How to increase profits and improve profit margins

Published Tuesday 9 June 2026

Table of contents

• What is the difference between revenue and profit?
• Why increasing profits matters for your business
• Profitability factors
• Increasing revenue to increase profits
• Decreasing costs to increase profits
• How to increase gross profit
• How to increase net profit
• How to create a profit improvement plan
• Use Xero to track and improve your profits
• FAQs on increasing profits

Key takeaways

• Focus on improving your gross profit margin by accurately estimating all costs in your quotes, monitoring scope creep with change orders, and regularly negotiating better rates with suppliers to reduce direct production expenses.
• Implement systematic cost reduction by reviewing discretionary spending like travel and entertainment, consolidating debt at lower interest rates, and eliminating workflow inefficiencies such as double handling and waiting time.
• Increase revenue through 5 proven strategies, from encouraging repeat purchases and acquiring new customers to expanding your offerings and raising prices strategically.
• Create a structured profit improvement plan by assessing your margins, setting measurable quarterly goals, and tracking progress monthly to make adjustments.

What is the difference between revenue and profit?

Before you can increase your profit, it helps to understand the key numbers. Revenue is the total amount of money your business brings in from sales. Profit is what's left after you subtract all your business costs from that revenue.

What is profit margin?

Your profit margin shows how much profit you make for every rand of revenue, expressed as a percentage. A higher profit margin means your business is more efficient at converting revenue into actual profit.

How to calculate profit margins

You can calculate your gross profit margin by subtracting your cost of goods sold from your revenue, dividing by revenue, and multiplying by 100. This formula gives you a clear picture of how profitable your products or services are before indirect costs.

Gross profit margin = (Revenue minus Cost of goods sold) / Revenue x 100

For example, if your business earns R500,000 in revenue and your cost of goods sold is R300,000, your gross profit is R200,000. Dividing R200,000 by R500,000 and multiplying by 100 gives you a gross profit margin of 40%.

Your net profit margin shows the profitability of your entire business after all expenses, including taxes and overheads. You can calculate it using a similar formula.

Net profit margin = (Revenue minus All expenses) / Revenue x 100

Use both margins together to get a full picture. If your gross margin is healthy but your net margin is thin, your indirect costs are eating into your profits. Try Xero's net profit margin calculator for a quick check.

Why increasing profits matters for your business

Increasing your profits gives your business the financial strength to grow, weather downturns, and invest in new opportunities. Without healthy margins, even a high-revenue business can struggle to survive unexpected expenses or market shifts.

Stronger profits let you reinvest in the areas that drive growth. You can hire better talent, upgrade your tools, expand into new markets, or develop new products and services. Each of these moves becomes possible when you have cash left over after covering your costs.

Profitable businesses are also more resilient. A solid profit margin acts as a buffer during slow periods, helping you cover your fixed costs without taking on debt or cutting essential spending.

If you're looking to attract investors or secure funding, your profit margins are among the first numbers they'll examine. Consistent profitability signals that your business model works and that their investment is likely to generate returns.

Profitability factors

Profit is the money left over after you subtract your costs from your sales revenue. Understanding the factors that drive profitability helps you measure profitability and identify where to focus your efforts.

The main factors that determine your profitability are:

• Revenue: the total money coming into your business from sales
• Costs: the expenses you pay to run your business, including both direct production costs and indirect overheads
• Margin: the gap between revenue and costs, expressed as a percentage
• Gross profit: the money left after subtracting direct production costs (known as cost of goods sold) from revenue
• Net profit: the money left after subtracting all business costs, including taxes and overheads

The wider that gap between revenue and costs, the more profit you keep. According to NYU Stern's January 2026 sector analysis, Business and Consumer Services companies average a gross margin of 33.38% but only a 7.03% net margin, illustrating how much indirect costs can erode the gap between revenue and profit.

Growing your sales is a proven path to higher profits.

Increasing revenue to increase profits

Increasing revenue is a proven way to grow profits, as research shows an extra 5 percentage points of revenue per year correlates with additional shareholder returns. When you sell more while keeping your margins steady, you keep more money at the end.

That optimism is widespread: a 2025 Comerica Small Business Pulse Index found that 79% of small businesses anticipate revenue growth in 2026, projecting an average increase of 7.9%.

As sales grow, your margins may even improve. Economies of scale often kick in, meaning your cost per unit drops as volume increases.

Revenue growth often requires spending money before you see returns. Common upfront investments include:

• buying more supplies or inventory
• increasing your marketing spend
• hiring more staff or contractors
• purchasing new tools or equipment

Make sure you can fund these costs and that the investment pays off over time.

