How to increase profit: strategies for small businesses

Published Friday 15 May 2026

Table of contents

• What increasing profit means for your business
• Main ways to increase profit
• Profitability factors
• Understanding profit drivers (financial and non-financial)
• Increasing revenue to increase profits
• Decreasing costs to increase profits
• How to increase gross profit
• How to increase net profit
• How to improve profit margins
• Cash flow and profit: what's the connection?
• Track and measure your profit improvement
• Simplify your profit tracking with Xero
• FAQs on increasing profit

Key takeaways

• A balanced approach that combines revenue growth, cost reduction, and margin improvement delivers the strongest profit gains. You'll get the strongest results by working on all three areas at the same time rather than focusing on just one.
• Monitor your gross profit margin by accurately estimating all direct costs, controlling scope creep through change orders, and regularly reviewing supplier pricing. Your pricing should always cover true costs plus a healthy profit buffer.
• Track essential profit metrics monthly, including gross profit margin, net profit margin, revenue growth, and cost per sale. Use accounting software to spot which improvement strategies deliver the best results.
• Prioritise high-impact, low-cost actions for quick wins: review and adjust your prices, upsell to existing customers, and cut non-essential discretionary spending before pursuing larger investments.

What increasing profit means for your business

Increasing profit means expanding the money your business keeps after paying all expenses. It comes down to three core approaches: growing revenue, reducing costs, or improving the margins between what you earn and what you spend.

Profit improvement matters because it gives you more control over your business. Stronger profits translate into better cash flow, greater financial stability during slow periods, and more opportunities to invest in growth.

Here are four reasons profit improvement should be a priority:

• better cash flow: more money available for day-to-day operations and growth investments
• financial stability: a stronger buffer against unexpected expenses or seasonal downturns
• growth opportunities: extra funds to invest in expansion, equipment, or new hires
• business value: higher profits typically increase what your business is worth overall

Main ways to increase profit

You can increase profit through three fundamental approaches: growing revenue, cutting costs, or improving margins. Each approach works differently, and the best results usually come from combining all three.

Here are the three main approaches:

• increase revenue: grow sales through new customers, higher prices, or more frequent purchases. For example, a landscaping business might introduce a seasonal maintenance package to boost repeat purchases.
• reduce costs: cut expenses without compromising quality or operational efficiency. For example, renegotiating supplier contracts or switching to energy-efficient equipment can lower overheads.
• improve margins: widen the gap between what you charge and what you spend. For example, focusing on your most profitable services and scaling back low-margin offerings can lift your overall profit margin.

You'll get the best results by combining all three approaches. Start by identifying which area offers the biggest opportunity for your specific situation, then implement targeted strategies there first.

Profitability factors

Profitability factors are the key elements that determine how much profit your business generates. Understanding them helps you pinpoint exactly where to focus your improvement efforts.

The main profitability factors fall into two categories: what comes in and what goes out. Revenue is the money your business earns from sales. Costs are everything you spend to operate. The gap between these two figures, your profit margin, is where your improvement opportunities live.

Here are the core profitability factors to monitor:

• revenue: the total money coming in from sales of your products or services
• cost of goods sold (COGS): the direct costs of producing what you sell, including materials, labour, and manufacturing
• gross profit: money remaining after paying direct costs of goods sold
• operating expenses: indirect costs such as rent, utilities, marketing, and administration
• net profit: the money left after paying all business expenses and taxes

You can measure profitability by tracking these factors monthly, looking for trends, and comparing them against industry benchmarks.

Understanding profit drivers (financial and non-financial)

Profit drivers are the specific variables that have the greatest influence on your bottom line. Identifying and ranking them helps you focus your efforts where they'll have the most impact.

