I think you’ll agree with me when I say: running a business is hard work, but finding ways to drive extra profit from your business is one of those great delights of being your own boss.
It’s the fruits of your labor, and makes all the effort worth it.
But it can be really hard to know where to look for profit improvement opportunities.
It doesn’t have to be so difficult.
As it turns out, you can run through the areas of your business one-by-one to identify changes that have profit potential. By finding these opportunities across all the vital areas of your business, you can start putting in place plans to build a more profitable business.
In today’s post, I’m going to list 7 smart areas to look for opportunities to improve your profits and show you examples that you can bring back to your business starting today.
1. Start With Growth
It can be tempting to start your journey towards improving profit by cutting costs.
However, the exact opposite approach is often more effective.
If you cut costs by buying cheaper supplies, cutting employees, reducing hours or canceling marketing campaigns then you will improve profits for a time. But soon after your sales might start to fall as your product quality declines and customer service gets worse.
With lower sales, you’ve then got to cut costs again.
This can create a negative cycle where cost cuts lead to lower sales, which lead to more cost cuts, lower sales again, and so on. This is NOT where you want to be.
No, most successful businesses that sustain strong performance over a long period of time find a way to continue growing over time. Costs will always creep up because of inflation, but having a focus on growing sales helps to reduce the percentage of fixed costs like rent and gives your business the momentum it needs to start having control over variable costs like wages.
So, just the small matter of growing sales, where to start?
The first reaction of most business owners is to start thinking of marketing initiatives. Campaigns and ideas to bring more customers through the door. Online ads, local letterbox drops, discounts, loyalty programs, you name it. The right marketing campaigns will generate a positive return on investment, and should be an ongoing focus of your business.
However, I believe that the single best way to grow your business is to get the fundamentals right. A consistently good product, great customer service and efficient operations.
Basically, create your own local monopoly.
Here are some examples of areas to focus on improving:
- Improve product quality: When was the last time you took a long hard look into your product offerings? Oftentimes business owners will go years without reflecting on the product, and making sure it remains relevant to customers and superior to competitors. Make upgrades to raw materials, suppliers and your production process to make sure your product is keeping customers happy.
- Improve customer service: Customers return to businesses that have a high customer satisfaction rating. Use this as an opportunity to think through the customer experience your business delivers at every step of their interaction with your business, and pinpoint areas that you can work on to improve their experience. This might mean an employee training program, or adding that nice little touch that customers love so much.
2. Increase Your Prices
My local sandwich shop carries a regional favorite that is always in high demand with local office workers. It’s called Banh Mi, and you should look it up.
I went past one Friday around lunchtime and there was a long line. I was in for a sandwich early the next week and saw one of the staff changing the prices on the menu board. I happily paid the new price of $10, and didn’t even think that last week it cost $8.
It’s just so good, and still a fair price.
The next Friday I happened to walk past again. There was the same long line of office workers. I couldn’t notice any difference in the length of the line.
I genuinely think they sold the same number of sandwiches before and after the price change. If they sold 100 sandwiches on each of those Friday’s, the simple pricing change increased sales from $800 to $1,000. That’s not even the best part. Because it costs nothing to change prices (at least in their instance) their profit increased by $200.
Just by changing the price.
The only mistake the sandwich shop made? Not changing the price earlier.
3. Study Your Numbers
Numbers are scary, right?
The numbers that business owners need to study involve only simple arithmetic. They are pretty straightforward, I’ve even created a simple guide on the numbers you need to know.
One of the objectives I’m trying to achieve is to demystify financials for small business owners, because I know how powerful they are. I also know that the barrier for most business owners to making use of their numbers is psychological.
Take this simple example:
This business is clearly performing well.
They are obviously focusing on the three key drivers of their business, cost of goods sold, employee wages and rent. Which all look really healthy.
These are the three biggest expenses of most businesses. By measuring these monthly, you can determine where your opportunities are and start to make changes.
