Best way to make profit: grow sales and cut costs now

Published Thursday 5 March 2026

Table of contents

• Profitability factors
• Understanding profit improvement strategies
• Increasing revenue to increase profits
• Decreasing costs to increase profits
• How to increase gross profit
• How to increase net profit
• Track and measure your profitability
• Make profit improvements last
• FAQs on increasing business profits

Key takeaways

• Focus on cost reduction first if you have tight cash flow or obvious inefficiencies, as cutting expenses delivers immediate results, while prioritizing revenue growth when your operations are already efficient and you have capacity to scale.
• Improve your gross profit margins by accurately estimating all project costs, managing scope creep with prompt change orders, and regularly reviewing supplier prices to ensure you're getting the best value.
• Track your gross profit margin and net profit margin monthly at minimum to spot problems early and identify which strategies are working best for your business.
• Optimize your workflow by eliminating common inefficiencies like waiting time, out-of-sequence work, double handling, and unnecessary steps that drain productivity without adding value.

Profitability factors

Profit is what remains from sales revenue after paying your costs. Understanding the key factors that drive profitability helps you identify where to focus your profit improvement efforts.

The main factors are:

• Revenue: the total money from sales, which forms the pool from which you derive profit
• Costs: the expenses required to run your business, which reduce your profit when they increase
• Gross profit: the money remaining after paying costs directly tied to providing your goods and services (known as cost of goods sold)
• Net profit: the money remaining after paying all business costs, including taxes
• Margin: the gap between revenue and costs

Understanding profit improvement strategies

There are two main paths to higher profits: grow revenue or reduce costs. Most businesses benefit from doing both, but where you start depends on your situation.

Here's how each approach compares:

Quick wins (cost reduction):

• Results appear faster because you're cutting expenses, not waiting for new sales
• Lower risk since you're not investing money upfront
• Best when you have obvious inefficiencies or bloated expenses

Long-term gains (revenue growth):

• Builds sustainable profit by expanding your customer base and sales
• Requires investment in marketing, inventory, or staff
• Best when your operations are already efficient and you have capacity to grow

Consider your current position. If margins are tight and cash is limited, start with cost reduction. If you're running efficiently but have room to scale, focus on revenue growth. Many businesses alternate between the two as circumstances change.

Increasing revenue to increase profits

Increasing revenue expands the pool of money from which you can generate profit. When your margins stay consistent, higher sales translate directly to higher profits. Economies of scale may even widen your margins as you grow.

Revenue growth typically requires investment:

• Supplies and inventory: more stock to meet higher demand
• Marketing: increased spending to attract new customers
• Tools and equipment: upgraded capacity to handle growth
• Staff: additional employees to deliver more products or services

Make sure these investments pay back over time, or your profit gains will be eaten up by costs.

You can drive revenue in five main ways:

• Encourage repeat purchases: get existing customers to buy more often
• Find new customers: expand your customer base through marketing and outreach
• Expand your offerings: add new products or services to increase sales opportunities
• Upsell and cross-sell: offer upgrades or complementary items at point of sale
• Raise prices: increase what you charge, provided your market supports it

Get more on these five strategies in our guide How to increase revenue.

Decreasing costs to increase profits

Reducing costs keeps more money in your business, which directly increases profit. This approach often carries less financial risk than revenue growth because you're cutting expenses rather than investing in uncertain returns.

Cost reduction requires balance. Maintain the quality and speed of your operations to protect your revenue. The goal is to reduce costs while maintaining the capabilities that drive sales.

How to increase gross profit

Gross profit is the money remaining after you subtract the direct costs of producing your goods or services from your revenue. You can increase gross profit by raising revenue, lowering production costs, or both.

The key metric to watch is your gross profit margin, which measures the gap between revenue and direct costs as a percentage.

Common ways to improve gross profit margins

Nail your estimating, quoting, and pricing

Accurate pricing is the foundation of profit. Your quotes need to cover your true costs to generate healthy margins.

To improve your estimating:

1. Count all costs: include every expense tied to delivering the work
2. Review completed projects: compare budgeted costs against actual costs to spot mistakes
3. Add contingencies: build in a percentage buffer for unexpected costs or estimating errors

Refining your estimating process over time will steadily improve your margins.

Keep an eye on scope creep

Clients often request extra work mid-project, or you end up doing tasks they said they'd handle. These additions eat into your margin if you don't address them.

Your contingency budget may absorb some extras. For larger additions, issue a change order, which is essentially a quote for the extra work. Here are the key points to remember when managing change orders:

• Issue change orders promptly: don't wait until the project ends
• Get approval before proceeding: confirm the client accepts the additional cost
• Document everything: keep a clear record of what was requested and agreed

Surprising clients with a bigger bill at the end rarely goes well.

Review your inventory costs

Compare suppliers from time to time to make sure you're getting value. Ask about bulk deals, too. You may be able to negotiate with the suppliers you already have.

Monitor third-party service costs

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

Balance payroll and productivity

Payroll is typically one of the largest expenses for small businesses. Optimizing how you use staff time directly improves your margins.

To get more value from payroll spending:

1. Remove low-value tasks: free your people to focus on work that drives revenue
2. Invest in better systems: use tools and software to automate repetitive work
3. Smooth out workflows: reduce reliance on overtime, casual staff, and contractors
4. Prevent burnout: overworked employees make mistakes and eventually leave

Design the most efficient workflow you can

Many business processes develop organically over time, which often creates hidden inefficiencies. Reviewing your workflows can reveal opportunities to save time and money.

Here are common inefficiencies to look for in your workflows:

• Waiting time: staff idle while waiting for materials, approvals, or information
• Out-of-sequence work: tasks done in the wrong order, causing rework
• Double handling: the same job done twice by different people
• Unnecessary steps: processes that add time but not value

Walk through your operations regularly to spot and eliminate these drains on productivity.

