As a small business owner, you’ll want to know what constitutes good revenue and how a small business is defined. Once you have those numbers, you can look at others in your industry and employ strategies to increase your small business revenue.
Why is revenue important?
Revenue is important for exactly the reason you think it matters: Less money means less profit. If all your expenses remain equal during a period in which your revenue declines, your business will be less profitable. Likewise, if all your expenses remain equal as your revenue increases, your company will be more profitable. Whether you’re working at a large firm or a startup, revenue is especially important.
Revenue formula
You can calculate your small business revenue using either of the below formulas:
Revenue = Number of product or service units sold * average price
or
Revenue = number of customers * average item price
The first formula may be more useful for small business owners who offer a relatively narrow selection of products or services at fixed prices. The second formula may be more useful for consumer-facing companies that sell several items at a wide range of prices. In either case, the most accurate way to calculate revenue is to multiply the total sales quantity of each product or service by its sales price, then add all your total revenue figures.
How is a Small Business Defined?
The Small Business Administration’s size standards are based on average annual revenues and the number of employees. A business must make between or below $750,000 and $35.5 million and have between or below 100 and 1,500 employees depending on the industry.
Using NAICS to Determine Industry Norms
The North American Industry Classification System (NAICS) is the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the economy. You can access the NAICS database to look at your industry on the census bureau website here.
Why is the Small Business Definition Important?
Size and revenue statistics shouldn’t discourage business owners that are struggling to generate revenue. Instead, the numbers can help you understand that small businesses cover a large spectrum. In a time when global connectivity makes it possible for all types of entrepreneurs to start and run businesses, it’s good to see the stats behind your business community.
What is the Average Revenue of Small Businesses?
The average revenue for small businesses is broken down between those with no employees and those that have employees. As you read the below revenue figures, it may help to remember that small business revenue isn’t necessarily the amount of money you’ll take home as a small business owner. Across all small business sizes and revenue values, small business owners currently earn an average annual personal income of $68,153.
Small Businesses with No Employees
Eighty percent of the small businesses in the United States do not have employees. On top of that, more than half of all small businesses are home-based businesses, with construction companies leading the way.
The average revenues (not profit) of small businesses with no employees is $44,000 per year. Two-thirds of these businesses earn less than $25,000 per year.
Small Businesses with Employees
Small businesses with employees tend to fare better, with average earnings of $4.9 million per year. Revenue typically increases as a company’s number of employees increases. The below small business sizes and average 2020 annual revenues best showcase this trend:
- One employee: $44,000
- Two to four employees: $387,000
- Five to nine employees: $1,080,000
- 10 to 19 employees: $2,164,000
- 20 to 99 employees: $7,124,000
- 100 to 499 employees: $40,775,000
As these numbers suggest, you may be able to make your company a million-dollar operation with fewer than a dozen employees. However, after subtracting your expenses from your revenue, your profit might fall below the million-dollar mark.
How much do small business owners really make?
As mentioned earlier, the average small business owner’s annual income is currently $68,153. However, there’s more than meets the eye with this number. In 2019, small business owners earned between $29,462 and $160,606 in annual personal income. This range is quite broad, and the following factors may account for income differences:
- Industry . Industries such as software, healthcare support, and oil are considerably more profitable than trucking, publishing, and food processing . Small business owners in the former set of industries are more likely to make more money than those in the latter set.
- Gender . In 2020, women in all types of work and of all experience levels were paid $0.82 per dollar that men were paid. Women with more experience, education and other compensable factors such as owning a small business still earned less than men at a rate of $0.98 to every male dollar.
- Location . Since the cost of living varies throughout the U.S., location is a major factor in small business owner incomes. In cities such as New York and San Francisco that are more expensive, business owners sometimes pay their employees more, thus leading to less income for themselves. Alternatively, these business owners may take more money for themselves too given their living costs, thus leaving the company with less cash.
- Age . Small business failure becomes more likely the longer your company exists, and you may need to take less of your business profit as personal income to stay afloat. On the other hand, if your business grows steadily, then the longer your company has existed, the more money you might make from it.
Ways to Increase Business Revenue
Depending on your industry, there are tried and true ways you can increase your business revenue.
- Increase the number of customers : In short, bring more business in the door. Even if transaction sizes stay the same, more customers = more revenue.
- Increase the frequency of transactions : This means encouraging people to purchase from you more often. If your average customer comes in once a month, convincing them to patronize your business once a week will increase your revenue.
- Upsell : This is when you encourage your customer to purchase more of your goods or services. For example, if you own a beauty salon, suggest a manicure in addition to a haircut. If you own a restaurant, upsell additional purchases like drinks, appetizers, or a dessert.
- Raise prices : If your prices go up, you’ll collect more revenue from every purchase a customer makes – with the same amount of effort. If you’re feeling uneasy about this strategy, check out these suggestions from American Express: 12 Ways to Raise Prices Without Ticking Off Your Customers.
- Manage your online reputation : Through online reputation management, you can minimize the large financial losses that often accompany negative reviews, customer data breaches, and more. Online reputation management also helps to bolster consumer perceptions of your company, thus potentially increasing your customer base. Learn more via the SmartBiz Loans guide to online reputation management.
- Ask your employees . Your employees might interact more directly with your customers than you do, so they might have unique insights into how your company can make more sales. They can also identify workflow inefficiencies and other internal weaknesses in need of improvements that save time and money.
- Cut costs . Technically, revenue isn’t a function of cost. If anything, it’s more accurate to say that revenue and costs are the two independent variables that impact your profit. However, if you figure out how to spend less money to produce each individual item you sell, then you’ll have more cash to use for additional production. And with the capacity to sell more items, you’re lined up for greater revenue.
What is the Business Revenue Trend?
If you’re seeking a low-cost SBA loan, banks will look at your Business Revenue Trend. This metric is a percentage that reflects the revenue growth of your business over time and illustrates how your sales have increased, decreased or plateaued. This is considered a more valuable measure of financial health than just flat revenue numbers per year.
Banks like to see a positive trend because it shows business growth and suggests that a business will continue growing with a loan they can repay. You can calculate your Business Revenue Trend by looking at the average growth in revenues from your earliest tax return to your most recent tax return.
Of course, your business is more than just your revenue trend. It’s just one of 7 key criteria banks use to evaluate your business when you apply for a business loan.