Several proven strategies can help you increase your sales. You can drive revenue in 5 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 offerings: add new products or services to your range
• Upsell and cross-sell: offer upgrades or complementary items at checkout
• Raise your prices: increase what you charge for your products or services

Get more on these 5 strategies in the guide How to increase revenue.

How to increase prices strategically

Raising your prices can be the fastest way to increase profit, but it needs careful thought. Before you make a change, research what your competitors charge and consider what makes your product or service unique. A small, well-explained price increase is often better received than a large, sudden one. You could also offer tiered pricing to give customers more choice.

Another approach to improving profitability focuses on the expense side of your business.

Decreasing costs to increase profits

Reducing costs means slowing the rate at which money flows out of your business. When you spend less while maintaining the same revenue, your profit margin grows. For more practical tactics, see Xero's guide to cost saving ideas.

Cost-cutting is popular because it carries less upfront financial risk than revenue-focused strategies. That risk-aversion shows in practice: a Vena Solutions analysis found that 70% of small business owners have made cost-related sacrifices to stay profitable, including raising prices (47%), working longer hours (45%), and cutting their own salaries (32%).

However, there's a trade-off. Maintain the spending levels that keep your business healthy. You generally need to spend money to make money, so the goal is to trim expenses without compromising quality or slowing down your operations.

How to increase gross profit

Gross profit is the money left after you subtract the direct costs of producing your goods or services from your revenue. To increase gross profit, you can either raise your revenue or reduce your production costs.

The key metric to watch is your gross profit margin, which measures the gap between what you earn and what it costs to deliver. Tracking your profitability ratios helps you benchmark performance over time. The wider that margin, the more profit you keep from each sale.

Common ways to improve gross profit margins

Nail your estimating, quoting, and pricing

Accurate pricing is the foundation of profitability. You can't generate a profit if your quotes don't cover your true costs.

Improving your estimating process takes practice and attention to detail. To improve your estimating:

• Count all costs: include materials, labour, overheads, and time
• Review completed projects: compare budgeted costs against actual costs to spot mistakes
• Add contingencies: build in a percentage buffer for unexpected expenses or estimating errors
• Refine over time: use past project data to improve future quotes

Keep an eye on scope creep

Scope creep happens when clients request extra work after a project starts, or when you end up doing tasks they were supposed to handle. These additions eat into your margins if you don't account for them.

Your contingency budget may absorb some extras. But for larger additions, issue a change order, which is an on-the-run quote for the extra work.

The key is timing. Issue change orders while the project is in progress to keep clients informed.

Review your inventory costs

Your supplier relationships deserve regular attention to ensure you're getting the best deals. Regularly check that you're getting value from your suppliers:

• Compare prices: shop around periodically to see if competitors offer better rates
• Ask about bulk discounts: larger orders often qualify for lower per-unit costs
• Negotiate with existing suppliers: loyalty often gives you room to negotiate better terms, and studies show that effective negotiation can help companies save an average of 9.2% on their total contract value

Monitor third-party service costs

If you rely on contractors or other businesses to deliver part of your work, keep a close eye on what they charge. Price increases that slip past you will eat into your margins.

Regular monitoring helps you catch cost increases early. To stay on top of third-party costs:

• Review invoices carefully: check for rate changes or unexpected fees
• Set calendar reminders: schedule regular reviews of contractor pricing
• Renegotiate when needed: ask questions about any price increases

Balance payroll and productivity

Payroll is typically the biggest expense for most small businesses. Data from the National Restaurant Association shows that full-service restaurant labour costs have risen to a median of 36.5% of sales, well above historical averages. The goal is to get maximum value from every hour you pay for.

Several strategies can help you get more value from your payroll spending. To optimise payroll costs:

• Remove low-value tasks: free your team to focus on work that drives revenue
• Use better tools: software and automation can handle repetitive tasks more cheaply, and some accounting automations can yield an ROI of up to 200% in the first year
• Plan workflows carefully: avoid relying on overtime, casual staff, or last-minute contractors, which all cost more
• Support staff wellbeing: well-rested employees perform better and stay longer

Design the most efficient workflow you can

Many business processes develop over time without much planning, which allows inefficiencies to creep in. Streamlining your workflow can cut costs without reducing output.

A systematic review of your processes can reveal hidden inefficiencies. Walk through your operations and look for:

• Waiting time: when staff sit idle while waiting for approvals, materials, or information
• Out-of-sequence tasks: when work is done in the wrong order, causing rework
• Double handling: when the same task is done twice by different people
• Wasted resources: when materials, time, or effort don't add value

Small workflow improvements often add up to significant savings.

