How to increase profits: a guide for small business owners

Published Wednesday 6 May 2026

Table of contents

• What is profitability and why does it matter?
• How to increase revenue to boost profits
• How to reduce costs to increase profits
• How to increase gross profit margins
• How to increase net profit margins
• Pricing strategies to improve profitability
• How to use financial data to track profitability
• Take control of your profitability with Xero
• FAQs on increasing profits

Key takeaways

• Profitability depends on two levers: increasing revenue and reducing costs. Small improvements in both areas can add up to significant gains over time.
• Tracking your gross profit margin and net profit margin separately helps you identify exactly where money is being lost, whether in production costs or overhead expenses.
• Pricing strategies like value-based pricing and regular price reviews are some of the fastest ways to improve your bottom line without increasing your workload.
• Using financial data and accounting software to monitor key performance indicators (KPIs) gives you the visibility you need to make confident, timely decisions about your business.

What is profitability and why does it matter?

Profitability is the measure of how much money your business keeps after covering all its expenses. Understanding it is the first step toward building a business that sustains itself and grows over time.

At its simplest, profit is revenue minus costs. But there are two types of profit that matter for small business owners: gross profit and net profit.

Gross profit is what's left after you subtract the direct costs of producing your goods or services, often called cost of goods sold (COGS). This includes materials, labor directly tied to production, and shipping costs. Your gross profit margin shows how efficiently you're producing and delivering what you sell.

Net profit is what remains after subtracting all expenses, including indirect costs like rent, utilities, marketing, insurance, and taxes. This is the true bottom line of your business.

Why does this distinction matter? A healthy gross profit margin but a weak net profit margin tells you that your overhead costs are eating into your earnings. On the other hand, a low gross margin means you may need to revisit your pricing or production costs. For a deeper look at how these numbers work together, check out this guide to profit margins.

How to increase revenue to boost profits

Growing your revenue is one of the most direct paths to higher profits. Here are five strategies that can help you bring in more money without dramatically changing your business model.

• Encourage repeat purchases: your existing customers already trust you. Loyalty programs, follow-up emails, and bundled offers can increase the frequency and size of their purchases.
• Find new customers: expand your reach through referral programs, partnerships with complementary businesses, social media marketing, or targeted online advertising.
• Expand your product or service range: look for natural extensions of what you already offer. If you're a landscaper, seasonal services like snow removal or holiday lighting can fill revenue gaps.
• Upsell and cross-sell: when a customer is already buying, suggest a premium version or a complementary product. A well-timed recommendation can increase the average transaction value. Get more tips on how to increase sales.
• Raise your prices: if you haven't reviewed your pricing recently, you may be leaving money on the table. Even small, well-communicated price increases can make a meaningful difference to your margins.

For more on building a stronger top line, explore this guide on how to increase revenue.

How to reduce costs to increase profits

Cutting unnecessary expenses is the other side of the profitability equation. Even small cost reductions can have an outsized impact on your bottom line, especially when revenue is steady.

Start by reviewing your recurring subscriptions and software tools. Many businesses pay for services they no longer use or have outgrown. Cancel what you don't need and consolidate where you can. For more ideas, see these business cost saving ideas.

Next, negotiate with your vendors and suppliers. If you've been a loyal customer, you may have room to ask for better rates, longer payment terms, or volume discounts. It's worth revisiting these relationships at least once a year.

Take a close look at your product or service lineup. If certain offerings consistently lose money or take up more time than they're worth, consider phasing them out. Focusing on what's profitable frees up resources for growth.

Finally, automate repetitive tasks wherever possible. Manual data entry, invoice chasing, and bank reconciliation eat up hours that could be spent on higher-value work. Accounting software and workflow tools can handle many of these tasks for you, reducing both time and errors.

How to increase gross profit margins

Your gross profit margin reflects how much you earn after covering the direct costs of delivering your product or service. Improving it means either earning more per sale or spending less to produce what you sell.

Nail your estimating and pricing

Accurate estimates are the foundation of healthy margins. If you're consistently underquoting jobs or underpricing products, your gross margin will suffer no matter how busy you are.

Review your past projects or sales to see where actual costs exceeded your estimates. Factor in all cost of goods sold, including materials, direct labor, and delivery. Then build a buffer into your pricing to account for unexpected overruns.

Keep an eye on scope creep

Scope creep happens when a project grows beyond its original agreement without a matching increase in price. It's one of the most common margin killers for service-based businesses.

Set clear boundaries in your contracts and communicate changes to clients as they arise. When extra work is requested, provide a revised quote before proceeding. This protects your time and your margins.

