How to increase profits and improve profit margins

Published Thursday 12 March 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 progress
• How to make a business more profitable
• FAQs on increasing profits

Key takeaways

• Focus on customer retention as your most cost-effective profit strategy, since selling to existing customers costs far less than acquiring new ones and even small improvements in retention create significant profit gains over time.
• Review your pricing regularly to ensure it covers all true costs including materials, labour, overheads, and your time, then add contingencies for unexpected expenses to protect your profit margins.
• Identify and prioritise your most profitable customers by analysing purchase history, factoring in costs like discounts and support time, then focus your marketing efforts on these high-value relationships.
• Track key metrics like gross profit margin, net profit margin, and revenue trends monthly or quarterly using accounting software to spot problems early and measure what strategies actually work.

Profitability factors

Profit is the money left from sales revenue after paying your costs. The wider the gap between what you earn and what you spend, the more profitable your business becomes.

Four factors drive profitability:

• Revenue: Increasing sales grows the pool of money from which you can draw a profit
• Costs: Reducing expenses keeps more money in the business
• Gross profit: The money left after paying direct costs tied to providing your goods and services (known as cost of sales)
• Net profit: The money left after paying all business costs, including taxes

You can increase profits by raising revenue, lowering costs, or both. The sections below show you how.

Increasing revenue to increase profits

Increasing revenue grows the pool of money from which you can draw a profit. When your margins stay steady, higher sales translate directly into higher profits. Economies of scale can even widen margins as you grow.

The trade-off is that growing revenue typically costs money. You may need to buy more supplies, increase marketing, invest in tools, or hire employees. Make sure any investment pays for itself over time.

Five main ways to drive revenue:

• Encourage repeat purchases: Get existing customers to buy more often
• Find new customers: Expand your customer base through marketing and referrals
• Expand your range: Add products or services that complement what you already offer
• Upsell: Encourage customers to buy higher-value options
• Lift prices: Charge more for the value you deliver

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

Keep existing customers coming back

Customer retention is one of the most cost-effective ways to increase profits. Selling to someone who already knows your business costs far less than acquiring a new customer.

Ways to encourage repeat purchases:

• Deliver consistently: Customers return when they trust your quality and service
• Stay in touch: Regular communication keeps your business front of mind
• Reward loyalty: Discounts, early access, or exclusive offers give customers reasons to come back
• Ask for feedback: Understanding what customers value helps you deliver more of it

Even small improvements in retention can have a big impact on profits over time.

Identify your most profitable customers

Not all customers contribute equally to your profits. Some buy frequently, pay promptly, and require little support. Others demand discounts, pay late, or take up disproportionate time.

To find your most profitable customers:

• Review purchase history: Look for customers with high order values or frequent purchases
• Factor in costs: Account for discounts, returns, support time, and payment delays
• Segment your base: Group customers by profitability to focus your efforts
• Use reporting tools: Accounting software can help you analyse customer profitability over time

Focus your marketing and service efforts on the customers who deliver the best returns.

Decreasing costs to increase profits

Reducing costs keeps more of your revenue in the business, which can boost profits without needing to grow sales. This approach carries less upfront financial risk than revenue-focused strategies.

The challenge is finding the right balance. Businesses need to spend money to make money, so cutting too deep can hurt revenue or quality. The goal is to trim expenses without slowing down operations or compromising what you deliver.

How to increase gross profit

Gross profit is the money left after paying the direct costs of providing your goods or services. It's calculated by subtracting your cost of sales from your revenue.

The percentage of revenue you keep as gross profit is your gross profit margin. A healthy margin gives you enough cash to cover overheads and still bank a net profit. You can improve it by increasing revenue, reducing direct costs, or both.

Common ways to improve gross profit margins

Nail your estimating, quoting, and pricing

Accurate pricing is the foundation of profit. You won't generate a margin if your prices don't cover your true costs.

To improve your estimating:

• Count all costs: Include materials, labour, overheads, and your time
• Review past projects: Compare budgeted costs against actual costs to spot patterns
• Add contingencies: Many businesses add a percentage to estimates for unexpected costs or mistakes
• Refine over time: Use what you learn from each job to improve future quotes

Keep an eye on scope creep

Scope creep happens when clients request extra work mid-project, or when you end up doing tasks they said they'd handle. These extras eat into your margin if you don't account for them.

Your contingency may absorb some additional costs. For larger changes, issue a change order while the project is in flight. A change order is a quote for extra work that the client approves before you proceed.

Present any additional costs while the project is still in progress. Addressing costs upfront leads to better outcomes.

Review your inventory costs

Shop around 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, then stay across their costs. If they bump up their prices before you notice it, you'll be left to eat the difference.

Read purchase invoices and stay vigilant.

Balance payroll and productivity

Payroll is one of the biggest expenses for most small businesses. Getting more value from every hour worked improves your margins without cutting headcount.

Ways to boost payroll productivity:

• Remove low-value tasks: Free your people to focus on work that drives revenue
• Use better systems: Tools and software can automate repetitive work
• Smooth your workflows: Avoid relying on casual staff, contractors, or overtime, which all carry premium costs
• Watch for burnout: Overworked staff make mistakes and eventually leave

Improve operational efficiency

Operational efficiency means getting more output from the same resources. Many businesses develop workflows over time without much planning, which allows inefficiencies to creep in.