Properly account for shipping

Freight costs can catch out businesses that have moved into online sales. If courier fees weren't part of your original pricing, you may be losing money on every delivery.

You can address shipping costs with a few straightforward changes. To fix this:

• Calculate true delivery costs: include packaging, handling time, and courier fees
• Build shipping into your prices: either add it to product prices or charge separately
• Review regularly: carrier rates change, so update your calculations periodically

For more logistics tips, see how to increase net profit.

Merchant service fees

Merchant service fees (also called transaction fees) are what you pay to accept card and online payments. These typically range from 1.5–3.5% of each sale, which can significantly reduce your margins.

Several approaches can help you reduce the impact of merchant fees. To manage these costs:

• Factor fees into your pricing: treat them as a cost of doing business
• Compare payment providers: rates vary, so shop around
• Consider minimum purchase amounts: small transactions lose more margin to fees

How to increase net profit

Net profit is the money left after you subtract all business costs from your revenue, including taxes, rent, and administrative expenses. It's your true bottom line.

Improving gross profit helps net profit too, but to widen your net profit margin, focus on indirect costs. These are expenses not directly tied to producing your goods or services, such as:

• rent and utilities
• marketing and sales
• administrative salaries
• professional services
• loan interest

Common ways to improve net profit margins

Measure and manage your sales and marketing

Marketing can be a major expense, so make sure your spending delivers results.

Understanding your marketing performance starts with the right data. Track these key metrics:

• Customer acquisition cost (CAC): how much you spend to win each new customer
• Return on investment (ROI): which tactics generate the most sales per rand spent
• Channel performance: compare paid advertising against free channels like word of mouth

Focus your budget on strategies with the highest returns, and be especially careful with big-ticket campaigns.

Reassess travel, entertainment, and discretionary spending

Habitual spending can drain profits without delivering value. Review your discretionary expenses with fresh eyes.

A critical review of your spending habits can reveal savings opportunities. Ask yourself:

• Does this expense generate measurable returns? Keep spending that delivers value
• Are you attending events out of habit? Tradeshows and conferences should earn their place in your budget
• Could you achieve the same result for less? Look for lower-cost alternatives

Restructure your lending

Interest payments reduce your net profit, especially when rates rise or when you rely on short-term finance to cover cash gaps. Effective managing cash flow can help you avoid expensive bridging finance.

Professional financial advice can help you restructure your debt more effectively. An accountant or bookkeeper can help you:

• Consolidate multiple loans: combine debts into a single, lower-interest arrangement
• Refinance at better rates: shop around for improved terms
• Reduce reliance on short-term credit: improve cash flow to avoid expensive bridging finance

Find a financial adviser in the Xero adviser directory.

Be resourceful with rent and utilities

Moving from a home-based setup to dedicated premises can significantly increase your overheads. If rent and utilities are squeezing your margins, look for creative solutions.

Several options can help you reduce your property-related expenses. Consider these lower-cost alternatives:

• Shared office spaces: pay only for the space and time you need
• Remote working: reduce office footprint by supporting work-from-home arrangements, which can also boost output; surveys consistently show that a majority of remote workers report higher productivity, with 77% saying they get more done when working remotely
• Pop-up shops: test retail locations without long-term lease commitments
• Energy efficiency: reduce utility bills with smart lighting, heating, and equipment

Balance payroll and productivity

Payroll can be either a direct cost (affecting gross profit) or an indirect cost (affecting net profit), depending on the role. For strategies to optimise payroll spending, see improving gross profit margins.

Strive for supply chain efficiencies

Freight, warehousing, and inventory holding costs can quietly erode your margins. The first step is understanding exactly what your logistics costs you.

Several strategies can help you reduce logistics costs. To improve supply chain efficiency:

• Source locally where practical: shorter distances mean lower freight costs
• Tighten inventory management: holding less stock reduces warehousing expenses and frees up cash
• Factor logistics into pricing: make sure your prices reflect the true cost of delivery
• Review supplier arrangements: consolidate orders or renegotiate terms

Pick your professional services wisely

Legal, accounting, and recruitment fees add up quickly. While these services are often essential, you can manage costs by choosing the right providers.

Choosing the right service providers can save you money in the long run. Look for professionals who:

• Specialise in your business size or industry: they understand your needs and work more efficiently
• Use compatible software: this reduces friction and saves time
• Offer flat-fee pricing: predictable costs make budgeting easier
• Provide clear value: shop around and compare before committing

Get into tax planning

Tax planning involves structuring your finances to minimise your tax bill legally. The right approach can make a meaningful difference to your net profit.

