Entrepreneurship, Second Edition

2.4. Profit Potential

Figure 2.4. Relationship of investor to entrepreneur

The level of profit that is reasonable depends on the type of business. On average, U.S. companies make about 5% net income. Hence, on one dollar of revenue, the average company makes a five-cent profit after paying all expenses and taxes. A company that consistently makes 10% is doing very well, and one that makes 15% is truly exceptional. Approximately 50% of the Inc. 500 companies make 5% or less; 13% of them make 16% or more. Profit margins in a wide variety of industries for companies both large and small are published by Robert Morris Associates, so entrepreneurs can compare their forecasts with the actual performance of similar-sized companies in the same industry.

Any business must make enough profit to recompense its investors (in most cases that is the entrepreneur) for their investment. This must be the profit after all normal business expenses have been accounted for, including a fair salary for the entrepreneur and any family members who are working in the business. A common error in assessing the profitability of a new venture is to ignore the owner's salary. Suppose someone leaves a secure job paying $50,000 per year plus fringe benefits and invests $100,000 of personal savings to start a new venture. That person should expect to take a $50,000 salary plus fringe benefits out of the new ...