How to increase profits in your small business

Published Monday 20 April 2026

Table of contents

• Profitability factors
• Increasing revenue to increase profits
• Decreasing costs to increase profits
• How to increase gross profit
• How to increase net profit
• Track your profitability with the right tools
• How to make a business more profitable
• FAQs on increasing profits

Key takeaways

• Focus on retaining existing customers through consistent quality, regular communication, and quick problem resolution, as keeping current customers costs far less than acquiring new ones and drives higher long-term profits.
• Implement accurate cost estimation and pricing by including all direct expenses, building in contingency buffers, and regularly reviewing supplier costs to protect your profit margins from unexpected expenses.
• Track your gross and net profit margins monthly using accounting software to identify which customers, products, or services generate the most profit and spot problems early.
• Reduce overhead costs by measuring marketing return on investment, reviewing discretionary spending like travel and entertainment, and restructuring high-interest debt to keep more money in your business.

Profitability factors

Profit is the money left after you subtract costs from revenue. The main factors that drive profitability are:

• Revenue: the total money coming into your business from sales
• Costs: the expenses you pay to run your business
• Margin: the gap between revenue and costs

Increase revenue, decrease costs, or do both to grow your profit.

Understanding these factors helps you identify where to focus your efforts. Here's how each one works:

• Revenue: the total money from sales, which creates the pool you draw profit from
• Costs: the expenses that flow out of your business, reducing what you keep
• Gross profit: the money left after paying direct costs tied to your products or services (known as cost of goods sold)
• Net profit: the money left after paying all business costs, including taxes

Increasing revenue to increase profits

Increasing revenue grows the pool of money available for profit. When your margins stay steady, more sales means more profit. As you scale, economies of scale can widen your margins even further.

The trade-off: growing revenue costs money upfront. You may need to:

• buy more supplies or inventory
• increase marketing spend
• invest in tools or equipment
• hire more employees

Make sure these investments pay back over time.

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 range: add new products or services to sell
• Upsell and cross-sell: increase the value of each transaction
• Raise prices: charge more for what you already offer

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

Keep your existing customers coming back

Customer retention is one of the most cost-effective ways to grow profit. Keeping an existing customer costs far less than winning a new one.

To improve retention:

• Deliver consistent quality: meet expectations every time
• Stay in touch: regular communication keeps your business top of mind
• Solve problems quickly: fast responses build trust and loyalty
• Reward repeat business: loyalty programs or discounts encourage return visits
• Ask for feedback: show customers you value their input

Loyal customers spend more over time and refer others to your business.

Focus on your most profitable customers

Not all customers contribute equally to your profit. Some buy frequently, pay on time, and require little support. Others demand discounts, pay late, and take up more of your time.

To identify your most profitable customers:

• Analyse purchase history: look for high-value, repeat buyers
• Track support costs: some customers cost more to serve
• Review payment behaviour: late payers tie up your cash flow
• Calculate profit per customer: factor in all costs, not just revenue

Once you know who your best customers are, focus your energy there. You may also decide to raise prices for high-maintenance customers or redirect them to other providers.

Increase the value of each sale

Upselling and cross-selling boost revenue without the cost of acquiring new customers. You're simply getting more value from each transaction.

To increase average order value:

• Suggest upgrades: offer a premium version of what the customer is buying
• Bundle products or services: combine related items at a slight discount
• Recommend add-ons: suggest complementary products at checkout
• Offer volume discounts: encourage larger purchases with tiered pricing
• Train your team: make sure staff know how to suggest additional value

Small increases in average order value add up quickly over time.

Decreasing costs to increase profits

Reducing costs keeps more money in your business without needing to increase sales. This approach carries less upfront financial risk than revenue-focused strategies.

The key is finding the right balance to maintain operational effectiveness. A business needs to spend money to make money. The goal is to trim expenses without slowing down your work or compromising quality.

How to increase gross profit

Gross profit is the money left after paying direct costs tied to your products or services. To increase it, you can raise revenue, cut direct costs, or do both.

The key metric to track is your gross profit margin: the percentage gap between what you earn and what you spend on production or delivery.

