The Most Profitable Small Business Industries
You’ve got to spend money to make money. But that doesn’t mean you have to risk all your life savings to get a small business off the ground.
Here’s a roundup of small business ideas that could turn you a high profit with a small investment.
What is a ‘good’ profit margin for a small business?
First things first, let’s define what we mean by the term ‘high profit.’ And the simple answer is: it depends.
There are several factors that can influence whether your profit is ‘good’ or not. Here are just four of them.
It’s no secret that some industries are more profitable than others. We’ll dive into this in more detail later. For the time being, consider this.
The alcohol industry had a gross profit margin of 46.25 percent in the third quarter of 2018. By contrast, the agricultural industry’s gross profit margin during the same period was 16.77 percent. Gross profit margin is the sum of your total sales minus production costs before tax, expressed as a percentage.
The size of your business
And here, you’re in for some good news. Smaller businesses typically have fewer expenses. And this may have a positive effect on their profit margin.
Think about it. As a small business, you probably have only a handful of employees (if any). And you might work from home, which means there’s no office rent to pay. As a result, you get to keep a larger slice of your income.
A large business, on the other hand, probably has a large payroll, a big office space and other overheads. Inevitably, this will eat into their profit margin.
How long you’ve been in business
The longer you’ve been in business, the greater your chances of having a higher profit margin.
Again, this stands to reason. When you’re just starting out, you probably won’t have much income coming in. Meanwhile, you’ll have business bills to pay, such as the cost of advertising and insurance. But, over time, you’ll build your client base and, so, increase your income.
Let’s say your business’s profit margin is 12 percent. If you’re happy with where you are right now, this is a good profit margin. But what if you have dreams of world domination? Can a 12 percent margin absorb the cost of new equipment or other expenses you need for your business to grow?
Okay, so ‘high profit’ is subjective. But what is a healthy profit margin?
Unfortunately, the Office of National Statistics doesn’t hold information about the average profit margin of small businesses in the UK. That said, it does hold information on the average profit margin of UK companies in general:
- Private non-financial corporations had an average profit margin of 12.7 percent in the second quarter of 2018
- Manufacturing companies had an average profit margin of 15.7 percent
- And companies that provide services had the highest profit margin, at 17.2 percent
So what would this look like if we were to translate it into cold, hard numbers?
Legal and General’s State of the Nation’s SMEs report splits the average small business profit in the UK into three categories:
- Newer businesses, that is businesses that are two years old or less. 48 percent of these businesses have a net profit of £50,000 or less
- Maturing businesses, that is businesses that are between three and 10 years old. These turn an average profit of £455,000
- Established businesses, that is businesses that are 10 years old or older. These turn an average profit of £584,000
How do I make my small business profitable?
Ah! That’s the million-pound question, isn’t it?
Luckily, there are lots you can do. Here are a few ideas.
Keep your business expenses to a minimum
It sounds obvious. But the less you spend, the more of your money you get to keep. So, it’s worth having a look at your business expenses and trying to figure out ways to reduce them.
Here are a few tips:
- Use a website like uSwitch or com to shop around for the best deal possible on energy, broadband, phone, car insurance and business insurance.
- Don’t pay for what you don’t have to. When it comes to business software, in particular, you’ll find that there are lots of quality free options on the market. For example, there’s a whole host of excellent accounting software programs, such as Wave Accounting, GnuCash and MoneyManagerEx, that get the job done and don’t cost a penny.
- Consider using independent contractors instead of hiring employees. That way, you pay for them only when you need them. Plus, you won’t have to pay holiday pay, sick pay or make National Insurance and pension contributions.
- Speak to your suppliers and try to negotiate better rates. If you don’t ask, you don’t get.
Make sure you’re pricing correctly
This is super important. You don’t want to charge too much, or your customers will go elsewhere. At the same time, you have to make sure you’re charging enough to make a reasonable profit.
If you sell products, you could use this simple formula to set your prices: (labour costs + materials) x 2.
Let’s say you make jewellery. It takes you about four hours to make a piece. You’d like to earn about £20 an hour. You also have to buy £40 worth of materials.
