For many business owners, maintaining a profit margin of just 2-5% feels like the norm. But these slim margins put a business at risk and severely limit its potential. At Sentinel Finance Group, the guidance to clients is clear: every business should aim for a minimum average annual profit margin of 10%, with 15% as the ideal target.
This recommendation often surprises business owners, but the reasoning behind it is simple—profit is what sustains and grows a business. It’s not enough to focus on top-line revenue growth. If expenses rise at the same pace as revenue, the business remains stagnant, even if sales numbers look impressive.
Why Profit Margins Matter
1. Profit Fuels Growth and Stability
A healthy profit margin gives a company the flexibility to navigate economic downturns, unexpected expenses, or internal challenges. It’s also the fuel for reinvestment—whether that means upgrading systems, expanding the team, entering new markets, or acquiring other companies.
2. Strong Margins Increase Strategic Opportunities
Healthy profit margins enable a business to build cash reserves, invest in employee development, and upgrade infrastructure. These advantages position the company to scale effectively, drive innovation, and adapt confidently to market changes.
3. Profit Indicates Business Health
Profit is a clear, objective measure of whether a business model is working. It reveals how much wealth is being created in the business and contributes directly to owner equity. Since equity is essentially the accumulation of retained profits, it’s a core metric that banks and investors evaluate when considering loans or investment.
Discipline is Key to Maintaining Profitability
Consistently achieving a 10–15% profit margin requires ongoing discipline. Profit margins should be reviewed monthly—not annually—to spot issues early and take corrective action. If a business isn’t hitting its profit targets, it’s a sign that something needs to change.
Potential solutions might include:
- Adjusting pricing strategies
- Increasing sales
- Managing project costs more effectively
- Reducing operating expenses
- Restructuring or paying down high-interest debt
Profit Comes After Reasonable Compensation
It’s also critical to define profit correctly. A 10% profit margin must be calculated after the business owner and employees receive fair, market-rate compensation. If the owner hasn’t paid themselves a salary but reports a 10% profit, that figure is misleading. That profit margin only becomes meaningful when compensation is appropriately accounted for. Owners may choose to take additional draws from profits, but this should come after salaries have been paid.
Strategic Support from Sentinel Finance Group
At Sentinel Finance Group, helping clients reach and sustain 10–15% profit margins is a central part of our service offering. By monitoring financial performance regularly and providing strategic guidance, businesses gain the clarity and control they need to grow stronger, more resilient, and more valuable over time.
If profit margins aren’t where they should be, it’s time to take action—and the right financial partner can make all the difference.
Sentinel Finance Group is an outsourced CFO firm in Kansas City and provides fractional CFO services and controller services to local businesses.