Review your inventory costs

If you sell physical products, inventory is likely one of your biggest expenses. Regularly review your purchasing patterns, storage costs, and supplier pricing.

Look for opportunities to buy in bulk for your best-selling items, reduce slow-moving stock, and negotiate better terms with suppliers. Even small savings per unit add up across hundreds or thousands of sales.

Monitor third-party service costs

Many businesses rely on contractors, freelancers, or third-party services to deliver their products. These costs directly affect your gross margin.

Audit these relationships regularly. Compare rates, evaluate quality, and make sure you're getting value for what you're paying. If a contractor's rates have crept up, it might be time to renegotiate or explore alternatives.

Balance payroll and productivity

Labor is often the single largest cost in a small business. The goal isn't necessarily to cut staff, but to make sure your team's time is being used as productively as possible.

Track how long tasks actually take versus how long you estimated. Identify bottlenecks and consider whether training, better tools, or process changes could help your team get more done in less time.

Design efficient workflows

Inefficient processes waste time and money. Map out your key workflows, from order intake to delivery, and look for steps that can be streamlined or eliminated.

Even small changes, like automating order confirmations or standardizing templates, can reduce the time and cost of each transaction.

Account for shipping costs

Shipping can quietly erode your margins if it's not built into your pricing. Review your shipping expenses regularly and consider whether you need to adjust prices, negotiate carrier rates, or set minimum order thresholds for free shipping.

Compare carriers and look into flat-rate or regional shipping options that might save money on your most common shipments.

Watch merchant service fees

Credit card processing and payment platform fees are a cost of doing business, but they vary widely. Review your merchant service agreements and compare them against competitors.

Even a small reduction in your processing rate can save hundreds or thousands of dollars a year, depending on your sales volume.

How to increase net profit margins

While gross profit focuses on production costs, your net profit margin accounts for every expense in your business. Improving it means getting smarter about overhead costs, operations, and the way you allocate resources.

Manage sales and marketing ROI

Not all marketing dollars produce equal results. Track which channels and campaigns bring in the most revenue relative to their cost, and shift your budget toward what works.

If you're spending on advertising that doesn't convert, it's worth pausing those campaigns and testing new approaches. Small, targeted efforts often outperform expensive broad-reach strategies for small businesses.

Reassess discretionary spending

Discretionary expenses, like team events, office perks, or non-essential subscriptions, can add up faster than you'd expect. Review these costs quarterly and ask whether each one contributes to revenue, retention, or productivity.

Cutting discretionary spending doesn't mean cutting culture. It means being intentional about where your money goes.

Restructure your lending

If you're carrying business debt, the interest rates and terms you locked in may not be the best available today. Review your loans, lines of credit, and credit card balances regularly.

Refinancing at a lower rate or consolidating multiple debts into a single payment can reduce your monthly expenses and free up cash for other priorities. Staying on top of managing cash flow makes it easier to stay ahead of debt obligations.

Be resourceful with rent and utilities

Rent and utilities are fixed costs, but that doesn't mean they're set in stone. If your lease is up for renewal, negotiate. If you've shifted to remote or hybrid work, consider downsizing your space.

Simple changes like energy-efficient lighting, programmable thermostats, and shopping around for service providers can trim these costs over time.

Streamline supply chain costs

Look for ways to reduce the cost and complexity of your supply chain. This might mean consolidating suppliers, renegotiating freight rates, or switching to a more cost-effective logistics partner.

Even small adjustments to how and when you order materials can reduce carrying costs and minimize waste.

Choose professional services wisely

Legal, accounting, and consulting fees are necessary, but they should be proportional to the value they deliver. Get quotes from multiple providers, ask for fixed-fee arrangements when possible, and regularly evaluate whether your current advisors are meeting your needs.

Working with a good accountant or bookkeeper can actually save you money by identifying deductions, improving your financial processes, and helping you make better decisions. You can find qualified professionals through the Xero advisor directory.

Plan for taxes

Tax planning isn't just something that happens in April. By planning throughout the year, you can take advantage of deductions, credits, and timing strategies that reduce your overall tax burden.

Set aside a percentage of your income for taxes each month so you're never caught off guard. Work with a tax professional to identify opportunities specific to your business structure and industry. Learn more about tax deductions for your business.

Pricing strategies to improve profitability

Your pricing has a direct and immediate effect on your profit margins. Yet many small business owners set their prices once and rarely revisit them. A thoughtful approach to pricing is one of the fastest ways to improve profitability.

