How to increase profits by growing revenue and margins

Published Friday 5 June 2026

Table of contents

• Profitability factors
• Choose your profit-improvement strategy
• Increasing revenue to increase profits
• Identify your most profitable customers, products, and services
• Retain and reward existing customers
• Decreasing costs to increase profits
• Create a budget to track profitability
• How to increase gross profit
• Reduce waste to protect margins
• How to increase net profit
• Manage your working capital
• Track and improve your profitability with Xero
• FAQs on increasing profits

Key takeaways

• Focus on your most profitable customers and products by applying the 80/20 rule, where roughly 80% of your profit comes from just 20% of your customers or products, then direct your marketing and resources toward these high-margin areas.
• Prioritise customer retention over acquisition since keeping existing customers costs 3 to 25 times less than finding new ones, and existing customers convert at 60–70% compared to just 5–20% for new prospects.
• Improve your gross profit margin by accurately pricing your products or services to cover all direct costs plus a buffer, regularly reviewing supplier costs, and managing scope creep through formal change orders during projects.
• Create a budget, reduce waste, and manage your working capital to protect margins from the inside out, so more of every ringgit earned stays in your business as profit.

Profitability factors

Profitability factors are the elements that determine how much money your business keeps after expenses. The main factors are your revenue, your costs, and the margin between them.

• Revenue: the total money coming into your business from sales
• Costs: the expenses you pay to run your business and deliver products or services
• Gross profit: the money left after subtracting direct costs (cost of goods sold) from revenue
• Net profit: the money left after subtracting all business costs, including taxes

Choose your profit-improvement strategy

The most effective way to increase profits is to combine several profitability strategies rather than relying on one approach. Each of the four main methods suits different situations.

• Increase revenue: grow sales through new customers, higher prices, or expanded offerings
• Reduce costs: cut expenses without hurting quality or operations
• Improve gross profit margin: optimise direct costs like materials, labour, and delivery
• Improve net profit margin: reduce overhead costs like rent, marketing, and administration

Most businesses benefit from a combination. Start with the approach that offers the quickest wins for your situation, then build from there.

Increasing revenue to increase profits

Revenue growth is one of the most direct ways to increase profits. When you increase revenue and margins stay steady, higher sales mean higher profits. Economies of scale can even widen margins as you grow.

The trade-off is that growth typically requires investment. You may need to spend on supplies, marketing, tools, and staff. Make sure any investment pays back over time.

You can drive revenue in five main ways:

• Increase purchase frequency: encourage existing customers to buy more often
• Acquire new customers: expand your customer base through marketing and outreach
• Expand your range: add new products or services to capture more sales
• Upsell and cross-sell: offer upgrades or complementary items at point of sale
• Raise prices: adjust pricing to reflect the value you deliver

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

Identify your most profitable customers, products, and services

Not all revenue is equal. Some customers, products, and services deliver higher margins than others. Research suggests that applying the Pareto principle shows around 80 per cent of your profit comes from just 20 per cent of your customers or products. When you focus on your most profitable areas, you can boost overall profits without increasing sales volume.

To identify your best performers:

• Analyse revenue by customer: which customers generate the most profit after accounting for service costs?
• Review product margins: which products or services have the highest gross margin?
• Assess time and effort: some sales require more support, returns, or follow-up, which reduces true profitability

Once you know where your best margins come from, you can focus marketing, sales, and resources on those areas.

Retain and reward existing customers

Customer retention is one of the most cost-effective profitability strategies available. You spend significantly more to acquire a new customer than to keep an existing one; a 2023 analysis found acquiring a new customer costs 3x to 25x more than retaining a current one, depending on the industry.

Strategies to retain customers:

• Deliver consistent quality: meet expectations every time to build trust
• Stay in touch: regular communication keeps your business top of mind
• Reward loyalty: offer discounts, early access, or exclusive perks for repeat customers
• Ask for feedback: when you understand what customers value, you can improve and show you care

A small improvement in retention can have a large impact on profit over time, particularly since existing customers convert at 60–70%, while new prospects convert at a much lower rate of 5–20%.

Decreasing costs to increase profits

Reducing costs is one of the fastest ways to increase profits because savings flow directly to your bottom line. This approach carries less upfront financial risk than revenue-focused strategies because you're cutting expenses rather than investing in growth.

The challenge is to find the right balance. Cutting too deeply can hurt revenue and quality. Focus on trimming expenses that don't affect the speed or quality of your operations.

Create a budget to track profitability

A budget is one of the most practical tools for improving profitability because it gives you a clear plan for where your money should go. Without a budget, it's difficult to know whether your spending is aligned with your profit goals or quietly eating into your margins.

Start by listing your expected revenue and all your costs for the coming quarter or year. Break costs into fixed expenses (rent, salaries, insurance) and variable expenses (materials, freight, marketing). Then set a target profit margin and work backwards to determine how much you can afford to spend in each category.

Review your budget against actual results at least monthly. Look for categories where spending has crept above target and investigate why. Even small overruns add up over time, and catching them early gives you room to adjust before they affect your bottom line.