Financial profit drivers

Financial drivers are the numbers you can directly measure and adjust. These four variables sit at the heart of every profit calculation:

• price: the amount you charge per unit or per job. Even a small price increase of two to three percent can significantly improve margins if your sales volume holds steady.
• volume: the number of units sold or jobs completed. Higher volume can spread fixed costs across more sales, lowering your cost per unit.
• variable costs: expenses that rise and fall with your sales volume, such as materials, freight, and casual labour. Reducing variable costs per unit directly widens your margin on every sale.
• fixed costs: expenses that stay relatively constant regardless of sales volume, such as rent, insurance, and permanent salaries. Keeping fixed costs under control means more of each additional dollar of revenue flows through to profit.

Non-financial profit drivers

Non-financial drivers don't appear on your profit and loss statement directly, but they influence every financial metric. These include:

• employee skills and engagement: well-trained, motivated staff tend to be more productive and deliver higher-quality work, reducing rework costs and improving customer retention
• business processes: streamlined workflows reduce waste, speed up delivery, and lower the cost of each sale
• market conditions: economic trends, competitor activity, and shifts in customer demand all affect your pricing power and sales volume
• customer satisfaction: satisfied customers buy more often, refer others, and are less price-sensitive

How to rank and measure your profit drivers

Start by listing every factor that affects your profit, then rank them by impact and by how much control you have over each one. The Business Queensland framework suggests grouping drivers into high-impact and low-impact categories, then focusing your energy on the high-impact drivers you can realistically influence.

Measure financial drivers using your accounting software. Track non-financial drivers through customer feedback, employee performance reviews, and process audits. Review your rankings quarterly, because the drivers that matter most can shift as your business and market conditions change.

Increasing revenue to increase profits

Increasing revenue means growing your sales to expand the money pool available for profit. This strategy works best when your profit margins stay stable or improve as sales grow.

Revenue growth often creates economies of scale. As sales increase, your cost per unit typically decreases, which can widen your profit margins. However, growing revenue usually requires upfront investment in supplies, marketing, tools, and people. The key is making sure these investments pay back over time.

Here are five revenue growth strategies to consider:

• upsell and cross-sell to existing customers: offer higher-value versions of your current products or complementary add-ons. Selling more to the customers you already have is typically cheaper than acquiring new ones.
• increase purchase frequency: encourage repeat buying through loyalty program, subscription models, or regular follow-up communications
• acquire new customers: expand your customer base through targeted marketing, referrals, and partnerships
• form strategic alliances: partner with complementary businesses to access each other's customer bases. For example, a web designer and a copywriter could refer clients to each other.
• focus on your most profitable customers: identify which customers generate the highest margins and invest more in serving and retaining them

If you introduce a product or service that is new to your market, you're significantly more likely to see growth, according to research from CPA Australia. Expanding your range can open up revenue streams you haven't tapped yet.

Decreasing costs to increase profits

Reducing costs means cutting business expenses so you keep more of each dollar as profit. This approach carries less financial risk than growing revenue because it doesn't require upfront investment.

Cost reduction requires careful balance. Cut too aggressively and you might hurt revenue, quality, or staff morale. The goal is trimming expenses without compromising the speed or quality of your operations.

Here are strategies for reducing costs effectively:

• improve systems and processes: automate repetitive tasks and remove unnecessary steps from your workflows. Better tools and software can reduce the time and labour needed for routine work.
• link staff performance to profitability: set clear targets and incentivise efficiency. When your team understands how their work affects profit, they're more likely to find savings themselves.
• reduce energy and utility costs: switch to energy-efficient equipment, review your utility plans, and look for ways to cut waste. Even small changes like LED lighting or optimised heating schedules add up.
• review subscriptions and recurring expenses: audit every regular payment and cancel anything that isn't delivering clear value
• negotiate with suppliers: request better rates, explore bulk discounts, and compare quotes regularly

For more cost saving ideas, consider reviewing your discretionary spending line by line. Legacy expenses that made sense years ago may no longer be the best use of your money.

