American Elephants

How Much Profit Do You Think The Average Business Makes? The Answer Might Surprise You. by The Elephant's Child

A random sample of American adults were asked the question: “Just as a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?” For the Reason-Rupe poll in May 2013 — the average response was 36%. That response was very close to historical results for a poll from ORC for a similar but slightly different question.

How do the public’s estimates of business profit margins compare to reality? According to a Yahoo!Finance database for 212 different industries the average profit margin for the most recent quarter was 7.5% and the median profit margin was 6.3%. There was not a single industry out of 212 that had a profit margin as high as 36%.

That bit of misinformation drives a lot of bad legislation, for example, the effort to make $15 the minimum wage. If Walmart made $36 profit on every $100 of earnings, then they should certainly be able to pay their workers a little more. But Walmart’s profit margin in the most recent quarter was 3.1% — and a completely different story. For every $100 in sales for Walmart, the state and local governments  get an average of $6.88 in sales taxes ( and as much as $9.44 in Tennessee, $9.16 in Arizona). Did you notice that Walmart is closing a lot of stores?

But what about Big Oil?  Major integrated Oil and Gas make big profits don’t they? Nope. A below average profit margin of 5.1%. If people realized that their estimates of profit margins were five times too high — would it help to understand why their wages weren’t higher for beginning workers? Would it help to understand how government regulation that imposes big costs on a business puts a damper on business growth and expansion? Or why our economy is not growing as it should?

Government does not make money. It just spends other people’s money, and not often wisely.  A growing economy comes from encouraging business to grow and prosper. It’s pretty easy for a business to move from a 6% profit margin down to barely breaking even if sales drop. And that 6% profit margin depends on a lot of correct decisions and correct executions of the decisions.

When the big new thing that you thought would be a huge success just isn’t — there you go. For small business the difficulties are even greater, and the reason so many small businesses have closed up shop. And the failure of the administration to understand these basics is why the business startup rate is in the tank. Who needs to take an enormous risk when tomorrows regulation may destroy the whole thing?

pm(source: Carpe Diem blog by Mark Perry at AEI)

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