Common ways to improve gross profit margins

Nail your estimating, quoting, and pricing

You can't generate profit without covering your costs first. Build accurate estimates by:

• Counting true costs: include every expense tied to delivering the work
• Reviewing past projects: compare budgeted costs to actual costs to spot patterns
• Adding contingencies: build in a buffer (many businesses add a set percentage) for unexpected expenses or estimating errors

Improve your process over time by learning from each project.

Keep an eye on scope creep

Scope creep happens when clients request extra work mid-project, or you take on tasks they were meant to handle. These additions eat into your margin if you don't account for them.

To protect your profit:

• Use your contingency: absorb small extras if your estimate includes a buffer
• Issue change orders: for larger additions, quote the extra work before doing it
• Act quickly: don't wait until the project ends to raise additional costs

Review your inventory costs

Your suppliers affect your margins directly. Stay on top of costs by:

• Shopping around: compare prices from different suppliers regularly
• Asking about bulk deals: volume discounts can lower your per-unit cost
• Negotiating with current suppliers: you may get better terms without switching

Monitor third-party service costs

Contractors and service providers can raise prices without warning. If you miss it, you absorb the cost.

Stay ahead by:

• Reviewing invoices regularly: check that rates match your agreements
• Tracking price changes: note any increases and adjust your own pricing if needed
• Building reviews into your schedule: set reminders to check supplier costs quarterly

Balance payroll and productivity

Payroll is a major expense for most small businesses. In developed economies, small and medium-sized enterprises (SMEs) contribute 60–70% of the employment base, making payroll a significant area to manage. Get more value from it by:

• Focusing staff on high-value work: remove trivial tasks that waste their time
• Using better systems and tools: software can automate repetitive work
• Managing workflows smoothly: reduce reliance on casual staff, contractors, and overtime

These steps cut costs and reduce burnout risk.

Design the most efficient workflow you can

Many business processes develop over time without much planning. When that happens, inefficiencies creep in.

Walk through your workflows and look for:

• Unnecessary steps: tasks that don't add value
• Double handling: work that gets done twice
• Waiting time: delays caused by poor sequencing
• Wasted resources: materials or effort that don't contribute to output

Fixing these issues can free up time and reduce costs.

Properly account for shipping

Freight costs catch many businesses off guard, especially when moving to online sales. Courier fees may not have been part of your original pricing.

To protect your margins:

• Calculate true delivery costs: include packaging, handling, and courier fees
• Adjust your pricing: build shipping into product prices or charge separately
• Review regularly: carrier rates change, so check costs periodically

See how to increase net profit for more logistics tips.

Merchant service fees

Transaction fees for accepting online payments typically range from 2% to 4% of each sale. That can significantly reduce your margin.

Account for these fees by:

• Including them in your pricing formula: treat them as a cost of sale
• Comparing payment providers: rates vary, so shop around
• Review regularly: fees can change as your volume grows

How to increase net profit

Net profit is the money left after paying all business costs, including overhead and taxes. To increase it, focus on reducing your indirect costs.

Indirect costs include expenses not tied directly to production or service delivery. These often fall under sales, general, and administration:

• rent and utilities
• marketing and sales
• professional services
• interest payments

Anything you do to improve gross profit also helps net profit. But to go further, target these overhead expenses.

Common ways to improve net profit margins

Measure and manage your sales and marketing

Marketing spend is a major expense, so make sure it delivers results. Track your return by:

• Calculating customer acquisition cost: know what you spend to win each new customer
• Benchmarking strategies: compare costs across channels to find the best performers
• Scrutinising big-budget tactics: high spend needs high return
• Using free channels: word of mouth and referrals cost nothing but can drive real sales

Reassess travel, entertainment, and discretionary spending

Discretionary spending can become a habit. Attending the same tradeshow every year without measuring results is a common trap.

Review these costs by asking:

• What's the return? Does this expense generate measurable value?
• Is it still relevant? Has your business or market changed?
• Can it be cut or reduced? Some legacy spending may no longer make sense

Restructure your lending

Interest payments eat into profits, especially when rates rise or you rely on short-term finance to cover cash gaps.

