Brad Nakase, Attorney
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Claudia has always dreamed of starting her own small business. As a talented artist, she would like to open her own tattoo studio, where she would hire the best tattooists in Los Angeles to work for her. However, Claudia’s friend, Eric, opened his own bar two years ago. Within a few months, it shut down due to a lack of funds. Nervous about her own business, Claudia asks Eric about his bar. He tells her that it was very hard to maintain a steady revenue, and before he knew it, the business was closed. Eric also says that he did not make as much money as he thought he would. “I could barely pay rent,” he tells Claudia. After talking to her friend, Claudia wonders what the average small business makes in revenue. She hopes that her tattoo parlor will make enough revenue to survive.
When an entrepreneur comes up with a unique idea for a small business, it is tempting for them to start dreaming big. Often, a great idea equals great revenue. But not every small business is destined to be the next Walmart or Facebook. When creating a startup or running a small business, it pays to be realistic and set achievable goals. To do this, a small business owner should be educated on what is considered average revenue for a small business.
First, it may be helpful to go over some statistics related to small business revenue, to paint a picture of what profits look like for the modern small business:
A few major points can be taken away from these statistics. First, a small business owner should not expect to become wealthy – certainly not immediately – from their business. This means that passion and determination is important, especially in the early stages of running a business. Second, it appears that small businesses are finding increased success in recent years. This means that there is no better time to take that great idea and turn it into a reality. Third, the unfortunate reality is that women-run businesses make on average four times less revenue than male-run businesses. Women entrepreneurs should be aware of this reality and should do research into loans for women-led businesses, as well as other resources for women entrepreneurs. Finally, it is critical that businesses maintain a flow of cash to keep their businesses running. This means that it is important not only to have steady revenue, but to be financially responsible with that money.
The United States is a place where small businesses can thrive, and indeed, we interact with small businesses every day. Small businesses are a part of everyone’s life and influence the way people live. America is home to 30 million small businesses. In fact, small businesses make up 99.9% of all businesses in the United States. Nearly half of the country’s workers are employed by small businesses.
Because small businesses play such an important part in the economy and culture of the United States, it is worthwhile studying the finances behind these enterprises. Every year, the Small Business Administration keeps track of small business revenue. Information can also be found in census records, as well as other resources.
The average annual revenue of a small business refers to how much money the company is bringing in every year. Revenue refers specifically to the money the business makes before accounting for expenses and taxes, amounts thereafter subtracted from the total. Revenue is sometimes called the “top line.” This is because revenue appears on the first line of a small business’ income statement. Everything else falls below this number on the statement.
Small business’ average annual revenue is therefore the average amount of money these businesses bring in. The U.S. Census refers to revenue as “receipts.” According to the Census, these receipts include “gross receipts, sales, commissions, and income from trades and businesses, as reported on annual business income tax returns.” Forbes reports that the average revenue of small businesses in the United States comes out to $46,978.
This may be surprising to some people, who might have thought that all small business owners are millionaires. Many are tempted by the thought of starting a small business and becoming rich. It is therefore important to realize that this is not usually what happens with small businesses. The average small business owner enjoys a much smaller revenue. And again, one should remember that revenue is the amount before expenses and taxes are subtracted.
That said, bigger small businesses typically perform better. These businesses tend to have employees, and revenue is generally greater than small companies lacking employees (nonemployer businesses). There tends to be a relationship between the number of employees and a business’ revenue: the more employees, the more revenue. In turn, the greater revenue allows a business to hire more employees and grow.
Small businesses with up to four employees brought in an average of $387,000 in revenue per year, as of 2007. Meanwhile, businesses with five to nine employees averaged $1,080,000. This trend continued the more employees a business had. For businesses with 10-19 employees, the average revenue was even higher at $2,164,000, while businesses with 20-99 employees broke $7 million on average. Companies with 100 to 499 employees made the most revenue, bringing in an average of $40,775,000.
As these numbers demonstrate, the more employees a small business has, the more revenue it tends to make. So, while many small businesses do not make a significant amount in revenue, there are a portion that make an impressive amount.
While small business owners and entrepreneurs interested in starting a business should remain realistic about their goals, there is reason to be excited. More and more nonemployer businesses – one-person companies – are cracking $1 million in revenue. As of 2016, there was a 1.6% increase in nonemployer firms making $1-2.5 million in revenue.
One may be intimidated by the fact that less than 2% of nonemployer businesses break the $1 million mark. However, despite the odds, the fact that so many businesses run by a single person are making that money is very impressive. It is a difficult feat running an entire business on one’s own, after all. Managing production, sales, and marketing takes a lot of work. So, the fact that so many are doing this and breaking $1 million in revenue is impressive in and of itself.
Small business owners often rely on the income from their company. In fact, the Federal Reserve Bank of New York reports that up to two-thirds of nonemployer businesses provide the primary income of the owner. These small business owners make a median income of $50,347 as of 2016. Owners who run unincorporated firms make even less – a median of $23,060. Because the Small Business Association focuses only on median income, we have to look elsewhere to find averages.
Fundera conducted a study of hundreds of business owners and found that over 86% of them made less than $100,000 in annual income. Payscale similarly reported that the typical small business owner makes $71,813 on average.
Small business owners’ salary also depends a lot on the specific industry. In their study, Payscale discovered that retail store owners make $50,454 on average, while construction workers make an average of $72,346.
In 2015, businesses making less than $5 million in yearly revenue enjoyed a nearly 8% increase in annual sales. That growth was a whole percentage point greater than the 2014 estimates. Small businesses in health care, construction, and food and accommodation services saw the greatest growth during this period.
Unfortunately, between men and women there is still a large difference in business participation and success. First, there are more male business owners than women overall. As of 2007, there were just under 8 million women small business owners, while there were 14 million male business owners. Not only is there a difference in participation, but women business owners also bring in far less money in revenue each year. In the same time period, women brought in an average of $130,000 in revenue, while men brought in an average of $570,000. That is more than four times the amount that women produced.
The key to keeping a small business running is to have a steady inflow of cash. Statistics back this theory up. One study showed that over 80% of businesses failed primarily due to a lack of cash flow. In fact, that percentage indicates that cash flow is the number one reason why businesses fail. Of course, a business can fail due to a build-up of smaller problems. These might include the issues of running a seasonal business or joining an oversaturated market. However, the main problem always comes down to a lack of money to run the business.
For those entrepreneurs who have not yet started their business, it is wise to perform a cash flow analysis. This analysis will help a business owner predict if there will be any financial issues that could get in the way of maintaining profits. It also helps ensure that there is a healthy demand for the good or service that the business provides.
Example: Kevin runs a Christmas tree business which operates seasonally from Halloween to Christmas. Kevin would like to rely on his business as his main source of income. However, because his business only operates three months out of the year, he does not make enough money to support himself. He also finds that the business is barely profitable due to all the competition. In order to increase his annual revenue, Kevin decides to branch into a tree trimming business, which gives him work during the spring and summer months.
Some small businesses make it big, and their owners end up making millions of dollars in revenue. However, this is not typical in the small business world. By studying the revenue and income of small businesses and their owners, it appears that many are moderately successful, but most bring in modest amounts.
It is important to remember that while small businesses may not bring in a lot of money, most do well enough to continue running for many years. Indeed, 80% of businesses make it past their first year and about half survive five years. If a business owner is planning on starting a small business, he or she should be aware that the number one reason for failure is a lack of cash flow. Keeping these facts in mind will help an entrepreneur create a strong business plan, hopefully turning a great idea into a successful business.
