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Small biz profit margins at pre-recession rates, report says

Net profit margins are returning to pre-recession rates, a report shows

Small businesses this year saw net profit margins increase by the highest rate in seven years, according to a report generated by the Raleigh, NC-based financial information company Sageworks.

The report reflects activity exclusively among privately held companies with under $1 million in annual sales in more than 20 industry categories including real estate, construction, retail trade, scientific and technical services, healthcare, accommodation and food services, and manufacturing. Sageworks collects more than 1,000 financial statements daily from certified public accountants and banks nationwide. The company generated its report from this audited data.

According to the report, in the last 12 months profit margins of small companies were up 6.01 percent over the year-ago period. It marks the first period since 2005 that profit margins rose more than 6 percent. In 2004, profit margins among the group rose 6.65 percent, and in 2005 they rose 6.78 percent. Profit margin increases were at their lowest—3 percent—in 2009.

Sales growth among the same cross section of companies is also strong for the 12-month period, with a 4.35 percent improvement over the same period last year. "While sales growth isn't quite back to the ten-year high of nearly 8 percent, it seems to have rebounded from 2009, and profits margins appear to be at their highest level since 2005," Sageworks spokesman Jack Ochs said. Companies in the report saw sales growth of only 1.26 percent between 2007 and 2008, and a sales decline of more than 5 percent between 2008 and 2009. In 2011, sales grew 4.3 percent over 2010.

Sageworks analyst Sam Zippin told Yahoo! Small Business Advisor: "The data is showing that for these small companies, sales growth and net profit margins are starting to get back to their pre-recession rates. They're starting to see growth that they haven't seen in a few years."

Zippin noted that an increase in net income over sales occurs when sales are going up, as is seen in this case, but also occurs when businesses reduce expenses. Companies that survive a tough economy "get better and better at becoming more efficient," she said.

As for sales growth, Zippin said, "We're not seeing the growth rates of 2004, 2005, 2006, but we are seeing pre-recession growth rates."

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