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May 2023
Adam Hoeksema
The IRS publishes tax return data each year on the roughly 28,000,000 sole proprietorships in the U.S. We analyzed the 3,662,296 tax returns that were filed in the professional services industry to pull out some key statistics and insights to help our customers ensure that they are creating realistic financial projections for their professional services business.
We hope that this data will be helpful for you as a “reality check” for your financial projections and professional services business planning process. We hope you create a forecast for your unique situation and plan, and then use this data to make sure your projections seem reasonable based on industry averages.
Here is what we will cover in this article:
Learn How to Use this Financial Data
If you are creating projections for your startup business, or you just want to see how your existing business stacks up to industry averages, you can take your income statement and compare key ratios and percentages for your business compared to this industry average data.
How many professional services businesses in the US are sole proprietorships
There are roughly 3,600,000 professional services businesses in the US organized as sole proprietorships. We specifically analyzed 3,662,296 professional services companies based on the 2019 IRS tax return data.
Average annual revenue for a professional services business
The average annual revenue for all sole proprietorship professional services businesses in the U.S. was just $57,056.
So how can a professional services business survive with just $57,000 in annual revenue?
I think we need to remember that this tax return data includes all sole proprietors that categorize themselves in the “professional services” industry, but this would include part time consultants that might just work on a project or two per year, but still need to file a tax return. This can bring the average revenue down significantly.
This underscores the importance of actually creating your own professional services projections based on your specific industry, service offerings, pricing, and whether you plan to do this as a side hustle or launch a full time professional services firm.
Average annual expenses for a professional services business
The average annual expenses for all sole proprietorship professional services businesses in the U.S. was $33,916.
The average annual expenses for a professional services will be made up of the rent, utilities, and advertising, but these all could vary depending on location and type of services offered, so again let’s not focus too much on the specific dollar amounts here. What we can gain from this tax return data is an understanding of expenses and profits as a percentage of revenue rather than a specific dollar amount.
Average net profit margin for a professional services business
The average net profit margin for a professional services business was 41%.
How much can I make by owning a professional services business?
In order to calculate the earnings potential of a professional services it is really quite simple, you can take the following assumptions:
- Billable rate per hour
- # of billable hours
These assumptions will allow you to come up with a revenue forecast for your professional services. From there you can apply the 41% profit margin.
Top 10 expenses for a professional services business
Based on the tax returns of roughly 3,662,296 sole proprietors operating in the professional services industry, the following were the 10 largest business expenses as a percentage of revenue.
Average material cost of goods sold for a professional services business
The average professional services business spent 10% of annual revenue on material costs of goods sold.
Depending on the service being provided, this may fluctuate if part of the consulting includes a deliverable. It is a bit perplexing to me what might be included as a material cost of good sold for a professional service, since it would seem most expenses would be labor, not material costs, but this is what the tax return data shows.
Average other business expense for a professional services
The average sole proprietor professional services business spent roughly 10% of annual revenue on other business expenses.
This is somewhat of a catch all for different types of expenses within an administrative business. This can be related to different types of fees, licenses or memberships as well as different kinds of administrative expenses that do not fall into office expenses
Average salaries and wages for a professional services
The average sole proprietor professional services spent roughly 7% of annual revenue on salaries and wages.
In many different professional services businesses, we would expect the cost of workers to be fairly significant. It is a bit surprising to see this only at 7%. This probably means that most of these firms are one person consulting firms where the owner is the only worker, so they don’t have outside labor costs.
Average contract labor expense for an professional services
The average professional services spent roughly 4% of annual revenue on contract labor.
Given the potential need to have certain skills or certifications to complete work, it is not surprising to see 4% of revenue for employing contract labor.
Important Details about the Data
I want to point out a few key items about the data:
- You can download this data for free from the IRS website.
- The data includes 3,662,296 professional services sole proprietorships in the U.S. in 2019.
- This data will include businesses that operate full time, and businesses that only operate on a part time basis.
- Because of this, you should take the raw numbers for revenue, expenses and profit with a grain of salt, but the percentages can still be quite valuable when trying to forecast expenses for your business.
- This data includes businesses from all across the country, keep in mind that revenue and expenses can vary greatly based on your specific geographic location.
- We used 2019 data because we felt it was most likely to be representative of a “normal” environment for the industry. COVID-19 caused disruption to almost every business in 2020 and 2021, so we wanted to utilize “normalized” data.
If you have any questions about the data or how to utilize the data in your financial forecasting process please don’t hesitate to reach out to us!
