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- Accounting, Tax Prep, Bookkeeping, and Payroll
- Legal Services
- Oil and Gas Extraction
- Commercial and Industrial Machinery/Equipment Leasing and Purchasing
- Dental Offices
- Real Estate Lessors
- Physicians' Offices
- Real Estate Agent and Broker Offices
- Other Health Practitioner Offices
- Management Groups (Companies and Enterprises)
- Outpatient Care Centers
- Other Schools and Instruction Centers
- Other Real Estate Services
- Death Care Services
- Support Activities for Mining
The Misconception Surrounding Profit and Success
When you look at the list above, accounting and bookkeeping services come out on top with a 19.8 percent profit margin for all activities compared to the 10.5 percent profit margin for support activities for mining. Companies are often viewed as successful based upon sales volume or market share alone, ignoring the flow of cash into the company.Take the example from above. Fortune points out that the profit margin of accounting and bookkeeping services are much higher because there is little to invest in these companies on the expense side. Incoming cash is the result of services rendered, some of which can be provided with a simple office location and some accounting software.
Support activities for mining, on the other hand, require immense expense to support that activity. For example, trucks are needed to haul pipes and drilling equipment around the country, setup drill sites, and support the transportation of crude and refined oil. This all costs money to complete, requires drivers and construction crews, and is even exposed to the fluctuating cost of fuel for transportation.
In this manner, the product sold by mining companies has higher value, but so too do the expenses of supporting it. It is also important to realize the difference between profit and cash flow.
Facts vs. Myth in Business
Given what's been covered above, it's ideal to start with a focus on the myth that businesses need to have a physical location to house a business. While a mining company would in fact need a warehouse or lot to store equipment and trucks, think about some of the most profitable businesses in America. One need only have a home office to launch a successful real estate endeavor or accounting firm.
Another pervasive myth is that all small businesses take as few as two and as many as 10 years to turn a profit. This is true for some industries, but not because they are unsuccessful. A restaurant, for example, could have great support from diners and bring in more money on meals than the food costs, but spend a lot of that money covering building expenses, employee payroll, and servicing loans that were likely taken out to open the location.
By contrast, a writer or web-design specialist could turn a profit on day one assuming they charge their first client more than it costs to provide that service to the client.
Finally, there is the myth that profit is more important than cash flow. Make no mistake, no company can succeed long term if it is not profitable. However, to identify profitability as the be all, end all of business is foolish. A profitable company with slow cash flow could routinely flirt with bankruptcy as it struggles to recover payments and cover its expenses, while a company with lower profitability and greater cash flow could go on indefinitely with a great product.
What to Look for in a Business
Considering the purchase of a business or looking into launching your own, there are a number of things to think of first. Keep in mind the myths busted above regarding profit, success, and cash flow. Successful businesses rely on a good profit margin and strong cash flow. Most importantly for you, the guidance of a smart consultant who can help you sift through the information before making a decision on a business type is critical.
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