Working with a tax professional can help you identify savings opportunities. An accountant can help you:

• Time income and expenses: shift revenue or costs between tax years where beneficial
• Claim all eligible deductions: ensure you're not missing legitimate write-offs
• Structure your business efficiently: choose the right entity type and arrangements
• Plan ahead: tax planning works best at the start of the financial year, not the end

Find an accountant in the Xero adviser directory.

Track the right profitability KPIs

Tracking the right metrics helps you spot profit leaks early and measure whether your strategies are working. Without clear benchmarks, it's difficult to know if your efforts are paying off.

Focus on these 5 key performance indicators:

• Gross profit margin: measures how efficiently you convert revenue into profit after direct costs. A declining gross margin signals rising production costs or pricing problems.
• Net profit margin: shows your true bottom-line profitability after all expenses. Compare this figure quarter over quarter to track your overall financial health.
• Customer acquisition cost (CAC): tells you how much you spend to win each new customer. If your CAC is climbing faster than your revenue per customer, your growth strategy may be eroding profits.
• Customer lifetime value (LTV): estimates the total revenue a customer generates over their relationship with your business. A healthy business typically has an LTV that's at least 3 times its CAC.
• Days sales outstanding (DSO): measures how long it takes to collect payment after a sale. A high DSO ties up cash and increases your risk of bad debts.

Review these KPIs monthly using your accounting software. Trends matter more than individual snapshots, so track changes over time to spot problems before they grow.

Once you understand the strategies available, you can put them into action.

How to create a profit improvement plan

Turning these ideas into action requires a plan. A clear plan helps you prioritise your efforts and track what's working so you can focus your time and money effectively.

1. Assess your current profit margins. Use your accounting software to see where you stand today. For context, a healthy small business profit margin typically falls between 7% and 10%, though this varies by industry. NYU Stern's January 2026 sector data shows net margins ranging from 1.25% in Healthcare Support Services to 9.47% in Homebuilding.
2. Identify your biggest opportunities. Look for areas where small changes could have a big impact.
3. Set specific, measurable goals. Aim to increase your net profit margin by a set percentage in the next quarter.
4. Choose 2 or 3 strategies to start. Focus on a few key actions rather than trying everything at once.
5. Track your progress monthly. Review your numbers to see if your plan is working and make adjustments as you go.

The right tools make tracking your progress easier.

Use Xero to track and improve your profits

Improving profitability starts with visibility. When you can see your margins clearly, you can make smarter decisions about where to cut costs and where to invest.

Accounting software gives you that visibility by pulling together your financial data in real time. You can track gross and net profit margins, monitor expenses, and spot trends before they become problems.

Xero Accounting Software provides the tools you need to manage your finances effectively. Xero helps you:

• See your margins at a glance: real-time dashboards show how your business is performing
• Automate routine tasks: spend less time on bookkeeping and more time on strategy
• Connect with advisers: find accountants and bookkeepers who can help you improve profitability

Ready to see your profit margins in real time? Get one month free and discover how Xero helps you make smarter financial decisions.

FAQs on increasing profits

Here are answers to common questions about improving your business profitability.

Which profit strategy should I start with: cutting costs or increasing revenue?

Start with cost reduction if you need quick results with minimal investment. Focus on revenue growth if you have cash to invest and want to scale your business. Many small businesses find that combining both approaches delivers the strongest results.

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

Cost-cutting measures can show results within weeks. Revenue growth strategies typically take 3 to 6 months to deliver measurable returns, depending on your industry and the tactics you choose.

How do I reduce costs without hurting quality or customer experience?

Focus on eliminating waste and inefficiency rather than cutting corners. Review processes for unnecessary steps, negotiate better supplier terms, and automate repetitive tasks. The goal is to spend less on activities that don't add value for your customers.

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

Healthy margins vary by industry. For example, salon margins average 10–20% net profit and landscaping crews average around 8%, while cleaning operations can exceed 31%. Generally, net profit margins of 10% to 20% are considered strong for small businesses.

How do you calculate gross profit margin?

Gross profit margin = (Revenue minus Cost of goods sold) / Revenue x 100. For example, if you earn R500,000 in revenue with R300,000 in production costs, your gross profit margin is 40%. For a deeper look at all your profitability metrics, see the guide on how to measure profitability.

What percentage of profit should a small business set aside for taxes?

A common rule of thumb is to set aside 25–30% of your net profit for taxes. However, the exact amount depends on your business structure, jurisdiction, and eligible deductions. Consult a tax professional to get a figure tailored to your situation; see the tax planning section above for more guidance.