How to increase profits and improve profit margins

Published Friday 15 May 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
• Track and grow your profits with Xero
• FAQs on increasing profits

Key takeaways

• 1. Retain your existing customers. Selling to someone who already knows your business costs far less than winning a new customer. Even small improvements in retention can deliver significant profit gains over time.
• 2. Review pricing and overheads regularly. Make sure your prices cover all true costs, including materials, labour, overheads and your time. At the same time, audit your fixed costs to find savings that drop straight to the bottom line.
• 3. Identify your most profitable customers. Analyse purchase history, factor in discounts and support time, then focus your marketing on the relationships that deliver the best returns.
• 4. Track margins monthly. Monitor gross profit margin, net profit margin and revenue trends using accounting software so you can spot problems early and measure what actually works.

Profitability factors

Profit is the money left from sales revenue after you pay your costs. In simple terms: profit equals revenue minus expenses. 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 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

Healthy working capital also plays a role. If cash is tied up in unpaid invoices or excess stock, you may struggle to cover day-to-day costs even when profits look good on paper.

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

Increasing revenue to increase profits

Growing revenue gives you a larger pool of money from which to draw a profit. When your margins stay steady, higher sales translate directly into higher profits, and economies of scale can widen margins further 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 increase sales:

• 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 and cross-sell: encourage customers to buy higher-value or complementary options
• Lift prices: charge more for the value you deliver

Get more on these strategies in the 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, so repeat buyers deliver better margins from the start.

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.

Upsell and cross-sell

Upselling and cross-selling increase the value of each transaction without the cost of acquiring a new customer. Upselling means encouraging buyers to choose a higher-value option; cross-selling means suggesting complementary products or services alongside their purchase.

Both strategies work because the customer has already decided to buy. You're simply helping them get more value from the relationship.

Ways to upsell and cross-sell effectively:

• Bundle related items: offer a package that combines products or services at a slight discount compared to buying separately
• Suggest upgrades at the point of sale: a timely recommendation can feel helpful rather than pushy
• Use purchase data: look at what customers commonly buy together and build offers around those patterns
• Train your team: make sure staff know the full range so they can recommend relevant add-ons

The key is relevance. Recommendations that genuinely solve a problem convert better than generic add-ons.

Decreasing costs to increase profits

Reducing costs keeps more of your revenue in the business, which boosts profits without needing to grow sales. This approach carries less upfront financial risk than revenue-focused strategies. For more ideas, see this guide on cost reduction 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.

Review your overheads

Overhead costs (rent, utilities, insurance, subscriptions) tend to creep upward without regular review. Because they're fixed or semi-fixed, every pound you save drops straight to your bottom line.

Steps to review your overheads:

• List every recurring cost: pull a report from your accounting software and check for subscriptions or services you no longer use
• Benchmark against peers: industry bodies and your accountant can help you understand whether your costs are in line with similar businesses
• Renegotiate contracts: suppliers often have room to move on price, especially if you've been a loyal customer
• Consider alternatives: shared office space, remote working or energy-efficient equipment can reduce premises and utility bills

Schedule an overhead review at least once a year so savings don't go unnoticed.

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. Fixing these can reduce costs across the board.

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 cost savings.

How to increase gross profit

Gross profit is the money left after paying the direct costs of providing your goods or services. You calculate it by subtracting your cost of sales from your revenue.

The percentage of revenue you keep as gross profit is your gross profit margin. You can work it out with this formula:

Gross profit margin = (Revenue − Cost of sales) / Revenue × 100

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

The tactics below target the direct costs that sit between your revenue and your gross profit.

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. Explore markup strategies to find the right approach for your business.

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

Supplier pricing shifts over time, so shopping around regularly helps you confirm you're getting value. Ask about bulk deals and don't hesitate to negotiate with the suppliers you already have.

Monitor third-party service costs

If you rely on another business or contractor to do part of the work, stay across their costs. If they raise prices before you notice, you'll absorb the difference.

Read purchase invoices carefully and review them often.

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

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 alongside 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. You can check yours with a net profit margin calculator.

Common ways to improve net profit margins

The strategies below focus on the indirect costs that separate your gross profit from your net profit.

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 return on investment:

• 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 and look at your discretionary spending through the lens of 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 covers 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. Many businesses use a tax agent or accountant because they lack the specialist tax knowledge to handle complex returns themselves. According to a UK government report on mid-sized businesses, nearly all mid-sized businesses rely on external tax expertise. 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. Good cash flow management underpins all of these measures.

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.

Track and grow your profits with Xero

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.

Xero's accounting software helps you track your margins in real time, so you can spot problems early and measure what's working. Real-time dashboards, automated reporting and clear insights into your margins put the numbers at your fingertips. Get one month free and start making more informed decisions about your business.

FAQs on increasing profits

Here are answers to some frequently asked questions about increasing profits for your business.

What's the fastest way to increase profits?

Review your pricing and focus on customer retention. Both can improve margins quickly without major upfront investment. Pricing adjustments take effect immediately, while retention strategies build compounding returns as repeat customers buy more often and cost less to serve.

Should I focus on increasing revenue or reducing costs first?

It depends on your current margins. If margins are healthy, focus on growing revenue because each additional sale contributes strongly to profit. If margins are thin, address costs first so you stop losing money on each transaction. Most businesses benefit from working on both at the same time.

How do I calculate my profit margin?

For gross profit margin, subtract your cost of sales from revenue, divide by revenue and multiply by 100. For example, if revenue is £200,000 and cost of sales is £120,000, your gross profit margin is 40%. Net profit margin uses the same formula but subtracts all costs, not just direct ones.

What are common mistakes that hurt profitability?

Common mistakes include underpricing your products or services, failing to account for all costs (especially overheads and your own time), cutting expenses so deeply that quality suffers, ignoring margins in favour of chasing revenue, and neglecting existing customers while spending heavily to acquire new ones.

How can accounting software help me increase profits?

Accounting software gives you real-time visibility into your margins, automates cost tracking and speeds up invoicing so you get paid faster. It can also identify unprofitable products or customers, generate profit-and-loss reports on demand, and reduce the time you spend on bookkeeping, freeing you to focus on growing your business.

What is the difference between gross profit and net profit?

Gross profit is revenue minus the direct costs of producing your goods or services, such as materials and labour. Net profit goes further: it subtracts all remaining costs including rent, utilities, marketing, administration and taxes. Net profit is the amount you actually keep or reinvest after every expense has been paid.