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Metro Areas with the Most Profitable Businesses
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Launching a business is notoriously risky — a majority of private firms survive their first, second, even fifth years in business, but fail by the 10-year mark. Economic conditions, competing companies, lawsuits and even weather pose a threat to small businesses.
Could your city tip the balance? Location may have an impact on a business’s success — some cities are home to a larger number of profitable businesses than others, according to new data from LendingTree. Researchers ranked the largest U.S. metro areas with the highest share of profitable businesses.
Here are a few key findings from the research:
- Most businesses are profitable, even in the most cut-throat markets. In New York, the metro area with the lowest share of profitable businesses, about 57% of firms with employees cut a profit.
- Not all is doom and gloom for unprofitable businesses in the Big Apple — many are at least breaking even. New York had the highest share of businesses reporting break-even revenue.
- Seattle took the top spot with an astounding almost 71% of firms reporting profits. Of the rest of the firms in Seattle, 16% reported losing money and 13% reported breaking even.
- Houston was the unfortunate champion of the unprofitable firm. According to Census Bureau data, 23.37% of firms there report a loss.
Top-ranking metros for profitable businesses
Out of 51,661 total businesses in Seattle, 36,643 businesses reported profits. That’s 70.93% of all business, putting Seattle at the top of our ranking. Profits are up for small businesses across the nation, according to Jeff Snell, the chairman of the International Business Broker Association as quoted by the Associated Press. This has slowed business sales and acquisitions throughout the country, an assessment that jibes with Washington state’s overall economy. Small business exits were down there, with a greater number of startups in the third quarter of 2017, the most recent information available. Washington’s overall economy grew at 5.8% in the third quarter of 2018, faster than the U.S. national rate of 3.4%.
In Louisville, Kentucky, 69.98% of businesses or 9,380 out of 13,404 recorded profits. Each spring, businesses in Louisville see a spike in customers thanks to the Kentucky Derby. Many retailers and restaurants benefit from two weeks of tourism leading up the annual horse race which has an annual economic impact of more than $127 million, according to the Kentucky Derby Festival. According to the city’s Chamber of Commerce, shipping giant United Parcel Service is Louisville’s largest employer.
In Indianapolis, Indiana, 15,001 of 21,455 businesses reported profits. That puts 69.92% of Indianapolis businesses at profitability and the city in the No. 3 spot, just a hair behind Louisville. Though many businesses are profitable, companies in Indianapolis face high health care costs, as do businesses across the state, according to the Employers’ Forum of Indiana. The group asked the RAND Corporation to study prices employers pay to hospitals; the RAND study found that prices paid for private outpatient care averaged 3.5 times what Medicare would have paid for the same services.
Metros with the most businesses on the losing end
Houston has the largest share of businesses reporting losses at 23.37%, or 13,271 out of 56,793 total businesses. Energy companies like Exxon Mobil and Chevron have a big presence in Houston, though an industry-wide profit slowdown this year has impacted the oil and gas producers, refiners and chemical makers that are majorly influential in Houston’s economy, the Houston Chronicle reported. Houston lost 300 jobs in energy, exploration and production in the 12 months ending in February 2019, along with drops in retail, employment services and restaurants and bars, according to the Texas Workforce Commission. Among the positives are an uptick in durable goods manufacturing, professional, scientific and technical services, health care, wholesale trade and oil field services.
2. Virginia Beach
Even with a smaller number of firms, 21.99% weren’t profitable, amounting to 3,981 of 18,100 total businesses in the metro area. Federal government spending dominates the Virginia Beach economy, thanks to large military bases, but tourism represents a growing business opportunity for firms in Virginia Beach. Local organizations are developing relationships to bring American cruise lines to ports in nearby Norfolk, according to The Hampton Roads Business Journal.
3. San Jose
Just behind Virginia Beach, San Jose, California, has a 20.40% share of businesses reporting losses. In San Jose, 4,868 of 23,867 total businesses in the area were unprofitable. Although big-name tech companies like Cisco and eBay are based in San Jose, the metro area ranks low on our list of overall profitability. Oftentimes, fast-growing Silicon Valley companies and startups don’t immediately turn a profit, despite major investments and valuations.
In addition to the findings regarding each metro area, the data led to additional conclusions about the relation of profitability to industry and company size.
Small versus large firms
Profitable firms tended to be larger than money-losing businesses. Across the nation, the average profitable firm had about 18 employees, compared with 14 for firms that posted a loss. This trend held up in all but six metros: Seattle, Indianapolis, Birmingham, New Orleans, Oklahoma City and San Diego.
Smaller businesses tended to live on the edge. Break-even firms tended to employ far fewer employees than firms making a profit or firms making a loss. For example, in Milwaukee, the average firm reporting profits employed about 26 people. The average firm reporting making losses employed 19 people with the average break-even firm employing eight people.
Profitability by industry
Firms in the finance and insurance sector had the highest rates of profitable firms at 73%, while firms in the mining, quarrying and oil and gas extraction sector had the lowest rates of profitable firms. Other sectors with high rates of profitability include the professional, scientific and technical services sectors and the management of companies and enterprises sector.
In order to rank the metro areas with the highest share of profitable firms, researchers compared the total number of firms with employees in a metro area to the number of firms in a metro area reporting profits. This gave the share of profit-making firms by metro area. The metro areas were ranked highest to lowest based on this figure.
Data for all figures come from the Census Bureau’s 2016 Survey of Entrepreneurs.
Improve the profitability of your small business
Some of the most famous U.S. companies are famously unprofitable — Uber, Tesla — but for companies that don’t have investors or other types of financing, such as small business loans, profit may be their only source of capital. No business can survive for a significant amount of time without it.
But what exactly is profit? It’s the money remaining after you pay all expenses. To be profitable, the value remaining must be positive; if the value is negative after deducting expenses, the business would then have a loss.
Your income statement would show your profit, as well as the business’ financial activity and performance during a certain period of time. To turn a loss into profit, consider areas of the business where you could make changes.
Alter or add a product. For instance, you could alter a product or service to make it more appealing to customers. You could also analyze the cost per unit for a product or service and make cuts to ensure the production cost doesn’t exceed the money that it earns.
Understanding the typical profit margins in your industry would help you determine what changes you can make within the business to become profitable. Some industries may be restricted in the amount of profit to be made. You may need to create an additional product line to expand the business.
Employees versus contractors. Although employee count typically does not negatively impact profitability, as our research shows, you may want to consider hiring contractors rather than employees to keep the business lean. Working with contractors instead of putting employees on your payroll could help you keep costs down and build profitability.
Strategically boost sales. Increasing sales may seem like an obvious strategy to earn more profit, but not all sales have the same value. The key is to raise sales without making an equal or significant increase in costs. You would need to evaluate your inventory and costs for each product line within your business to understand the individual impact to your bottom line.
A few of the most profitable small businesses in recent years have been legal services firms, businesses that lease real estate, land subdivision companies and equipment rental and leasing businesses. If you’re not in one of those industries, you could still run a profitable business by paying attention to your operating expenses and performance as a whole. And businesses in our top-ranking cities may be more likely to be profitable as well.