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One common question freelancers or small business owners ask is how much their businesses should grow each year. While there’s no easy answer, considering a few factors can help you set a realistic growth goal for your small business. Generally, business growth is directly related to profitability. If your business is profitable, you should be able to reinvest some profits back into the business to grow it.
In 2022, 65% of small business owners reported being profitable. There are other factors to consider when determining your small business’s growth, such as your total revenue, gross margin, sales metrics, cash flow, customer acquisition, and market share. Profitability, however, is the baseline for measuring your small business’s capacity for growth.
What is Business Growth?
Business growth means that you increase your revenue, while increasing your resources, such as employees, products, or services. Small businesses typically grow slowly at first, but pick up speed as they become more established. Once a small business reaches a specific size, it can begin to experience different types of growth, such as rapid growth or organic growth. Rapid growth is when a company grows quickly, usually through aggressive marketing and expansion strategies. Organic growth is when a company grows steadily, usually through word-of-mouth and referrals.
What is Profit?
Profit or net income is the total revenue minus the business’s expenses. There are two types of expenses you’ll need to account for when calculating your business’s profit:
Operating expenses: These are the costs associated with running your business, such as rent, utilities, office supplies, and employee salaries.
Non-operating expenses: These are one-time costs or costs that aren’t related to running your business, such as legal fees, marketing expenses, and loan interest.
Fiverr Workspace’s expense tracking feature allows freelancers and small business owners to automatically track their expenses, so they can easily see how much their business is spending on operating and non-operating expenses over any given period of time.
There are also two types of profit that you will need to understand:
Gross profit: This is the revenue of your business minus the cost of goods sold (COGS). COGS includes the costs associated with producing your product or service, such as materials, labor, and shipping. Net profit: This is the gross profit of your business minus all other expenses.
What is a Profit Margin?
Your profit margin is another essential metric to consider when determining growth. This is the percentage of revenue that your business keeps as profit after accounting for all expenses. For example, if your small business has a net profit of $10,000 and total revenue of $100,000, your profit margin would be 10%. Your business’s profit margin can give you a good idea of how much room you have to grow, without increasing your expenses.
How Do I Know if My Small Business is Profitable?
There are a few key indicators you can look at to help determine whether your small business is profitable.
This is the percentage increase or decrease in revenue from one period to another. For example, if your business had $10,000 in revenue in 2020 and $12,000 in revenue in 2021, your revenue growth would be 20%.
This is the gross profit of your business divided by your total revenue. For example, if your business has a gross profit of $5,000 and total revenue of $10,000, your gross margin would be 50%.
Operating cash flow
Your cash flow is the lifeblood of your business. It is the money that you have available to meet your financial obligations and keep your business running. To calculate your cash flow, you can use specific formulas that will help you to ensure accuracy.
This is the number of new customers or clients you acquire over a period of time. For example, if you acquire 10 new customers in a month, your customer acquisition for that month would be 10.
This is the percentage of your industry or market that you own. Your market share is calculated by taking your total revenue divided by the total revenue of your industry. For example, if your business has $10,000 in revenue and your industry has a total revenue of $100,000, your market share would be 10%.
Ultimately, if your small business is growing in revenue, gross margin, operating cash flow, customer acquisition, and market share, it is likely to be profitable, unless you have significant overheads. But the only definitive way to calculate profitability is to track your revenue and expenses over time and compare them.
What is the Average Profit I Can Expect in the First Year?
The answer to this question varies greatly depending on your industry, location, and several other factors, including the economy and how competitive your industry is. While most small businesses reported being profitable in 2022, the reality is that 98% of small businesses make no profit in the first year, so it’s important to be realistic in your expectations. However, if you are losing a great deal of money, it may be time to reassess your business model.
Rather than looking at average profit, which varies from business to business according to a range of factors mentioned above, looking at an average profit margin might be more helpful. It is estimated that a healthy profit margin for a small business is between 7% to 10%. This is, of course, for a small business that is more than likely beyond its first year and is already profitable.
How to Calculate Profit for Your Freelance Business or Small Business
Keeping track of your business’s profit is essential to determine if your business is growing or if you need to make changes to your pricing, expenses, or business model. To calculate your business’s profit, subtract your total expenses from your total revenue. For example, if your small business had $10,000 in revenue and $5,000 in expenses, your profit would be $5,000.
As a freelancer or small business, you might not have a dedicated accounting department, so keeping meticulous records of your revenue and expenses and ensuring that you have your financial reporting in order is critical in making sure that your profit calculation is accurate.
Automating this process is also crucial to free up your time so you can focus on other areas of your business. Fiverr Workspace’s reporting features will allow you to gain the in-depth key insights you need to determine whether your business is growing and at what rate this is happening. If you’re looking to secure investment, these records will be a vital part of convincing potential investors of your business’s profitability.
The Difference Between Growing and Scaling Your Small Business
Small business owners and freelancers often confuse growth with scale. While growing your small business means increasing your revenue at the same time as your resources, scaling your small business means increasing your revenue without proportionate increases in costs (i.e., your revenue will increase at a much faster rate than the resources required to generate that revenue).
For example, if you want to scale your business, you might focus on automating processes or increasing efficiency, so you can do more with less. If you want to grow your business, you might focus on strategies to increase sales, so you can reinvest in growing your team and expanding your product line or service offering – for example, by hiring a marketing company or a production team. Again, the first step to growing your business is ensuring that you are profitable.
How to Become Profitable as a Freelancer or Small Business
If you’re starting out or if you have an existing small business that is not yet profitable, there are several strategies you can implement to increase your chances of becoming profitable.
Firstly, make sure that you have a clear understanding of your target market and your ideal customer. It’s important to know your customer and what needs or wants your product or service satisfies. Once you understand your target market, you can focus on strategies to reach them, such as marketing, advertising, or public relations.
Another important factor in becoming profitable is ensuring that you have a pricing strategy that covers your costs and allows you to make a profit. This means knowing your cost of goods sold (COGS), as well as your overheads and factoring these into your pricing. You might also want to consider value-based pricing, which takes into account the perceived value of your product or service to your customer rather than just the cost of producing it.
Finally, remember that becoming profitable takes time, and there is no one-size-fits-all solution. The most important thing is to focus on keeping track of your progress and remaining flexible so that you can make logical changes to your strategy as you work your way to profitability and, ultimately, growth.