Properly account for shipping

Freight costs deserve attention from 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 make adjustments.

Merchant service fees

Transaction fees for accepting online payments can reach 2% to 4% of each sale's value. This can reduce your margin significantly, so account for it in your pricing, just as you would for delivery costs.

How to increase net profit

Net profit is the money remaining after you pay all business costs, including indirect expenses like rent, marketing, and administration. It represents your true bottom line.

Improving gross profit helps net profit, but to maximize your net profit margin, you also need to manage indirect costs. These include everything not directly tied to producing your goods or services, often called "sales, general and administration" expenses.

Common ways to improve net profit margins

Measure and manage your sales and marketing

Marketing can be a major expense, so track whether it's actually generating sales. The key metric is your customer acquisition cost, which is how much you spend to gain each new customer.

To optimize marketing spend:

1. Calculate cost per customer: divide marketing spend by new customers acquired
2. Compare channel performance: identify which strategies deliver the best return
3. Scrutinize big-budget tactics: ensure expensive campaigns justify their cost
4. Activate free channels: encourage word of mouth and referrals

Reassess travel, entertainment and discretionary spending

Evaluate whether attending the same tradeshow each year still delivers value. Step back from your habits and evaluate your discretionary spending based on return on investment (ROI). You may find old expenses that you can cut.

Restructure your lending

Interest payments reduce your net profit, especially when rates rise or you rely on expensive short-term financing. Restructuring your debt can free up cash, especially as financial market practices and risks have evolved considerably over the past decade.

Here are options to explore for restructuring your debt:

• Consolidate loans: combine multiple debts into a single lower-interest loan
• Refinance at better rates: renegotiate terms when market conditions improve
• Reduce short-term borrowing: plan cash flow to avoid expensive bridge financing

An accountant or bookkeeper can review your lending and identify savings, helping you understand what regulators consider top risk areas, such as the growth in private credit. Find one in Xero's advisor directory.

Be resourceful with rent and utilities

Rent and utilities can surprise businesses that are expanding from home-based beginnings. Renting a dedicated space is much more expensive than running a workshop out of your garage, or a consultancy from your kitchen table.

You may need to adjust your pricing or find savings elsewhere. Either way, it always pays to make sure you're using space (and saving energy) in the cleverest ways you can. Consider lower-cost options such as shared office spaces, pop-up shops, food trucks, and remote working.

Balance payroll and productivity

Payroll can be an indirect cost (relevant to net profit) or direct cost (relevant to gross profit). This guide deals with it under How to increase gross profit.

Strive for supply chain efficiencies

Freight and warehousing costs can add up if you source from multiple locations or keep a large inventory. Look for ways to reduce these costs. Local suppliers may solve some problems and tighter inventory management could help, too.

Most importantly, understand your logistics costs and include them in your pricing where possible.

Pick your professional services wisely

Fees for legal services, accounting, recruitment, and similar services will add up. These are often essential services that you need, but it's worth shopping around for the right provider.

Find consultants who focus on businesses of your size or in your industry. They tend to provide services suited to your needs at reasonable prices, and they often use software designed for businesses like yours. Sometimes they'll even charge a flat fee rather than hourly billing, which can help with budgeting.

Get into tax planning

How you structure payments, schedule spending, and organize your accounting can significantly affect your tax bill. Tax planning reduces what you owe and keeps more profit in your business.

The key is timing. Tax planning happens at the start of the financial year, not the end. An accountant can set up your finances for maximum tax efficiency, but they need to be involved early.

Find an accountant in Xero's advisor directory.

Track and measure your profitability

Measuring your results helps you improve them. Tracking your profit metrics regularly helps you spot problems early and see which strategies are working.

Here are the key metrics to monitor:

• Gross profit margin: shows how efficiently you produce goods or deliver services
• Net profit margin: reveals your true bottom-line performance after all costs
• Profit per customer: helps you identify your most valuable customer segments
• Month-over-month trends: highlights whether you're improving or slipping

Cloud accounting software makes tracking straightforward. You can set up dashboards that show your margins in real time, without manual calculations. Regular reviews, whether weekly or monthly, help you stay on top of your profitability and make adjustments before small issues become big problems.

Make profit improvements last

Sustainable profit growth comes from building good habits and consistent practices. Set clear profitability goals, monitor your progress regularly, and adjust your approach based on what the numbers tell you.

Getting support helps you succeed. Accountants, mentors, and industry peers can share strategies that have worked for businesses like yours.

Good tools simplify the process. Accounting software pulls together your numbers quickly, so you can track margins, spot trends, and make informed decisions. Get one month of Xero free and start managing your profitability.

FAQs on increasing business profits

Here are answers to common questions about improving profitability.

What's the fastest way to increase business profits?

Cutting unnecessary costs typically delivers the fastest results because savings appear immediately in your profits. Revenue growth takes longer because it requires attracting customers and closing sales.

Should I focus on revenue growth or cost reduction first?

Start with cost reduction if you have obvious inefficiencies or tight cash flow. Focus on revenue growth if your operations are already efficient and you have capacity to handle more business.

What's a healthy profit margin for a small business?

Healthy margins vary by industry, but most small businesses aim for a net profit margin of 5%–20%. Check industry benchmarks to see how you compare to similar businesses.

How often should I review my profit margins?

Review your margins monthly at minimum. More frequent checks, such as weekly, help you spot problems early and respond before they affect your profits.

Can accounting software really help improve profitability?

Yes. Accounting software automates tracking, provides real-time visibility into your margins, and generates reports that highlight where you're making or losing money. This helps you make better decisions faster.