Many businesses use benchmarks to assess their own performance or their position relative to competitors, but benchmarks that shed light on the performance of industries outside of your own can also help you decide where to make new investments. Those investments could be in the form of new staff, new equipment or simply additional effort focused on a specific market. For some companies, the target market is narrowly defined or limited – by geography or by a specific industry served by the product or service. Other businesses, especially many of the service-based industries, can have customers across multiple industries.
Knowing which industries to target can shape marketing efforts, new hires and other operational aspects of your business. But how do you know which industries to target?
Before targeting an industry for new business, it’s imperative to know whether you can make money in that industry. That may seem obvious, but unfortunately, some people confuse sales growth with profits. Sales may be growing in a particular industry, but if profit margins are thin or nonexistent, companies in that industry may have trouble paying bills (i.e., you), or they may be more inclined to seek steep discounts on your prices.
Profitability is also one industry benchmark that sheds light on creditworthiness, so targeting a profitable industry may mean you have fewer issues with collections.
Sageworks, a financial information company that analyzes privately held companies, recently conducted a financial statement analysis to determine which industries have had the highest profit margins over the past 12 months. Through its cooperative data model, Sageworks collects financial statements for private companies from accounting firms, banks and credit unions, aggregating the data at an approximate rate of 1,000 statements a day. Net profit margin was adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries -- adjustments commonly made to private-company financials in order to provide a more accurate picture of the companies’ operational performance.
Some of the most profitable industries are being aided by sector trends, while others have inherent characteristics that boost their profitability, according to Sageworks analyst Mike Lubansky.
For example, much of the profitability in the oil and gas extraction industry may be driven by the continued development and growth in the U.S. of unconventional oil and gas supplies, such as shale gas and tight oil, says Lubansky. And the lower cost nature of outpatient care has resulted in many procedures being shifted from hospitals, which could be aiding efficiencies of scale.
For lessors of real estate, a combination of declining vacancy and increasing rental rates is likely contributing to profitability, Lubansky says. “There are generally positive trends in vacancy rates in both commercial and residential real estate,” he says. Commercial real estate rents have increased slowly in recent years, although they remain below pre-financial crisis levels, and some markets have experienced increases for residential rental rates.
Accounting firms and legal services, meanwhile, are perennially on the list of most profitable industries, according to Lubansky. These are mature industries, and firms can often be started with relatively low overhead when it comes to staff and equipment. Sales are also less reliant on where the economy is at the moment. “In other words, they are services that maintain demand during downturns,” Lubansky says.
Just because the industry average is high right now doesn’t mean companies you target will have the same level of profitability, and business owners can always take steps to boost their profit margins. But examining this industry benchmark is a good place to start as you weigh various industry options.
Sageworks is a financial information company and the leader in the financial analysis of privately held companies. Sageworks’ data and applications are used by thousands of banks and accounting firms across North America.