What is a Good Profit Margin?? ($0-$1M Business)

Hey, everyone, it's Mike Andes. Today I'm in my tiny house and we're talking about how profitable your home service business can be. I don't care if you're doing landscaping, painting, chemical applications, tree trimming. I typically see these profit ranges being made at certain sizes of business. So some people, like, for myself, when I was first getting started, I want to know, like, am I doing good? Am I being more profitable than most people? Why is it that I'm not making as much money as I used to when I was a smaller business? Those are the topics we're going to be covering today. And I hope that using the flip chart will be helpful for you to be able to understand exactly what stage of business you're in. Now, first, I want to talk about profit compared to revenue, because everyone thinks the more revenue I make, the more profitable I am. I would agree. If you zoom out at a very large business, it would look like a little blip at the beginning. And then basically you can achieve economies of scale, which means you get things for cheaper because you buy them in bulk. You're able to have better brand awareness, you will attract better talent, et cetera. But when you're first getting started, I see this happen all the time. And I believe it is the reason why 60, 70% of home service businesses won't make it through five years in business is because of this little blip on that chart. And that is what we're going to be talking about today. So over here, we got the amount of profit that you have in the business. Now, I define profit as money you can take out of the company and put in your own personal pocket. Now, revenue is the top line revenue, total gross revenue the business makes as that increases. I believe that the very beginning of your business, from zero to a million dollars, there's this little S curve, this little blip. And this is the cause of what keeps small businesses small in home services. And honestly, not just small, it makes people quit. And I'll explain when you're first getting started. Every dollar you make, you're very profitable in. I call this stage one. And in stage one, it's zero to $100,000. And then stage two is $200,000. So stage one, stage two. At this stage, I'm making a lot of profit. Every dollar I make, I'm probably 50, 60, 70% profitable. And so I'm making good cash. And so I start to grow my business. And then all of a sudden, I need an employee, I need an office space. I can't do work outside of just my house anymore, in my garage. I actually need to go get a storage facility or some land. And because of that, I have increased amounts of overhead. And in fact, as I begin to grow the business into what I call the wilderness, as I grow into the wilderness in stage three, I actually make just as much, if not less profit as I grow the business. And this, in my opinion, is where a lot of home service business owners will quit. And as they grow to about 300 to $500,000 in annual revenue, they're making just as much, if not less, profit than they were making when they're at 150, 200, 250,000. Now why is that? Well, that's. This is what I believe in stage three, between 200,000 and $500,000 in annual revenue. I typically don't see home service business owners make any more additional profit. What does that mean? It means that at $200,000, I'm usually having myself and one employee. I'm working out of my house, super low overhead. I'm just making money hand over fist. My profit margins are extremely high. And this is usually where I see people. They're making good money. And then all of a sudden, as they cross 200,000, they enter the wilderness of profit. What starts to happen is because they need to hire an office person, because they need to get more employees, get more trucks, their insurance starts to go up, all of these things start to happen. They start getting callbacks and customers leaving. They have to spend more money on marketing to keep their crew busy during the off season. All of a sudden, their profit margins flatten out. Not just their profit margins, just their total amount taking home. And what gets really frustrating is they're all the way over here almost at $500,000 in annual revenue for their location, and they're making the same amount of profit. It's like, why would I have a business that doing $500,000 in annual revenue? I got to deal with employees, more insurance, more customer complaints, all of this drama. Why would I not just go back to. To being a solo operator? Because over here in stage one and two, I consider you a solo operator. You can make up to 200 grand by yourself and maybe a little bit of help on the weekends or a day or two a week. And that's really easy, like low stress in terms of, you know, you don't have to deal with employees. And so over here, I'm going to have physical stress right here. Lots of work. You're doing the work yourself. You're a solo operator. But this is the part where everyone quits because you have financial stress. From 200,000 to that 500, 800,000. I see. Still financial stress because why you're making less profit margin. There's less percentage of your revenue going into the profit into your pocket. Less of that's happening and you get discouraged. And that's why I find so many home service business owners retreat back to being solo and working by themselves. Giving up on having employees is like, it's not worth it. I'm making just as much profit at 500,000 as I was back at 200,000. So why is that? In case that one didn't help you. Let's go over a different chart. This chart is essentially the exact same thing, except I'm going to be looking at.

