How Can You Increase Profit? 9 Measures for Small Business

Everyone who launches, owns, or operates a small business will know the importance of increasing profit. Without enough cash coming in to cover your expensive overheads, staff wages, and direct costs, your business will eventually fold.

For larger enterprises with deeper pockets, extended periods spent running at a loss can sometimes be absorbed—often to the detriment of smaller competitors—but for MSMEs, running at a loss is like a ticking time bomb.

With expertise in assisting small businesses across the UK to expand their reach, improve their branding, and acquire new customers for increased revenue, the ‘busy bee’s here at beefound.agency have compiled a veritable “hive” of information—delivering 9 practical ways to improve profit as a small business.

Dive in and discover the solution to your profitability concerns.

• Defining Key Terms
  • Revenue
  • Direct Costs
  • Overheads
  • Profit
• 9 Ways to Improve Profit and Profitability
  • 1) Reassess Your Costs
  • 2) Review Your Products or Services
  • 3) Target Key Customers and Develop Client Relationships
  • 4) Eliminate Wastage
  • 5) Improve Procurement Efficiency
  • 6) Consider Expanding into Other Market Sectors and Niches
  • 7) Streamline Productivity and Efficiency
  • 8) Focus on the Details
  • 9) Outsource Non-Profitable Elements of Your Business Operations
• TLDR

Defining Profit, Revenue, Direct Costs and Overheads

Though it may seem self-explanatory, it’s worth taking a moment before we begin to define profit, revenue, direct costs and overheads in the context of profitability.

• Revenue is the total amount of money received as income, annually, by your business.
• Gross Profit is the total amount of income left after deducting your Cost of Sales from your Revenue.
• Cost of Sales (Direct Costs) are the expenses directly connected to the production of your products and/or services, e.g., the cost of the raw materials, wages of the workers who make the product/service, shipping costs to customers.
• Operating Expenses (Overheads) are the indirect expenses incurred during the operation of your business, e.g., tax, rates, utilities, marketing, wages for the wider team.
• Net Profit is the amount of money you are left with once any additional operating expenses have been deducted from your gross profit. As a formula, net profit looks like this:

Net Profit = Revenue – (Cost of Sales + Operating Expenses)

or

Net Profit = Gross Profit – Operating Expenses

For example, if you sell a pint of beer for £5.50 that costs you £2.50, then your gross profit is £3. If you were to sell 2,000 pints in a month (for a gross profit of £6,000) and had operating expenses of £4,500/month, then your net profit would be £1,500/month.

As such, profitability is the ability of a business to consistently turn a profit. It is a key marker of success.

9 Ways to Improve Profit and the Profitability of Your Small Business

When it comes to assessing your business’s profitability, most small business owners will begin by looking at their expenses—in other words, “How can I reduce the direct costs of my product, or reduce my overheads, to increase my profit?”

Yet this forms only one small part of a web of approaches you could, and should, be taking. Reducing costs is a great place to start, but if your revenue doesn’t increase, shaving expenses can only improve your profitability so far and risks degrading the quality of your offering.

Below, we discuss a range of key strategies small business owners can use to tackle the 6 major pillars of profitability: costs, turnover, productivity, efficiency, market, and offering.

1) Reassess your costs

As discussed, it’s sensible when asking how can you increase profit to begin with your current costs. Reassessing the nature of your outgoings can help you to identify wasteful spending and inefficiencies which, once eliminated, help to drive the profitability of your business.

Of course, it is, at the same time, important not to sacrifice the quality or consistency of your offering through cost-cutting.

A few of the costliest areas you could start by examining include:

1. Supply: Are your procurement and materials costs as favourable as they could be? Could another supplier offer better terms, such as a better deal for buying in bulk?
2. Financing: Are the loans, overdrafts, and other finance streams your business relies on operating on the best possible terms, or are there more competitive options available?
3. Premises: Commercial units are expensive to buy or rent, operate and maintain. Could you be putting your space to better use? Are the overheads there (such as energy supply) running efficiently, or are better tariffs available? Do you use all of the space available to you at your current premises, or could you downsize?
4. Production: When assessing production costs, it’s worth conducting an ‘activity-based’ costing to identify the true cost of producing your various offerings. By assessing exactly what staff hours, materials, direct and overhead costs are required to produce a single unit, you can clearly identify each offering’s profit margin and thus identify shortfalls.

