How to increase profits

Profits are the lifeblood of a sustainable business. They finance its operations, fuel growth, repay debts and are often relied upon to pay the owner. Given all that, it’s not surprising that most owners want to know how to increase profits.

There are a few levers you can move to increase profits. Let’s run through them.

Profitability factors

Profit is what’s left of sales revenue after paying your costs. So it naturally follows that the main profitability factors are your revenue, your costs, and the gap between the two.

• Revenue: increasing revenue (or sales) will increase the pool of money from which you can derive a profit.
• Costs: decreasing costs helps keep money in the business, which can also give you a shot at bigger profits.
• Gross profit: the money left after paying a subset of costs tied specifically to providing your goods and services. These are known as the cost of goods sold.
• Net profit: the money left after paying all business costs, including taxes (although you may sometimes see businesses quote their net profit before taxes).

Increasing revenue to increase profits

Lots of businesses that want to earn bigger profits focus on raising revenue. So long as their margins stay roughly the same, it works. And in fact margins may even widen as a business increases sales because economies of scale will often kick in.

On the downside, growing revenue typically costs money. You have to do things like buy more supplies, increase your marketing, buy more tools and hire more employees. You’ll need to find cash for all those things and you’ll need to ensure that investment is paid back over time.

You can drive revenue in five main ways:

• encourage more purchases from your customers
• find new customers
• expand your range of products or services
• upsell
• lift prices

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

Decreasing costs to increase profits

Slowing the rate at which money flows out of the business is another way to increase profits. This is a popular way to grow profits because, when it works, this strategy cuts costs. That means less upfront financial risk than revenue-growing strategies.

Nevertheless, it’s a tricky balance. A business generally has to spend money to make money so if you go too hard at cost reductions, you can hurt revenue. The goal is to trim expenses without compromising the speed or the quality of your operations.

How to increase gross profit

An increase in revenue or a decrease in costs can both drive more gross profit. Whichever way you go, the key is to optimise the gap between the two – which are your gross profit margins.

Common ways to improve gross profit margins

Nail your estimating, quoting, and pricing

You’ll never magically generate a profit without properly covering your costs in the first place. Be careful to count the true costs of the work you do. You may not nail it every time so it’s a good idea to review projects afterward and compare budgeted costs against actual costs. That way you’ll spot your mistakes and can improve your estimating process over time. Don’t forget to add contingencies – lots of businesses simply add a certain percentage to their estimate – to account for unexpected costs or estimating mistakes.

Keep an eye on scope creep

Clients often ask for extra work once a project is underway, or you end up doing something they said they’d do just to keep a project moving. You may be able to absorb some of these extra costs if you added a contingency to your estimate. But sometimes you will need to claw back those additional hours worked. In those cases, you should get in the habit of issuing change orders. This is like an on-the-run quote for extra work requested. You’ll need to issue a change order while the project is in flight. Don’t just leave it till the end and give them a bigger bill. That doesn’t typically end well.

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 3rd-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. It’s worth reading purchase invoices and staying vigilant.

Balance payroll and productivity

Paying employees and contractors is a major expense for most small businesses so manage it as tightly as you can. Keep your people focused on the jobs they’re good at by removing trivial or menial tasks that waste their time. Better systems, tools, or software can play a big role here. And where you can, try to manage workflows so that you’re not constantly calling up casual staff, contractors, or asking people to work overtime – as these all come with extra costs (and burnout risks, too).

Design the most efficient workflow you can

Take a look at how the work gets done in your business. Many of the practices and procedures in your workshop, office or store may simply have developed over time without a whole ton of thought. And when this happens, inefficiencies often emerge. People end up waiting on things, jobs get done out of sequence, or sometimes they get done twice. Walk through the processes on your floor and keep an eye out for unnecessary steps, double handling, wasted time, and wasted resources. They will be there.

Properly account for shipping

Freight can be a trap for businesses who’ve 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

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

How to increase net profit

Just as with gross profit, revenue, costs, and margin are big drivers of net profit too. And anything you do in the gross profit space will generally help your net profit. But to build on that work, you will focus on a different subset of costs to widen your net profit margin. Specifically, your indirect costs, which often fall into the category ‘sales, general and administration’ – although it doesn’t matter what you call them. They are all the myriad business costs that aren’t directly involved in production costs or delivering services.

Common ways to improve net profit margins

Measure and manage your sales and marketing

Sales and marketing is a major expense for many small businesses so just make sure your strategies are delivering actual sales. Try to calculate roughly what it costs for each new customer and use that as a benchmark to find the highest-returning strategies. Be especially diligent with big-budget marketing tactics. The return on investment is key. Also, make sure free channels – such as word of mouth – are active.

Reassess travel, entertainment and discretionary spending

Going to the same tradeshow each year just because you always have can be a money trap. Step back from your habits and look at your discretionary spending through the lens of ROI (return on investment). There may be some legacy spending that could go.

Restructure your lending

Interest payments eat into profits, especially when rates climb, or if you’ve got into a habit of using short-term finance to bridge cash shortages. Ask an accountant or bookkeeper to look at your lending. They can often restructure your debt by consolidating loans into lower-interest deals. You can look for a financial advisor in Xero’s advisor directory.

Be resourceful with rent and utilities

Rent and utilities can catch out businesses that are expanding from home-based beginnings. Renting a dedicated space is a lot dearer than running a workshop out of your garage, or a consultancy from your kitchen table. You may need to adjust your pricing or find savings elsewhere. Either way, it always pays to make sure you’re utilising space (and saving energy) in the cleverest ways you can. Consider the potential for lower-cost real estate solutions such as shared office spaces, pop-up shops, food trucks, and remote working.

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 under How to increase gross profit.

Strive for supply chain efficiencies

Freight and warehousing can become a factor if you have a distributed supply chain or if you keep a big inventory. Consider your alternatives. Local suppliers may solve some problems and tighter inventory management could help, too. But most importantly, understand what logistics costs you and factor it into your pricing where you can.

Pick your professional services wisely

Fees for things like legal services, accounting, recruitment and so on will add up. These are often mission-critical services that you’d never chop but it’s worth shopping around for the right provider. Find consultants that are focused on businesses of your size or in your industry. They tend to provide tailored, cost-effective services and they often use software that’s designed for businesses like yours, too. Sometimes they’ll even charge a flat fee rate rather than hourly billing, which can help with budgeting.

Get into tax planning

The way you structure payments, schedule spending, and do your accounting can all push your tax bill up or down. An accountant will help you manage your finances in the most tax efficient way possible, so get them involved in your planning. But be aware that it is definitely a planning thing. They need to set things up right at the beginning of the financial year, not the end. Find an accountant in Xero’s advisor directory.

How to make a business more profitable

Knowing how to increase profit in business is an important skill. When you’re more profitable, you have less financial stress and feel more confident about investing in new growth opportunities. Accounting software can pull together the numbers you need quickly, so you can measure margins with ease.

Getting help from those who have been through it before is another way to increase your business profit. Get advice from experts, mentors, or other industry peers and ask how you can make improvements that last. By setting clear goals for profitability and monitoring your progress towards them, you can set yourself up for success with a profit strategy that delivers results and adds to your bottom line.