How to increase gross profit

Gross profit is the money left after subtracting the direct costs of producing your goods or services from your revenue. To increase it, you either grow revenue, reduce direct costs, or do both.

The key metric to track is your gross profit margin, which shows the percentage of revenue remaining after paying for what you sell. Here is the formula:

Gross Profit Margin = ((Revenue - Cost of Goods Sold) / Revenue) x 100

For example, if your revenue is $500,000 and your cost of goods sold is $300,000, your gross profit margin is (($500,000 - $300,000) / $500,000) x 100 = 40%. That means you keep 40 cents of every dollar earned after covering direct costs.

Nail your estimating, quoting, and pricing

Set your pricing so it always covers your true costs and leaves room for profit. Count all the costs that go into each job or product, including materials, labour, transport, and merchant fees. Review completed projects afterward and compare budgeted costs with actual costs so you can improve your estimates over time.

Add a contingency amount to your estimates to cover unexpected costs or estimating mistakes. Even five to 10 percent can protect your margin on complex jobs.

Keep an eye on scope creep

Clients often ask for extra work once a project is underway, or you may step in to do tasks they planned to handle themselves. You can sometimes absorb these extra costs if you allow for a contingency amount in your estimate.

When the extra work is significant, issue a change order. This works like a quick quote for the additional work requested. Issue change orders while the project is in progress so everyone stays clear on scope and price.

Review your inventory costs

Shop around with different suppliers from time to time to make sure you're getting value. Ask about bulk deals too. You may be able to negotiate better terms with the suppliers you already use.

Monitor third-party service costs

If you rely on another business or contractor to do part of the work, monitor their costs. If they raise their prices before you notice, you'll absorb the difference. Read purchase invoices carefully and review them regularly.

Balance payroll and productivity

Paying employees and contractors is a major expense for most small businesses, so manage it as tightly as you can. Keep your people focused on the jobs they're good at by removing trivial or time-consuming tasks. Better systems, tools, or software can play a big role here.

Across Asia-Pacific, investing in technology is linked to stronger profitability growth, according to the same CPA Australia research. The right tools can free up your team to focus on higher-value work.

Where you can, manage workflows so you're not constantly calling up casual staff, contractors, or asking people to work overtime. These all come with extra costs and burnout risks.

Design the most efficient workflow you can

Take a look at how work gets done in your business. Many practices and procedures develop over time without much planning, and inefficiencies often emerge as a result.

People may end up waiting on tasks, jobs get done out of sequence, or work gets duplicated. Walk through your processes and look for unnecessary steps, double handling, wasted time, and wasted resources.

Properly account for shipping

Freight can be a challenge for businesses that have started selling online. Courier costs may not have been part of your initial pricing formula, so you'll need to work out the true costs of delivering products and adjust accordingly.

Account for merchant service fees

Transaction fees for accepting online payments can climb to between two and four percent of the value of a sale. That can take a significant slice out of your margin, so make sure you factor these fees into your pricing formula.

How to increase net profit

Net profit is the money left after paying all business expenses, not just direct costs. While improving gross profit helps, you also need to manage indirect costs like administration, marketing, rent, and overhead to grow your net profit.

The distinction matters: gross profit only accounts for the cost of goods sold, while net profit captures every expense your business incurs. You can have a healthy gross profit margin and still struggle with net profit if your overheads are too high.

Measure and manage your sales and marketing

Sales and marketing are major expenses for many small businesses. Check that your strategies lead to real sales by estimating what it costs to win each new customer. Use that figure as a benchmark to find your highest-return channels.

Be especially careful with big-budget marketing. Focus on return on investment and keep low-cost channels such as word of mouth and referrals active.

Reassess travel, entertainment, and discretionary spending

Attending the same tradeshow each year out of habit can tie up money that might work harder elsewhere. Step back and look at your discretionary spending through the lens of return on investment. There may be legacy expenses that could be eliminated.

