Hey guys so I’m a really small company (part time) but I have some questions on profit margins. It may be a stupid question but I keep reading a hearing owners say that on average there profit margins are 15-20% do things like owners salary and marketing budgets do thoes come out of the 15-20% profit or are they already acounted for? For example let’s say we’re talking about a medium to large company that makes 500,000 per year. Obliviously they have to pay taxes, pay employees, pay rent, business insurance, medical insurance,WC insurance, truck insurance, materials and any other expense. After all the expenses are paid if your left with 18% does the owners salary and marketing budget come out of the 18% or are thoes still considered expenses? I’m assuming things like marketing is considered an expense but not sure about owners salary
Hopefully that makes since and hopefully it’s not to dumb of a question
Accounting wise, profit is considered anything that is left after you have paid every expense including payroll. As an S-corp, I have a higher profit margin because I am only required to pay myself a reasonable wage. Before I used to draw my account down to virtually a NET 0 through my last few paychecks, but a with the new tax laws you’ll pay less taxes than you would taking that money in terms of a payroll expense.
Think of profit as Financial Gain. The Gain or Profit is over and above all operating expenses, It is also over and above Owners Compensation. You will here some businesses suggest that they are making 40-50 % " profit " because they are including what they Draw. That is not an accurate representation of the term profit. What they are actually describing is owners cash flow or total cash flow of the business ( which includes also the owners discretionary benefits ). Look up and Understanding the term EBITDA !
Here is a very rudimentary example : Imagine you want to sell your business to a person who does not want to work in that business ( he is buying it as an investment as an absentee owner ). He would need to know how much it would take to replace you ( the owner ) with a person that does everything you do for the business. Lets say that amount is $40,000.00. Then after he pays all of his expenses and the wages of the new person who took your place he has $15,000.00 left over at the end of the year. THAT IS HIS PROFIT. If he grosses $100,000.00 in sales he would have a net pretax profit of 15%.
And yes. marketing budget is an operating expense.
a business usually is in the 5-10% range of profit, if you see any more being claimed you need to investigate more thoroughly to verify what is being claimed as profit
profit is what is left over after absolutely everything else has been done and paid for
technically, the act of window cleaning itself is “cost of service” a parallel to “cost of goods”, a frontline expense
yes it is an operations expense but when categorized this way sometimes it makes more sense for the proprietor to see his wage as an expense along with all other things “cost of service”