The beauty is, you can pull these straight from your bookkeeping or accounting system. Once you have the information at hand, all you need to do is compare your numbers to the best practice in your industry:
This businesses is exceeding the industry standard net profit margin by 7.5%, a great performance. When you study the numbers you can see that it is cost of goods sold and employees wages that are below the industry benchmark. The owner is obviously has a good buying and production process to turn supplies into finished product so efficiently, and an effective human resources model.
Your actions will depend on what you learn. If your numbers are too high or too low compared to your benchmark, it means either one of two things.
- You have made an active choice to overinvest in an area, or
- You have an opportunity to improve your performance in this area.
For example, some restaurants will intentionally spend more on employee wages as they look to have service as a differentiator. They will hire more staff and attempt to attract the best staff by paying them more. However, if you are running a more traditional restaurant and your cost of sales are coming in significantly higher than the industry standard, it shows you can increase profit by bringing these costs back into line, and that it’s possible.
4. Improve Your Operations
No customer likes bad service.
It’s bad for your business, and usually comes from a lack of operating discipline.
Truth be told, your employees hate inefficiency too. They don’t want to deal with inefficient processes and unhappy customers. Life is easier when each activity is clear, takes less time and customers are delighted with the service they are provided.
When it comes to making the impact of operating processes on your business clear, let’s take an example. Say you run a bar that usually requires two staff per shift. If sales grow by 25%, then you have two options:
- Add another employee to the shift and give up the extra profit, or
- Keep two employees on the shift and pocket the extra profit, but experience a decline in service so that sales might decline back to where they began.
Here, your operating efficiency directly impacts profits. However, you don’t have to decide between those two options.
The better way is to focus on improving operational efficiency. That’s a fancy way of saying that you need to create simple systems and processes that allow your employees to do more with less. To help make your employees more productive without using extra time and effort. In doing this, you can grow sales and profit at the same time.
Here are two practical ways to do that:
- Simplify your products: Reducing the number of products you offer, or simplifying the products will allow your employees to get more efficient at serving customers as there is less complexity and they can focus on fewer tasks. Complex products take up time to deliver to customers. Save time by simplifying your products.
- Improve your production process: Really think about the end-to-end process required to deliver each of your products. What are the bottlenecks? Where is time lost? Take what you learn and then rearrange your workspace to allow for a better flow. For example, in a physical producing environment you can rearrange equipment, benches and furniture to minimize the amount of running around by staff.
- Document your standard operating procedures: Streamline your business by codifying repetitive tasks. They will allow employees to solve problems themselves without asking you or other employees and lead to a more consistent result. A simple rule of thumb is that any repetitive task that is brought to your attention every week should have a documented standard operating procedure.
- Automate repetitive processes: Better than documenting procedures to complete tasks is to completely automate them. Automation can be both physical and digital. For example, coffee shops can replace human labor with automatic grinders, milk steamers and contactless card systems to save time on repetitive tasks. You can automate a lot of your marketing efforts using email response sequences and automated ad campaigns. These days my principle is: if it can be automated, automate it.
Business owners should regularly investigate how efficiently their operations are running. By looking into your operating procedures and improving them you and your employees can do more with less. It will help you lock in extra profit.
5. Change Your Sales Mix
The products or services you sell are not all equal.
Some of your offers will have more sales revenue and higher profit margins, others have very little sales revenue and lower margins.
You need to know which is which.
It makes more sense to allocate resources to products and services that are bringing in more revenue and profits than others. You may even want to consider cutting products or services that are expensive to maintain and don't bring in much revenue.
To do this, generate a report called ‘sales by product’ or ‘product sales analysis’ using your bookkeeping and accounting software. Then analyze the data looking for products and services with low revenue and low profits. You can use my sales mix guide if you want to go deeper.
Removing these low selling products with low profitability raises your overall profitability and frees up resources to focus on selling more of your higher profit products and services.
If products don’t sell well, they just take more training, require more supplies and are harder to deliver to customers. Reducing the number of products you offer from 20 to 10 often doesn’t reduce the customer experience, but drastically reduces the time taken to deliver them.