Revenue over your profit margin. This is what percentage of your revenue is going into your pocket. Now again, if we have, okay, a million dollars over here and over here, we're getting started at zero. We have our 200,000, we have 500,000. Okay, and these are in annual revenue, profit percentage up here we got 100% profit margin. Let's go. Every single dollar we make in revenue is going into our pocket. Now is that going to happen very much? No. You have expenses, you have cost of goods like materials. However, the biggest expense when you come to running a home service business is what labor. And at this size of business, 0 to 200,000, you don't have a lot of labor costs. You don't have a shop space, you don't have to have an office person, you don't have to have a salesperson, an estimate or a general manager, all of that stuff. You don't have to do it. And this is why it's very hard to get through this stage of business. Because when you're small, you're literally probably making like 90% profit margin. Like almost every single dollar you make, you're able to put in your pocket. You pay for some gas and you pay some for some insurance and maybe some software. You're like super profitable actually at doing like a couple thousand dollars in a year. A year in revenue. You don't even need software. You probably don't even need insurance. I recommend it, but you're probably not going to get it. And the amount of fuel you're going to spend is like negligible. Okay, so you're super profitable. Now this is what's crazy on a million dollar business. If I could be 20% profitable. So let's just say this is like 20% here. 20% is like 50%. Let's call that 50% profit. And I can be 20% profitable on a million dollar business, which means again, I'm taking $200,000 out of the business for myself every single year. That's a really good business. But this is insane. This drop in profit is what kills people. But more importantly, this trough is what kills people. Because this is what it sort of looks like at $200,000 you can make a good living if you keep it at that size, keep raising prices, optimizing your growth, et cetera. You could probably be somewhere around here, 50% profit, which means out of that $200,000, I'm able to literally pull $100,000 out of the business. I see lots of solo operators do this, especially if they keep at $200,000 for three, four, five years and keep slowly raising prices. And as they hit capacity of how much work they can, how many customers they can serve. So we can. Okay, let's fill in the gaps. Okay, great. There's our profit margin. You know, it's like, look, I'm growing the business, fantastic. But my profit margins are going down. But this is what gets crazy. I see this happen at 500,000 and that is this continues to go down to 500,000. Now after 500,000 and on your way to a million and beyond, I do see this, and that is a slow rebounding. And you're increasing your profit margins why? Because after 500,000, guess what? I can afford a general manager. I can have better systems in place. And yes, it's going to cost me. I'm not super profit margin heavy. Like I'm still only shooting for 20% profit again. After several years of optimizing pricing, everything that's a great business, $200,000 in distributions, let's go. That's after you pay yourself a salary, all the rest of it. But this trough right here is why so many home service businesses quit. It's because you compare back to here like profit margin dropping bad. However, the actual amount of money you're making is stagnant. Like you're not making any more money down here. Let's just call it 10% profit margin. If you're doing 10% profit margin of 500,000, guess what, you're making 50 grand. Well, why would I not just go back all the way to being over here without employees and overhead and all the rest of it and just make $50,000 take home there there's less headache, less stress, less employees Less insurance, less liability, less customer complaints. And that's why most home service business owners won't get through the wilderness. This 200,000 to 500,000 level is so difficult because you need overhead positions now. You need an office person. You to need, you need to get an office space. And if you're getting a commercial space where an office person go in there, you could be looking at 2, $3,000 per month in rent. That back here you didn't have to worry about at Augusta Lawn Care. It's literally why we have command center just to get them through this stage of growth. Because I know you can't afford to have an office space and a full time office person, but you kind of need them for like half of the year. And that's the challenging part is right here you're going to get demoralized because you see this massive drop in how much profit you're making and you're very, very tempted just to go back here. And I'm not saying you shouldn't. Some people would do better with having physical stress, doing the work themselves than the financial stress that comes with what's called margin compression. Big fancy word for your margins are going lower, you're making less profit per dollar of revenue and that gets demoralizing. So why in the world would you do this? Because as you pass 500,000 and you can afford an overhead person, you can afford a general manager and you go past a million, two million maybe you have two or three locations and you have multiple general managers and a regional manager. As you start to do that, you can scale the business and not have to show up to work every single day and put in sweat equity. You can take distributions and take your profit margins without having to be at the locations, assuming that you have built systems in place so that as you continue to grow, your profit margin rebounds. It's never going to get up to 90%, it's never going to get to 50 or 60%. But as you grow the business, if you have systems in place, you can actually increase your profits while doing less work in the business. That's the promised land. That's where everyone wants to get. But I would say 90% of people won't get there because this is extremely hard. So you say, why are you making this video? It's just like super, like, you know, negative. No, I'm saying this mostly because if someone would have told me this when I was at 2000-005000-00800,000 and not seeing any difference in my profit, I would have kept going and not been as despondent or feeling rejected or I was stupid or that I didn't know what I was doing or that I was dumb, I couldn't make money. You're not. You're going through this cycle. You're going through this process. And I hope this video gives you hope to keep pushing forward. I promise you, on the other side of this, it's worth it. Assuming that's what you want for your business and that's the goals you have, maybe this is also a good indication that maybe you should go back. To be at 200,000. $250,000 in annual revenue is a great business. You can do six figures in profit, optimize your pricing over the course of three or four or five years and raise prices on customers. Don't expand, don't get more trucks and more employees. That's fine, too. The question is, do you want to have more financial stress by growing the business, or would you rather deal with the physical stress that comes with actually having to do the work? I hope that was helpful. I wish I would have known this because it would have given me a lot of courage going through the wilderness of low profit margins, breaking through that sound barrier, and being able to make my business more profitable.