Many businesses use benchmarks to assess their performanceor their position relative to competitors, but benchmarks that shed light on the performance of other industries can also help you decide where to make new investments.
Want New Business? Target Profitable Industries
Those investments could be in the form of new staff, new equipment or additional marketing effort focused on a specific demographic. For some companies, the target market is narrowly defined or limited – by geography or industry – due to the product or service. Other businesses, especially many service-based industries, can engage 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 lead to fewer issues with collections.
Sageworks, a financial information company, recently conducted a financial statement analysis to determine which industries have had the highest net profit margins over the past 12 months. Sageworks collects financial statements for private companies from accounting firms and financial institutions, 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 market-rate salaries – adjustments commonly made to private-company financials for a more accurate picture of the companies’ operational performance.
Some of the most profitable industries identified in the analysis have benefited from broad, sector-wide 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 of outpatient care has resulted in many medical procedures being shifted from hospitals, leading to efficiencies of scale in outpatient care.
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 in 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 operate with relatively low overhead when it comes to staff and equipment. Sales are also less reliant on the general economy. “In other words, they are services that maintain demand during downturns,” Lubansky says.
When reviewing this and other data, it’s important to remember that, while the industry average is high now, specific companies within the industry may not have the same level of profitability, and business owners can always take steps to boost profit margins. But examining this industry benchmark is a good place to start as you weigh various industry options.
Mary Ellen Biery is a research specialist at Sageworks, a financial information company that provides financial statement analysis solutions to business owners and financial professionals. She is a veteran financial reporter whose works have appeared in The Wall Street Journal and on Dow Jones Newswires, CNN.com, MarketWatch.com, CNBC.com, and other sites.