It’s time to think of your products like a sports team. If a product isn’t performing, it’s time to put it on the bench and bring on some fresh legs. Those low-selling, low-margin products are dragging down your overall profit.
The focus should be on high-margin products and services whenever possible.
6. Improve Your Relationships
Business owners can neglect supplier relationships, or take them for granted.
However, building strong relationships with suppliers and vendors can both increase and protect your profits. Consider the following questions:
- Do you want your suppliers to save the best supplies for you?
- Do you want your suppliers to supply your business when inventory is in short supply?
- Do you want your suppliers to give you the best possible deal on your supplies?
I imagine you answered a resounding “Yes!” to all these questions. That’s why it’s important to build close relationships with your suppliers. Importantly, while the first two questions help derisk your business, the last suggests how these relationships can lead to increased profits.
Once you have strong relationships with your suppliers, you can focus on the following ways to improve your profits:
- Negotiate vendor discounts: The better the discounts, the lower price you are paying for your supplies and the more profit in your pocket. Approach discounts carefully as you want to make sure you maintain your relationship.
- Negotiate improved payment terms: Ask your vendors if they will provide payment terms. For example, explore deals where you receive a discount of 2% if you pay your invoice within 10 days, as opposed to the 30 or 60 day standard terms. The 2% goes to your profit, and helps to increase your profit margin.
- Negotiate more favorable freight agreements: There are often ways to work with your suppliers to find beneficial freight agreements, for example by changing delivery times or frequencies. If you can reduce your freight charges, you will reduce the overall cost to have the goods delivered to your door, and in turn, improve profit margin.
- Consolidate suppliers or orders: Rather than order multiple products on separate orders that require individual processing and delivery, you can look to consolidate more products per shipment. This will reduce shipping fees and create leverage you can use to negotiate vendor discounts.
Pro tip: As you are approaching these discussions, look for a way to make it win-win for your and your suppliers.
7. Increase Your Capacity
Once you have started to grow sales (Point #1) and have your business running efficiently (Point #4) it's worth exploring whether you have the opportunity to increase the capacity of your business. For example, a restaurateur could add tables to their restaurant or a local boutique store could extend operating hours.
More capacity means the ability to make more sales, and if you maintain profit margins, more profit for you to take home.
Here are some ways you can increase capacity in different businesses:
- Add physical capacity: If your business is operating at capacity during peak times, you can add capacity by making investments in new space or equipment. For example, adding seats and tables to a food business, introducing a second coffee machine to a cafe, another oven to a bakery, or reconfiguring your layout to create more usable space.
- Review your operating hours: Extending hours from the traditional 9am to 5pm or adding extra sessions can bring in more customers. Adding to your trading hours can be slow at first, but can pay off in the long run.
- Speed up service times: Getting customers out your door faster, still with a smile on their face, frees up capacity to service more customers per hour or day. Plus, quicker service means customers are more likely to come back more often. It’s incredibly simple, but so many businesses are just too slow.
- Add new distribution channels: Consider adding new channels or offerings. For example, a dine-in restaurant could add a takeaway service and sign-up for mobile ordering platforms like Uber Eats and Deliveroo.
Exploring these 7 profit improvement ideas is a surefire way to generate initiatives for your business that will help you improve profits.
I recommend that you choose just two or three initiatives that will drive performance in key areas of your business. Don’t spread yourself too thin. Pick the best ones and then focus on putting those initiatives into action, track the results and tweak when necessary.
It's that simple.
Before you go...
We all know that small business is about doing the little things right.
The little optimisations, the high-impact tweaks and the 1% gains you can make to your business to make it a little better, a little more profitable and even a little bit more pleasant to run.
I have interviewed 500+ business owners, surveyed thousands more, and I am always probing for their best tips, tricks and hacks to improve their business. There are three that stand out above the rest and I want to share them with you.
Join my email list for free and I’ll send them to you right now.