A budget also helps you make better decisions about new spending. Before committing to a new hire, a marketing campaign, or a piece of equipment, check it against your budget to confirm it fits within your profit plan. This budgeting guide walks you through the process step by step.

How to increase gross profit

Gross profit is the money left after subtracting direct costs from revenue. The profit margin formula for gross profit is: gross profit margin = (revenue – cost of goods sold) / revenue x 100. You can increase it by raising revenue, lowering direct costs, or both. The goal is to widen your gross profit margin, which is the percentage of revenue you keep after covering direct costs.

For example, if your business earns RM500,000 in revenue and your cost of goods sold is RM300,000, your gross profit is RM200,000 and your gross profit margin is 40%. Reducing your direct costs by just 5% would lift your gross profit to RM215,000 and your margin to 43%.

Here are practical strategies to widen your gross profit margin.

Each of the strategies below targets a specific area where direct costs tend to grow unchecked.

1. Nail your estimating, quoting, and pricing

Accurate pricing is the foundation of a healthy profit margin. Cover your true costs to generate a margin that sustains your business.

To improve your estimates:

• Track actual vs budgeted costs: review completed projects to spot where estimates fell short
• Add contingencies: include a percentage buffer to cover unexpected expenses or estimating errors
• Refine over time: use each project as a learning opportunity to sharpen future quotes

2. Keep an eye on scope creep

Extra work requests during a project can eat into your margin. Contingencies may cover small additions, but larger changes need a formal response.

Issue change orders for significant extra work while the project is still in progress. A change order is a quote for the additional scope. Present change orders while the project is in progress so the customer agrees to the cost before you begin the work.

3. Review your inventory costs

Supplier costs directly affect your gross margin. Regularly check that you're getting competitive pricing.

• Compare suppliers: shop around periodically to benchmark your current rates
• Ask about bulk discounts: larger orders may unlock better pricing
• Negotiate with existing suppliers: use competitor quotes as leverage for better terms

4. Monitor third-party service costs

Contractors and service providers may raise prices without notice. Catch price increases early to protect your margin.

Review purchase invoices regularly and flag any rate changes before they affect your profitability.

5. Balance payroll and productivity

Payroll is often the largest expense for small businesses. For example, the National Restaurant Association reports that profitable full-service restaurants keep labour at 34.2% of sales, while for unprofitable ones it can be as high as 42.9%. Manage it well to get the most value from every hour worked.

• Remove low-value tasks: free your team to focus on work that drives revenue
• Use better systems and tools: automation and software reduce manual effort
• Manage workflows proactively: avoid relying on overtime, casual staff, or last-minute contractors, which add cost and increase burnout risk

6. Design the most efficient workflow you can

Workflows that develop organically are often inefficient. Review your processes to reveal easy wins.

Look for these common problems:

• Waiting: staff idle while waiting on approvals, materials, or information
• Sequencing errors: tasks done out of order, causing rework
• Duplication: the same work done twice by different people
• Wasted resources: materials, time, or effort spent on unnecessary steps

7. Properly account for shipping

Build freight costs into your pricing to protect your margins. This is especially common for businesses that have recently started selling online.

Calculate your true delivery costs per order and adjust your pricing or shipping fees accordingly.

8. Merchant service fees

Merchant service fees (also called transaction fees) are charges for accepting card or online payments. These typically range from 2% to 4% of each sale.

Factor these fees into your pricing to protect your margin. Compare payment providers to find better rates and protect your profits.

Reduce waste to protect margins

Waste is any cost that doesn't add value for your customer, and reducing it is one of the simplest ways to protect your profit margins. Waste shows up in three main areas: operations, materials, and time.

Operational waste includes steps in your processes that slow things down without improving the result. Look for approval bottlenecks, unnecessary handovers between team members, and reports that no one reads. Removing these frees up capacity without adding cost.

Material waste hits product-based businesses hardest. Track spoilage, defects, and excess stock to see where physical resources are being lost. Even small improvements in ordering accuracy or storage conditions can add up to meaningful savings over a quarter.

Time waste is often the least visible but most expensive form. Meetings without clear outcomes, manual data entry that could be automated, and rework caused by unclear briefs all consume hours that could be spent on revenue-generating work. Audit how your team spends a typical week and look for patterns you can eliminate.

Set a target to reduce waste by a measurable amount each quarter. Track the results alongside your gross and net margins to confirm the savings are flowing through to profit.

How to increase net profit

Net profit is the money left after subtracting all business costs from revenue, including indirect expenses like rent, utilities, marketing, and administration. The net profit margin formula is: net profit margin = net profit / revenue x 100. Improving net profit means managing these overhead costs alongside the direct costs covered in gross profit.

To widen your net profit margin, focus on reducing indirect costs while maintaining your ability to operate and grow.

Here are strategies to reduce overhead costs and improve your net profit margin.

The strategies below target indirect costs that tend to grow as your business scales.

1. Measure and manage your sales and marketing

Marketing spend can grow quickly, so track results to ensure proportional returns. Track your return on investment to keep spending efficient.

