dec 1969||106|
|June 2009 – Present||105|
|Dec 1982 – Jul 1990||92|
|Nov 2001 – Dec 2007||73|
|Mar 1975 – Jan 1980||58|
|Oct 1949 – Jul 1953||45|
|May 1954 – Aug 1957||39|
|Oct 1945 – Nov 1948||37|
|Nov 1970 – Nov 1973||36|
|Apr 1958 – Apr 1960||24|
Maybe the US has figured out how to grow the economy for long stretches. The modern era of Federal Reserve Bank management from 1979 on has seen mostly extended growth periods (in bold above). But then again, the previous expansion ended with the nasty Great Recession, so it’s not clear how smart modern economists really are.
Separate Your Business and Industry From The Economy
There are 28 million businesses in the US, 5 million of which have some employees beyond the owner. Not all of them move up and down at the same time, and with the same level of revenue changes and profitability.
There are plenty of innovative businesses that have grown revenue, and even profits, while the rest of the economy was shrinking. But it’s probably a good time to take a moment and think about the question: what will happen to your business when the economic growth and profit party comes to an end?
Yeah, that’s a bummer question. It’s why they call Economics the “dismal science.” And my B.A. is in Economics.
But you’ll thank me in two years if you’ve weathered the next recession. Here are some potential strategies to consider now, ahead of the inevitable downturn.
- Pay down debt faster – if profits are surging now in the good times, paying down your long term business loans a bit faster than planned could make some sense.
- Think hard about expansion – if you are considering a very significant expansion that requires a big chunk of long term debt, do some extra calculations and run “down side scenarios” of what happens if the economy slows. Then consider growing just a bit less than planned.
- Raise more equity now – if you’re on the equity path and things are going well, consider raising even more now. Angels and VCs will often contract investment activity in economic downturns. And two years from now your financials may not show the revenue growth your current hockey stick forecast predicts. That means either no more money, or very expensive money.
The average profit data comes from Sageworks, a financial information company (www.sageworks.com). The economic expansion data comes from Wikipedia.