If you’re tired of the corporate rat race and have dreams of becoming your own boss, you’re not alone. The number of small business owners in the United States has been steadily increasing. In 2022, the US Small Business Administration reported that small business owners provide half of the total employment in the country. But how much is an average small business revenue?
Entrepreneurs and individuals contemplating starting their own businesses often wonder how much they can expect to earn from their venture. While there is no definitive answer to this question, exploring average small business revenue can provide valuable insights into the financial landscape of small business owners.
So, if you decide to start your own business, how much can you expect to make?
Let’s explore the average income of small business owners.
When it comes to the average small business revenue, it’s important to note that most small businesses are truly small. They often operate from home, and almost 80% have no employees, and earn an average annual revenue of $44,000. However, as soon as your business grows and starts adding employees, the revenue numbers increase significantly.
Even with just one to four employees, the average annual revenue climbs to $335,000. With five to nine employees, the average revenue surpasses one million dollars. Make sure to check the latest statistics by the US Chamber of Commerce.
Factors Affecting Revenue
Apart from the annual revenue of the business, several other factors contribute to the income small business owners can pay themselves. Let’s explore some of these factors:
The industry in which a small business operates plays a significant role in determining its revenue potential. Certain sectors, such as technology, finance, and healthcare, tend to generate higher incomes compared to others. For example, a small technology startup may have greater revenue potential than a local retail store.
Surprisingly, the wage gap between men and women affects small business owners as well. Even though small business owners have control over pricing male small business owners generally earn 25% more than their female counterparts. This statistic is particularly discouraging considering that many women start their own businesses due to the wage gap and limited advancement opportunities in traditional jobs.
The location of a small business can have a considerable influence on its revenue. Factors such as local market conditions, cost of living, competition, and consumer purchasing power can vary significantly from one region to another. For instance, small businesses in urban areas might have higher revenue potential compared to those in rural communities. The average small business in the US makes $53,000 in revenue according to Federal Reserve but this can range from $29,000 to $128,000, depending on location.
The size of a small business also impacts its revenue. Typically, larger businesses have the potential to generate higher incomes due to economies of scale, greater market reach, and increased. However, small businesses with niche offerings or unique value propositions can still thrive and achieve substantial revenues.
The stage of a small business’s development also impacts its revenue. Newly established businesses often face initial challenges and may take some time to gain traction. On the other hand, more mature businesses with an established customer base and brand presence have a better chance of generating higher revenues.
Small Business Costs
Labor: The Primary Cost Driver
Labor remains the number one cost for businesses at 70% of spending. It is the largest chunk of a business’s budget, making it a significant area to consider for cost-saving measures. Many businesses explore options such as layoffs, outsourcing to more affordable staff overseas, or implementing software to streamline operations and reduce the need for additional manpower.
Inventory: A Major Expense
Inventory accounts for the second biggest cost for small businesses, averaging between 17% to 25% of their budget. While inventory is expected to generate revenue in the future, it poses a substantial upfront cost for small businesses with limited budgets. To mitigate this, drop shipping and smaller minimum quantity orders have gained popularity, helping to reduce upfront investment and storage requirements, while also minimizing the risk of damage or spoilage.
Advertising: Minimal Allocation
On average, advertising expenses represent just 1% of a business’s revenue. Despite the perception of astronomical advertising budgets, businesses allocate a relatively small portion of their budget to advertising. Social media has emerged as a favored advertising channel, with 55% of businesses utilizing its pay-per-click-based ad platform. The affordability, ease of use, and accessibility of these platforms make them attractive to businesses of all sizes and budgets.
Over half of all small businesses have reportedly implemented cost-cutting measures due to rising inflation and payroll expenditures. The overall cost of doing business has increased, including human capital costs, materials and shipping expenses, property taxes, building maintenance, and utilities. As a result, 57% of businesses have taken steps to reduce overhead.
Various strategies have been employed to achieve cost reductions. Some businesses have transitioned to remote work arrangements, eliminating costly office spaces and perks. Others have sought more affordable manufacturing contracts or suppliers. Artificial intelligence tools, like Chat GPT, have also been leveraged to decrease downtime and increase productivity.
By carefully managing labor, inventory, and advertising expenses, and implementing targeted cost-cutting measures, small businesses can navigate the financial challenges and improve their overall profitability.
Steps to Increase Profits
Now that we understand the factors that influence small business income, let’s explore three steps to increase profits:
Step 1: Enhance Your Reputation
Building a positive brand reputation is directly linked to your average annual revenue. Manage your online reputation by promptly responding to customer feedback, whether it’s positive or negative.
Create a plan to address customer issues efficiently and effectively. Actively seek customer reviews, as they not only improve your reputation but also boost your search engine rankings.
Additionally, utilize social media platforms to promote your business and reach a wider audience.
Step 2: Seek Employee Feedback
If you have employees, they are a valuable source of insights and ideas. They interact with customers daily and experience the strengths and weaknesses of your business firsthand. Encourage them to share their observations and suggestions for improvement.
Their input might uncover new marketing strategies or innovative ways to enhance your products or services.
Step 3: Optimize Expenses
Understanding the difference between revenue and profit is essential. Regularly review accounting reports, particularly the profit and loss statement, to track your expenses. Conduct quarterly expense audits to identify any unnecessary costs or subscriptions that are no longer required.
Look for opportunities to reduce expenses, such as switching to an annual plan that offers a 20% discount compared to monthly payments. Every cost-saving measure contributes to increased profits and, ultimately, your take-home salary.
By considering these factors and implementing the suggested steps, you can take control of your small business income and increase your salary. Remember, running a successful small business requires continuous effort, adaptability, and a focus on maximizing profitability.
Small Business Ideas
There is a wide range of options to consider based on your skills and interests.
You could start an e-commerce store and sell products online, offer freelance services such as graphic design or web development, provide personal training or event planning services, start a rental business, offer home cleaning services, become a tutor, provide pet services, create and sell handmade crafts, start a digital marketing agency, offer personal styling services, start a home renovation or handyman business, open a coffee shop or café, sell eco-friendly products, or even venture into mobile app development.
We have also created a dedicated guide for women who are looking to start a side hustle, do make sure you check it out. Remember to choose an idea that aligns with your passion, market demand, and feasibility, and conduct thorough research and planning to increase your chances of success.
In conclusion, determining the average income of small business owners is a complex task due to various factors that influence revenue. While industry type, business size, geographical location, and business maturity are important considerations, individual circumstances, financial management, and personal expenses can greatly affect a small business owner’s income.
It is crucial for aspiring entrepreneurs to conduct thorough market research, develop a robust business plan, and seek professional advice to maximize their chances of financial success.