2) Review your products or services

And speaking of reviewing your offering and its associated profit margins… One obvious way to make more profit as a small business is to sell your products or services at a higher price point.

Naturally, you want to avoid alienating your customers, but a careful, regular study of the market can help you to keep your prices fairly in line with inflation and competition, without risking sales.

3) Target key customers and develop your client relationships

For small businesses—especially those just starting out—it may seem as though every new customer interaction is a huge win; one which will in turn improve your profitability. The truth is less straightforward.

Whilst it remains important to attract and retain new custom throughout your business journey, not every customer will contribute to the overall profitability of your business. You can think of customers as falling into four distinct categories:

• High sales, low profit
• High sales, high profit
• Low sales, low profit
• Low sales, high profit

For example, one customer might buy from you very rarely—just once or twice a year—but the money they spend is on high-value goods and services with impressive profit margins. This customer would be considered a “low sales, high profit” client. On the other hand, a “high sales, high profit” customer may interact with your offering every single week, yet their spend is such that the profit you make from them is ultimately less than you do from your “low sales, high profit” customer.

In this scenario, it is helpful to ask yourself whether your “high sales, low profit” customer is worth keeping. Perhaps you could review the price points of your offering to turn that customer into a “high sales, high profit” lead, or you could redirect your focus toward engaging more “low sales, high profit” customers instead.

Cross-selling vs upselling to existing customers

An effective way to increase the profit made from existing customers is to upsell or cross-sell to them.

Upselling is the process of offering a customer higher value goods or services compared to their typical purchase. For example, if a customer is shopping for a 1hr massage on your website, you could upsell them by offering a good deal on an even more luxurious 1.5hr massage.

Cross-selling is the process of offering your customers additional goods or services, from elsewhere in your offering, which you think they might like. For example, when the customer searching for the massage above gets to checkout, you could cross-sell by offering an additional 15 minute body scrub and/or some skincare lotions.

4) Eliminate wastage

You’d be surprised by how much of your revenue ultimately goes to waste. A lot of the potential wastage in your business—especially in small businesses with fewer staff and resources to manage finances—can be hard to spot at the surface level. Which is why it’s highly recommended that you regularly review common wastage areas in order to trim the fat:

• Are you running machinery during peak electricity usage times, and thus paying a premium for your electricity when you could be running the same processes overnight?
• Is all electrical, non-essential equipment being turned off when not in use, especially overnight or outside your working hours?
• Have you any unnecessary subscriptions to services you don’t, or rarely, use? For example, internet packages, phone lines, etc.
• Is there room to renegotiate your commercial let, e.g., exchanging lower monthly rent for a longer contract?

5) Improve procurement efficiency

Whatever your offering—from masseuse services and IT troubleshooting to products like e-bikes, baked goods, books, you name it—there are often costs associated with production and procurement.

If you produce your offering in-house, then your costs will include things like raw materials; whereas if you sell goods produced elsewhere, then your costs will involve procurement from a supplier.

In order to achieve greater profit margins on your offering, it’s worth reevaluating the procurement chain. Could it in fact be more cost-effective to produce your offering in-house? Or, conversely, to outsource its production? Might another supplier offer a better deal, or be based closer so that shipping costs are reduced?

If your offering costs less to bring to market, your profit margins naturally widen without you necessarily having to increase price point—thus increasing your business’s profit.

6) Consider expanding into other markets sectors and niches

This next tip is not for every small business, but may still prove interesting to consider.

If you’ve already followed a number of the measures listed above, and yet are still struggling to break ahead of the pack in a competitive industry, or turn a comfortable enough profit, then there is always the possibility that market expansion could be the solution.