Restructure your lending

Interest payments reduce your profits, especially when rates rise or when you rely on short-term finance to cover cash shortages. Ask an accountant or bookkeeper to review your lending. They can often restructure your debt by consolidating loans into lower-interest deals. You can find a financial adviser in Xero's adviser directory.

Be resourceful with rent and utilities

Rent and utilities can surprise businesses moving on from home-based beginnings. Renting a dedicated space is often much dearer than running a workshop out of your garage or a consultancy from your kitchen table.

Make sure you use space and energy in the smartest ways you can. Consider lower-cost options such as shared office spaces, pop-up shops, food trucks, or remote working.

Strive for supply chain efficiencies

Freight and warehousing can become a significant expense if you have a distributed supply chain or keep a large inventory. Consider your alternatives: local suppliers may solve some problems, and tighter inventory management could help too. Most importantly, understand what logistics costs you and factor it into your pricing.

Pick your professional services wisely

Fees for services such as legal advice, accounting, and recruitment can add up. These services are often essential, but it's still worth shopping around for the right provider.

Look for consultants who focus on businesses of your size or in your industry. They tend to offer more tailored, cost-effective services. Some may offer flat fees instead of hourly billing, which can help with budgeting.

Get into tax planning

The way you structure payments, time your spending, and record your accounts can all affect your tax bill. An accountant can help you manage your finances in a tax-efficient way, so involve them in your planning at the beginning of the financial year, not the end. Find an accountant in Xero's adviser directory.

How to improve profit margins

Improving profit margins means increasing the percentage of each dollar you keep as profit. While the gross and net profit sections above focus on growing total profit, margin improvement is about efficiency: earning more from every sale.

Review your pricing strategy

Pricing is the single most powerful margin lever you have. A small price increase of just two to three percent, if your volume holds steady, flows almost entirely to your bottom line. Review your prices at least annually and benchmark them against competitors.

Consider value-based pricing, where you set prices based on the value your product or service delivers rather than just your costs. Customers will often pay more for faster turnaround, better quality, or a more convenient experience.

Manage your product and service mix

Not every product or service in your range generates the same margin. Identify your highest-margin offerings and look for ways to sell more of them. At the same time, review low-margin items and decide whether to reprice, improve, or retire them.

Use your accounting software to run a margin analysis by product, service, or customer segment. This data often reveals surprising results: the products or customers you think are your best performers may not be your most profitable.

Analyse margins by customer

Some customers cost more to serve than others. A customer who places large orders but demands heavy discounts and frequent support may generate a lower margin than a smaller customer who pays full price and requires minimal service.

Rank your customers by profitability, not just revenue. You can then focus your sales and retention efforts on high-margin customers, renegotiate terms with low-margin ones, or adjust your service model to reduce the cost of serving them. Use a margin calculator to model how different pricing and cost scenarios affect your bottom line.

Cash flow and profit: what's the connection?

Cash flow and profit are related but different. Profit is the accounting difference between your revenue and expenses over a period. Cash flow is the actual movement of money in and out of your bank account. A profitable business can still run out of cash, and a cash-rich business can still be unprofitable.

The most common reason for this disconnect is timing. You might record a $10,000 sale as revenue this month, but if the customer doesn't pay for 60 days, your cash flow won't reflect that income until the money arrives.

Working capital: the bridge between profit and cash

Working capital is the money tied up in the gap between when you pay your suppliers and when your customers pay you. Three key measures determine how much working capital your business needs:

• debtor days: the average number of days it takes your customers to pay you. The lower this number, the faster your profit converts to cash.
• stock days: the average number of days your inventory sits before it's sold. High stock days mean money is tied up in products sitting on shelves.
• creditor days: the average number of days you take to pay your suppliers. Longer creditor days give you more time to use that cash elsewhere, but don't stretch payments so far that you damage supplier relationships.

The goal is to collect from customers faster, turn over stock quicker, and negotiate reasonable payment terms with suppliers. Improving these three numbers frees up cash without needing to increase profit at all.