• Calculate customer acquisition cost: divide marketing spend by new customers gained to benchmark each channel
• Prioritise high-return tactics: focus budget on strategies that deliver measurable sales
• Activate free channels: word of mouth and referrals cost nothing but can drive significant growth

2. Reassess travel, entertainment, and discretionary spending

Recurring expenses like annual trade shows or client entertainment can become habits rather than strategic choices. Review each discretionary cost through the lens of return on investment.

Cut or reduce spending that no longer delivers measurable value.

3. Restructure your lending

Interest payments reduce net profit, especially when rates rise or you rely on short-term finance to cover cash gaps.

Ask an accountant or bookkeeper to review your debt. Consolidating loans into lower-interest options can reduce ongoing costs. Find an adviser through this adviser directory.

4. Be resourceful with rent and utilities

Fixed premises costs can rise sharply when you move from a home-based setup to dedicated space. Review whether your current arrangement delivers value for money.

Consider lower-cost alternatives:

• Shared office spaces: pay only for the space you use
• Pop-up shops: test locations without long-term leases
• Remote working: reduce office footprint by supporting flexible work
• Energy efficiency: lower utility bills through smarter usage

5. Balance payroll and productivity

Payroll can be an indirect cost (relevant to net profit) or direct cost (relevant to gross profit). This guide covers payroll strategies under How to increase gross profit.

6. Strive for supply chain efficiencies

Freight and warehousing costs grow with inventory size and supply chain complexity. Understanding these costs helps you price accurately and find savings.

• Use local suppliers: shorter distances reduce freight costs and lead times
• Tighten inventory management: carry less stock to reduce warehousing expenses
• Factor logistics into pricing: make sure delivery costs are covered in your margins

7. Pick your professional services wisely

Legal, accounting, and recruitment fees add up quickly. While these services are essential, choosing the right provider can reduce costs.

• Choose specialists in your size or industry: they understand your needs and often charge less
• Choose providers with compatible software: seamless integration saves time and reduces errors
• Choose providers with flat-fee pricing: predictable costs make budgeting easier

8. Get into tax planning

How you structure payments, schedule spending, and manage accounting affects your tax bill. Good tax planning can reduce what you owe.

Work with an accountant at the start of the financial year to set up tax-efficient structures. If you wait until year-end, you limit your options.

Manage your working capital

Working capital management is the practice of controlling the cash that flows between your receivables, inventory, and payables so your business always has enough to operate. Poor working capital management is one of the most common reasons profitable businesses still run into cash flow problems.

Focus on three key areas:

• Debtor days: this measures how long customers take to pay you. The faster you collect, the more cash you have available. Send invoices promptly, set clear payment terms, and follow up on overdue accounts without delay. Even reducing your average debtor days by a week can free up meaningful cash.
• Stock days: this measures how long inventory sits before it's sold. Excess stock ties up cash and increases storage costs. Review your ordering patterns to match stock levels more closely with actual demand.
• Creditor terms: this is how long you take to pay your suppliers. Negotiate longer payment terms where possible so you can hold onto cash for longer without damaging supplier relationships.

The goal is to collect from customers quickly, turn over stock efficiently, and pay suppliers on terms that work for your cash flow. Track these three metrics each month and look for trends that signal improvement or decline. This working capital guide explains these concepts in more detail.

Track and improve your profitability with Xero

To improve how profitable your business is, you need to see your numbers clearly. When you can see your margins in real time, you can make confident decisions about pricing, costs, and growth.

Xero's accounting software gives you real-time insights into your financial performance. Customisable reports help you track gross and net profit margins, monitor expenses, and spot opportunities to improve. Set budgets, compare actual results against your targets, and get a clear picture of where your money is going.

Set clear profitability goals, measure your progress, and adjust your strategy as you learn what works. Start tracking your profitability today and get one month free.

FAQs on increasing profits

Here are answers to frequently asked questions about increasing profits in your small business.

How quickly will I see results from profit-improvement strategies?

Results depend on the strategy. Cost reductions often show impact within weeks, while revenue-focused changes may take months to build momentum.

Should I focus on increasing revenue or reducing costs first?

Start where you have the most control and quickest wins. Cost reductions typically carry less risk, but revenue growth offers more long-term upside.

What is a healthy profit margin for a small business?

Healthy margins vary by industry. As a general guide, a good net profit margin for a small business typically ranges from 5–10%, though some consider 10% to 20% to be strong.

What are profit drivers?

Profit drivers are the factors that have the biggest influence on your bottom line. They include pricing, sales volume, cost of goods sold, overhead expenses, and customer retention rates.

How do I create a profit improvement plan?

Start by reviewing your current profit margins and identifying where you lose the most money. Set specific targets for revenue growth or cost reduction, assign actions to each target, and review progress monthly.

How can accounting software help me increase profits?

Accounting software gives you real-time visibility into revenue, costs, and margins. This helps you spot problems early, track the impact of changes, and make faster decisions based on accurate data.