Walk through your processes and look for:

• Waiting time: Staff idle while waiting for information, approvals, or materials
• Out-of-sequence work: Jobs done in the wrong order, causing rework
• Double handling: Tasks completed twice by different people
• Wasted resources: Materials, time, or effort that don't add value

Small improvements in each area compound into meaningful margin gains.

Properly account for shipping

Freight can be a trap 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 make adjustments.

See how to increase net profit for more logistics tips.

Merchant service fees

Transaction fees for accepting online payments can climb to between 2% and 4% of the value of a sale. That can take a significant slice out of your margin, so make sure you account for it in your pricing formula, as with delivery costs.

How to increase net profit

Net profit is the money left after paying all business costs, including overheads and taxes. It's what you actually get to keep or reinvest.

Improving gross profit helps your net profit too. But to widen your net profit margin, you also need to manage indirect costs. These are expenses not directly tied to producing goods or delivering services, such as rent, utilities, marketing, administration, and professional fees.

Common ways to improve net profit margins

Measure and manage your sales and marketing

Marketing spend is a major expense for many small businesses. Make sure your strategies deliver actual sales, not just activity.

To improve marketing ROI:

• Calculate customer acquisition cost: Work out what it costs to win each new customer
• Compare channels: Identify which strategies deliver the best returns
• Scrutinise big-budget tactics: High-cost campaigns need to justify their spend
• Activate free channels: Word of mouth and referrals cost nothing but can drive significant revenue

Reassess travel, entertainment and discretionary spending

Attending the same tradeshow each year out of habit can be a money trap. Step back from your habits and look at your discretionary spending through the lens of ROI (return on investment).

You may find legacy spending you can cut.

Restructure your lending

Interest payments reduce your 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. They can often consolidate loans into lower-interest deals, freeing up cash flow. Find a financial advisor in Xero's advisor directory.

Be resourceful with rent and utilities

Premises costs can surprise businesses expanding from home-based beginnings. A dedicated space costs far more than a garage workshop or kitchen-table consultancy.

Ways to reduce premises costs:

• Use space efficiently: Make sure every square metre earns its keep
• Save energy: Small changes in lighting, heating, and equipment add up
• Consider alternatives: Shared offices, pop-up shops, food trucks, or remote working can cut overheads significantly

If premises costs rise, you may need to adjust pricing or find savings elsewhere.

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 erode margins, especially if you hold large inventory or work with distant suppliers.

Ways to reduce supply chain costs:

• Source locally: Shorter distances mean lower freight costs and faster delivery
• Tighten inventory management: Hold less stock to reduce warehousing expenses
• Understand your true costs: Know exactly what logistics costs you per order
• Factor costs into pricing: Make sure your prices reflect delivery and storage expenses

Pick your professional services wisely

Professional fees for legal, accounting, and recruitment services add up quickly. These are often essential, but that doesn't mean you can't find better value.

When choosing providers:

• Look for specialists: Advisors focused on your size or industry often deliver more relevant, cost-effective service
• Check their tools: Providers using modern software can work more efficiently
• Ask about pricing models: Flat fees can be easier to budget than hourly billing
• Review regularly: Your needs change, so revisit your providers periodically

Get into tax planning

Tax planning means structuring your finances to minimise your tax bill legally. How you time payments, schedule spending, and organise your accounts can all affect what you owe.

An accountant can help you set things up for maximum tax efficiency. According to a UK government report, nearly all businesses use an agent because they lack the necessary tax expertise in-house. The key is to plan at the start of the financial year. Find an accountant in Xero's advisor directory.

Track your progress

Improving profitability only works if you measure the results. Regular tracking helps you see what's working, spot problems early, and stay focused on your goals. For instance, the ICAEW highlights the current and quick ratios as two important performance indicators for assessing a company's ability to meet short-term obligations.

Key metrics to monitor:

• Gross profit margin: The percentage of revenue left after direct costs
• Net profit margin: The percentage of revenue left after all costs
• Revenue trends: Whether sales are growing, flat, or declining
• Cost ratios: How much you spend on key areas relative to revenue

Review these numbers monthly or quarterly. Accounting software can generate reports and dashboards automatically, so you always know where you stand.

How to make a business more profitable

Knowing how to increase profit gives you more control over your business. With better margins, you'll have less financial stress and more confidence to invest in growth.

Accounting software helps you track your margins in real time, so you can spot problems early and measure what's working. Getting advice from accountants, mentors, or industry peers can also help you find improvements that last.

Set clear profitability goals and monitor your progress. Xero's accounting software gives you real-time dashboards, automated reporting, and clear insights into your margins. Get one month free and start making more informed decisions about your business.

FAQs on increasing profits

Increasing profitability raises questions. Here are answers to some of the most common ones.

What's the fastest way to increase my profits?

Review your pricing and focus on customer retention. Both can improve margins quickly without major upfront investment.

Should I focus on increasing revenue or reducing costs first?

It depends on your margins. If margins are healthy, focus on revenue. If margins are thin, address costs first. Most businesses benefit from working on both.

How long does it take to see profit improvements?

Pricing adjustments and cost cuts can show results within weeks. Operational improvements may take three to six months. Revenue growth strategies typically take longer.

What are common mistakes that hurt profitability?

Common mistakes include underpricing, not accounting for all costs, cutting expenses that damage quality, ignoring margins, and failing to retain existing customers.

How can accounting software help me increase profits?

Accounting software gives you real-time visibility into margins and automates cost tracking. It identifies unprofitable products or customers, speeds up invoicing and payment collection, and reduces time spent on bookkeeping.