Reduce interest costs by:

• Reviewing your loans: ask an accountant or bookkeeper to assess your current debt
• Consolidating where possible: combining loans into a lower-interest deal can save money
• Avoiding short-term fixes: high-interest bridging finance adds up quickly

You can find a financial adviser in Xero's adviser directory.

Be resourceful with rent and utilities

Rent and utilities can spike when you move from a home-based setup to a dedicated space. A workshop or office costs far more than your garage or kitchen table.

To manage these costs:

• Adjust pricing: factor higher overheads into what you charge
• Use space efficiently: make sure you're not paying for unused square footage
• Save energy: small changes reduce utility bills over time
• Consider alternatives: shared offices, pop-up shops, food trucks, and remote working can all lower costs

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 add up fast if you hold large inventory or work with distant suppliers.

Reduce these costs by:

• Using local suppliers: shorter distances mean lower shipping costs
• Managing inventory tightly: avoid overstocking and storage fees
• Understanding your logistics costs: know exactly what you're paying
• Factoring costs into pricing: pass logistics expenses on where you can

Pick your professional services wisely

Professional fees for legal, accounting, and recruitment services add up. These are often essential, but you can still manage costs.

Choose providers that:

• Specialise in your size or industry: they understand your needs and often charge less
• Use software suited to small businesses: this can speed up their work and reduce fees
• Offer flat-fee pricing: predictable costs help with budgeting

Shop around before committing to any long-term arrangement.

Get into tax planning

Tax planning can reduce your tax bill by structuring payments, timing expenses, and organising your accounts efficiently.

To get it right:

• Involve an accountant early: tax planning works best at the start of the financial year, not the end
• Review your structure: how you pay yourself and others affects your tax position
• Time your spending: some expenses are better made before or after year-end

Find an accountant in Xero's advisor directory.

Track your profitability with the right tools

Improving profit starts with knowing where you stand. Without clear visibility into your numbers, it's hard to know what's working. A global survey found that half of small and medium-sized accounting practices help businesses gain this clarity by providing management accounting services like budgeting and performance tracking.

Use accounting software to track:

• Profit and loss reports: see revenue, costs, and profit at a glance
• Gross and net margins: monitor the gap between what you earn and what you spend
• Customer profitability: identify which customers and products drive the most profit
• Cash flow: understand how money moves through your business

Review these reports regularly. Monthly check-ins help you spot trends, catch problems early, and measure the impact of changes you make.

Xero pulls this data together in real time, so you can make confident decisions without waiting for month-end reports.

How to make a business more profitable

Increasing profit gives you less financial stress and more confidence to invest in growth. The key is knowing your numbers and taking consistent action.

Accounting software like Xero pulls together your profit and loss data in real time, so you can track margins and spot opportunities quickly. Get one month free and see how the right tools support your profit strategy.

Getting advice helps too. Talk to accountants, mentors, or other business owners who've been through it. In fact, research shows that advice from accountants is associated with better performance, including improved profitability and higher survival rates. Set clear profitability goals, monitor your progress, and adjust as you go.

FAQs on increasing profits

Common questions about improving profitability in your business.

How long does it take to see results from profit improvement strategies?

It depends on the strategy. Cost cuts can show results within weeks. Revenue growth strategies like customer retention or upselling typically take a few months to build momentum. Track your margins monthly to measure progress.

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

It varies by industry. Net profit margins between 5% and 20% are common for small businesses. Service businesses often have higher margins than retail or manufacturing. Compare your margins to industry benchmarks to see where you stand.

Should I focus on increasing revenue or cutting costs first?

Start with costs if you need quick results with less risk. Cost cuts take effect immediately and don't require upfront investment. Focus on revenue if you have cash to invest and want long-term growth. Many businesses do both at the same time.

How can accounting software help me increase profits?

Accounting software gives you real-time visibility into revenue, costs, and margins. You can track which products, services, or customers are most profitable and spot problems early. Automated reports save time and help you make faster, more confident decisions.

What's the most common mistake small businesses make when trying to increase profitability?

Focusing only on revenue while ignoring costs. Growing sales is important, but if your margins are thin or your overheads are too high, more revenue won't translate to more profit. Track both sides of the equation.