Divider
Divider


Lauren Prosser
Looking to expand into a new niche?

New clients in these industries could prove to be among the most profitable.

August 12, 2013
by Lauren Prosser

Small and medium-size businesses can't be all things to all people, and accounting firms are no different. Such firms often find that it makes good business sense to target customers in a particular niche market. One firm might concentrate on providing services to doctors’ offices, for instance, while another may specialize in aiding restaurant owners.

But how does a firm know which niche or niches to expand into? When crafting an industry niche-driven growth strategy, the first step is to assess how well aligned your firm is to the industry. In doing so, several critical questions must be answered:

  • What is going on in the industry? What trends and changes (regulatory, technological, etc.) are defining the environment?
  • How do these conditions create opportunities and/or obstacles for a business operating in the industry?
  • Why is your firm uniquely positioned to serve the needs of businesses in this industry? What valuable resources, expertise and service offerings does your firm bring to the table?

Profitability is the bottom line

Now let's talk about the bottom line. The most important question to ask when designing your firm's strategy for overall sustainability and growth is, "Can I make money in this industry?" While that may seem obvious, you'd be surprised how often people confuse sales growth with profits. If sales in a particular industry are growing but profit margins are thin or nonexistent, it can be tough for companies to break even, much less have money to spend on the value–added professional services that your accounting firm offers. Profitability also is among the metrics that shed light on a company's creditworthiness, and your accounting firm certainly wants to do business with creditworthy customers.

So what are the most profitable industries in the United States? At Sageworks, a financial information company that analyzes privately held businesses, we have compiled a list of the top 10 industries that had the highest profit margins in the past 12 months. This net profit margin metric was adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries—a common adjustment that provides a more accurate picture of the companies’ operational performance. The 10 industries with the highest profit margins are below:

Net Profit Margin

Industry Code

19.42%

5411 - Legal Services

18.78%

5324 - Commercial and Industrial Machinery and Equipment Rental and Leasing

16.59%

2111 - Oil and Gas Extraction

16.37%

6214 - Outpatient Care Centers

15.41%

2131 - Support Activities for Mining

14.76%

5312 - Offices of Real Estate Agents and Brokers

14.41%

6215 - Medical and Diagnostic Laboratories

14.25%

5321 - Automotive Equipment Rental and Leasing

13.85%

6212 - Offices of Dentists

13.60%

6211 - Offices of Physicians

Perennial profit powerhouses

It shouldn't surprise CPAs and financial professionals to see these industries trending toward the top. Legal services and dentist offices perennially rank on the list of most profitable industries. These mature industries don't require huge amounts of overhead every year, and, for the most part, they see continued demand for their services even during economic downturns.

Some industries are doing well because of structural changes that have proved to be positive for business. For example, much of the profitability in the oil and gas extraction industry may be driven by the continued development and growth in the United States of unconventional oil and gas supplies, such as shale gas and tight oil.

Outpatient care has been a growing industry in recent years as many procedures are being performed in the less costly outpatient environment rather than in hospitals, and many states now have more than twice as many outpatient care centers as they did a decade ago.

Other industries may be benefiting from cyclical forces. Real estate is an attractive industry right now, as a combination of declining vacancy rates and increasing rental rates is contributing to the industry's profitability. Real estate and construction, as Sageworks Chairman Brian Hamilton explained in a recent report, were a bit late to the economic recovery, but these industries now are seeing strong growth.

As a CPA courting new business for your firm, you might consider incorporating these 10 industries into your outreach efforts. They have shown solid profitability and, in some cases, above-average sales growth. In any case, sound financial advice will help both their business and yours.

Rate this article 5 (excellent) to 1 (poor). Send your responses here.

Lauren Prosser is the director of ProfitCents Professional Services at Sageworks, a financial information company based in Raleigh, N.C., that provides accounting and audit solutions.