You’d price the finished piece of jewellery as follows:
- Labour costs — £20 multiplied by four hours, or £80
- Materials — £40
- So, (80 + 40) multiplied by 2
- This means a fair price for your piece of jewellery would be £240
But what if you sell a service?
You could work out your price using a similar formula to the one above. So, you’d work out the labour costs involved in providing the service, add in your overheads and add a markup.
Alternatively, you could use value-based pricing:
- Research the market to find out how much customers are paying, on average, for similar services.
- Figure out where you stand. Is your service better than the competition? Why? For instance, do you have many years of industry experience, or are you just starting out?
- Using the average market price as a benchmark, calculate your prices based on the quality of your service. So, if you’re just starting out, your prices should be at the lower end of the spectrum. By contrast, the more experienced you are, the more you should charge.
Upsell or cross-sell your services to current customers
It costs five times as much to get a new customer than to keep one you already have. So, while drumming up new business is important, don’t do it at the expense of your current customers.
You can add even more value and boost your revenue into the bargain by upselling or cross-selling.
Let’s say you have an electronics shop. A customer walks in to buy a new TV. You could add more value and boost your revenue by asking whether they’d also like to buy a DVD player.
Even better, you could start stocking cables, batteries and other bits and bobs your customers might need to set up their new TV. Or offering a repair service should something go wrong.
Boost your productivity
In business, time is money. The more efficient your processes are, the more work you can get done. And the more money you’ll earn.
Here are a few things you can do to boost your productivity:
- Put repetitive tasks on autopilot. For example, pay bills by direct debit, schedule payment reminders through your accounting software and track your business mileage automatically using a business mileage tracker.
- Stay organised. Technology can be invaluable here. Case in point, you can use project management software to assign tasks, monitor your workload and stay on top of deadlines.
- Invest in better equipment. Let’s say you have a cake business. Buying a better oven could halve the time it takes you to bake your cakes. Or increase your capacity, which means you get more done in less time. Enough said.
- Keep monitoring and improving. Ultimately, boosting your productivity is an ongoing process. It’s worth taking stock every once in a while. That way, you can see what’s working and what isn’t and make any necessary changes.
What are the most profitable small business industries?
So you’ve got an idea of what a ‘good’ profit margin should look like. And you’ve picked up some tips to help you make your business more profitable.
But let’s get more specific. What’s a very profitable business to get into in the UK with a relatively small investment?
Here’s a roundup of the top five:
1. Skilled tradesman
Skilled carpenters, joiners, plumbers and blacksmiths are becoming increasingly rare. As a result, you can expect to charge a fair chunk of change for your services.
According to a study, UK tradesmen make, on average, £10,000 a year more than University graduates, with plumbers and electricians earning more than architects or accountants. And bricklayers in London can earn as much as £90,000 a year.
Yes, you read that right.
Don’t have what it takes to be a skilled tradesman? Being an accountant is still a good choice. More Brits are going self-employed than ever before, and someone has to do their taxes, right?
These days, you can work as an accountant from anywhere. All you need is a laptop and an internet connection. And, if you’re really good, you can expect to hit upwards of six figures.
Don’t fancy studying that long? Becoming a bookkeeper is easier. And it can still be lucrative.
3. IT consulting
Handy with computers?
Have excellent organisational skills?
An IT consulting business could be right up your street.
Experienced IT consultants can expect to earn £550 or more. Per day. And, best of all, you can typically work from anywhere using just your laptop.
Love being around kids? Fancy making a living caring for them? You could start offering child-minding services from the comfort of your own home.
To do this you’ll need to:
- Complete an introductory childcare course, which costs £100
- Get an up-to-date paediatric first aid certificate, which lasts 2 days
- Register with Ofsted and get a DBS check
- Buy public liability insurance
5. Home improvements
With house prices skyrocketing across the UK, more and more people are opting to renovate their current property instead. Problem is, many aren’t cut out for DIY. In one survey, 77 percent admitted to having made a blunder that blew their budget.
The average Brit spends £3,000 hiring professionals to fix their DIY mistakes. So, if you’re handy around the house and enjoy it, this could be the perfect business opportunity. Best of all, you don’t need much initial investment: a set of quality tools, safety equipment and a van should do it.
And there you have it, five profitable businesses you can start with little investment.
So go on. Pick one, roll up your sleeves and let’s make some money.