Use value-based pricing

Value-based pricing means setting your prices based on the value your product or service delivers to the customer, not just what it costs you to produce. If your work saves a client thousands of dollars, your price should reflect that outcome.

Talk to your customers about what they value most. You might find that speed, reliability, or expertise matters more to them than the lowest price, and that gives you room to charge accordingly.

Review prices regularly

Costs change over time; your prices should too. Set a schedule to review your pricing at least twice a year. Factor in changes to material costs, labor rates, competitor pricing, and market demand.

Small, incremental price increases are generally better received than large, infrequent ones. Communicate changes clearly and tie them to the value you provide.

Avoid underpricing

Underpricing is one of the most common mistakes small business owners make. Charging too little can signal low quality, attract price-sensitive customers who are harder to retain, and leave you working long hours for thin margins.

If you're consistently busy but not profitable, your prices may be the problem. Benchmark your rates against competitors and make sure your pricing covers all your costs, including your own time.

Account for all costs in your pricing

Many businesses forget to include indirect costs like software subscriptions, insurance, vehicle expenses, or administrative time when setting prices. This leads to pricing that looks profitable on paper but doesn't hold up in practice.

Calculate your true cost of delivery, including overhead, and make sure your pricing provides a healthy margin above that number. Understanding your contribution margin ratio can help you determine whether each product or service is pulling its weight.

How to use financial data to track profitability

Making smart decisions about profitability starts with having the right data at your fingertips. Without clear visibility into your numbers, you're making guesses instead of informed choices.

Use your financial statements

Your profit and loss statement (also called an income statement) is the most direct way to track profitability. It shows your revenue, costs, and profit over a specific period, giving you a clear picture of how your business is performing.

Review it monthly, not just at tax time. Compare it against previous periods to spot trends, and use it to identify which expenses are growing faster than revenue. A guide on how to measure profitability can help you get started.

Track the right KPIs

Key performance indicators help you monitor your business health at a glance. For profitability, focus on these KPIs:

• Gross profit margin: the percentage of revenue remaining after direct costs
• Net profit margin: the percentage of revenue remaining after all expenses
• Cash flow: the money moving in and out of your business each month
• Customer acquisition cost: how much it costs to win a new customer
• Revenue per employee: a measure of your team's productivity and efficiency

Tracking these numbers over time helps you spot problems early and make adjustments before they become serious. Staying on top of managing your finances is just as valuable as growing your sales.

Use accounting software for real-time visibility

Spreadsheets and manual tracking only take you so far. Cloud-based accounting software automates bank feeds, invoicing, and reconciliation so your numbers are always up to date.

With real-time dashboards and customizable reports, you can see exactly where your money is going and how your margins are trending. This kind of visibility makes it easier to act quickly when something needs attention, rather than discovering problems weeks or months later. For practical tips, see how to track business expenses.

Take control of your profitability with Xero

Growing your profits starts with understanding your numbers. From tracking margins to automating repetitive admin, having the right tools in place makes all the difference.

Xero's cloud-based accounting software gives you real-time visibility into your finances, so you can make confident decisions about pricing, spending, and growth. With automated bank feeds, invoicing, expense tracking, and customizable reports, you'll spend less time on bookwork and more time building a profitable business.

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FAQs on increasing profits

Here are some frequently asked questions about increasing profits for small businesses.

What is the fastest way to increase profits?

Reviewing your pricing is often the quickest path to higher profits. Even a small price increase across your products or services can have an immediate impact on your margins without requiring additional resources or effort.

What is a good profit margin for a small business?

It varies by industry, but a net profit margin of 10% or higher is generally considered healthy for most small businesses. Some industries, like professional services, can achieve margins of 15% to 20% or more, while retail and food service typically operate on thinner margins.

Should I focus on cutting costs or increasing revenue?

Both matter, and the best approach depends on your situation. If your revenue is growing but profits aren't keeping up, your costs likely need attention. If your costs are already lean, focusing on revenue growth and pricing will have a bigger impact.

How often should I review my profit margins?

Review your profit margins monthly using your profit and loss statement. This helps you catch trends early and make timely adjustments. A more in-depth review each quarter, looking at margins by product line, customer segment, or service, can reveal deeper opportunities.

How can accounting software help increase profits?

Accounting software gives you real-time visibility into your revenue, costs, and cash flow. By automating tasks like bank reconciliation and invoicing, it frees up time you can spend on higher-value activities. Customizable reports and dashboards make it easier to spot margin issues and act on them quickly.