Say, for example, you run a traditional family-recipe pizza parlour in your neighbourhood, but are struggling to compete with the profit margins of a chain pizza place around the corner. The larger enterprise may well have greater capacity for wastage management, cost-cutting, bargaining with suppliers and undercutting your prices.

In this situation, it may be prudent to explore other niches within your industry that you could fill and your competitors could not. With the draw of an authentic family-run pizzeria already in place, perhaps you could expand to offer a dine-in experience, start serving cocktails, or reinvent the menu to include other classic Italian dishes like pasta and antipasti.

Whilst you would assume additional costs attached to market expansion, finding a niche only you can fill can open doors to far greater profitability for your small business than ever before.

7) Streamline productivity and efficiency throughout your business

The productivity and efficiency of your operations—especially of your staff/workforce—has a direct correlation to your profitability.

The faster and better staff can work—whilst minimising the time they spend in unhelpful meetings, completing cumbersome admin, or moving between sections of the business—the more revenue they can generate for your business in fewer paid hours.

A regular system of operational efficiency measurement should be put in place to ensure you are getting the most from your company’s resources.

8) Don’t forget to invest in the details

Our penultimate point is quite simple. Every facet of your business has the potential to contribute to, and thus enhance, your profitability. As such, it is worth paying just as much attention to the small things as you do to the more obvious money-makers and money-drainers.

• Quality staff training: The better trained your staff are, the less time you spend retraining, rehiring, or repairing mistakes, and the better the offering they can provide to customers.
• Staff wellbeing: The mental and physical wellbeing of your staff—particularly their enthusiasm for and comfort within your company—has a direct correlation to their productivity and lifespan as a team member. The longer they stick with you, and the more productive they are, the more profitable your operations.
• Marketing and branding: It’s all very well if your offering is exceptional, your customers happy, and your processes as cost-effective as they can be, but if you’re not reaching your target demographic and acquiring new customers, you will always struggle to grow. To become more profitable as a business, it’s worth investing in quality marketing and branding. Which brings us to our final point.

9) Outsource non-profitable elements of your business operations

Small business owners tend, understandably, to be precious about who is in charge. Many wish to oversee every facet of their operations, from production and design to delivery, finance and accounting to marketing and more. The problem is that few small businesses realistically have the resources—time, energy, expertise and cash—to manage every element of their enterprise; let alone doing so with optimal efficiency and success.

One of the ways to improve profit and profitability across your business is to consider outsourcing the elements of your day-to-day which don’t directly generate profit.

By outsourcing your PPC campaigns to digital marketing experts, for example, you enjoy the benefits of an optimised ad campaign (more visitors to your website, more conversions, more customers, more sales) whilst freeing up the time you would typically spend on marketing to work on areas of the business where you can make a greater impact in terms of sales and turnover.

How Can You Increase Profit: The 9-Step Checklist

To finish, let’s recap the many ways to improve profit as a small business.

1. Streamline your costs without sacrificing quality of offering
2. Routinely evaluate the price(s) of your offering, to see if they can reasonably be raised
3. Identify and develop the relationships you have with customers and clients; consider refocusing attention on leads which consistently generate the most profit, using upselling and cross-selling techniques.
4. Assess your operations to identify areas of wastage and eliminate these to increase profit.
5. Reduce the cost and improve the efficiency of production and procurement for higher profit margins further down the line.
6. Consider the potential benefits to your business’s profitability of expanding into new markets and filling new niches.
7. Prioritise workforce productivity and operational efficiency across the board.
8. Invest just as much in the details as you do in the more obvious areas—there is the potential for greater profit to be found by investing in projects and people who will help you accrue and retain customers for the long run.
9. Lastly, consider outsourcing non-directly profitable, or profit-generating, elements of your operations to third parties.

Of course, as always, if you find yourself overwhelmed by the natural stresses of owning and running a small business, or would like deeper insight into how best to grow, we are here to help.