Why this matters for your business

It's easy to confuse cash in the bank with profit. If your bank balance is healthy, it's tempting to assume your business is profitable. But that cash might include a tax payment you owe next quarter, customer deposits for work you haven't delivered yet, or a loan drawdown.

Track both numbers separately. Use your profit and loss statement to measure profitability and your cash flow statement to monitor liquidity. For practical guidance, see the Xero guide on managing cash flow.

Track and measure your profit improvement

Measuring profit improvement means monitoring key metrics regularly so you know whether your strategies are working. Without consistent tracking, you're guessing.

Track these essential numbers monthly:

• gross profit margin: revenue minus direct costs, expressed as a percentage
• net profit margin: total profit after all expenses, expressed as a percentage
• revenue growth: month-over-month or year-over-year sales increases
• cost per sale: total expenses divided by number of sales

Benchmark against industry averages

Your numbers mean more in context. Compare your profit margins and key ratios against industry averages to see how you stack up. The Australian Taxation Office and industry associations publish benchmark data for many sectors.

If your gross profit margin is 35% but the industry average is 45%, that gap highlights a specific improvement opportunity. Benchmarking also helps you set realistic targets rather than arbitrary goals. Review your profitability ratios alongside these benchmarks to get a complete picture.

Use your profit and loss statement

Your profit and loss statement (also called an income statement) is the most important tool for tracking profit improvement over time. Review it monthly, compare it against previous periods, and look for trends in revenue, cost of goods sold, and operating expenses.

Use accounting software to automate these calculations and generate regular reports. This data helps you identify which profit improvement strategies deliver the best results and where to focus your efforts next.

Simplify your profit tracking with Xero

Making your business more profitable reduces financial stress and creates real opportunities for growth. The key is measuring your current performance, implementing targeted improvements, and tracking the results over time.

Xero Accounting Software pulls together your revenue, costs, and profit metrics in one place, making it easier to spot improvement opportunities and act on them quickly.

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FAQs on increasing profit

Here are answers to frequently asked questions about increasing profit, covering strategies, margins, and common challenges.

What is the best strategy to increase profits?

There isn't one single best strategy, because it depends on your business. A good starting point is to use your financial data to see where the biggest opportunities are. For some businesses, it might be raising prices slightly; for others, it could be cutting a significant expense. A balanced approach that combines small changes across revenue, costs, and margins is often the most effective.

How can a small business increase profit quickly?

For quick wins, focus on high-impact, low-cost actions. Review and adjust your prices, upsell to existing customers, and cut non-essential discretionary spending. These changes don't require upfront investment and can deliver results within weeks.

What's the difference between gross profit margin and net profit margin?

Gross profit margin measures the percentage of revenue left after paying direct costs of production, such as materials and labour. Net profit margin measures the percentage left after paying all expenses, including rent, utilities, marketing, and taxes. A business can have a strong gross margin but a weak net margin if its overheads are too high.

What are profit drivers and why do they matter?

Profit drivers are the specific variables that have the greatest influence on your bottom line. Financial drivers include price, volume, variable costs, and fixed costs. Non-financial drivers include employee skills, business processes, and market conditions. Identifying your most important drivers helps you focus your improvement efforts where they'll have the biggest impact.

What's the difference between cash flow and profit?

Profit is an accounting measure of revenue minus expenses over a period. Cash flow is the actual movement of money in and out of your bank account. A profitable business can still run out of cash if customers are slow to pay or if money is tied up in inventory. Track both numbers separately using your profit and loss statement and cash flow statement.

How often should you review your profit margins?

Review your profit margins at least monthly. Monthly tracking lets you spot trends early and respond before small issues become big problems. Compare your margins against previous periods and industry benchmarks to set realistic improvement targets. Use your accounting software to automate these reports so reviewing them takes minutes, not hours.