## Steps to improve profit

The measures you put in place to improve your profit should align with your overall business goals and objectives. These should be set out in your business plan.

For example, if you've decided to increase your sales you may need to hire extra staff, purchase more stock or undertake marketing activities.

You will need to prepare a budget that shows not only increased profits, but the increased expenses you'll need to factor in to achieve the increase in profit margin.

Profit margins are used to determine the profitability of your business. Your profit margin shows whether the average mark-up on your products or services is enough to cover your direct expenses and make a profit.

Your gross profit and net profit are most commonly used to work out profit margins.

Use our interactive calculator to calculate your gross profit margin.

#### Calculate gross profit margin

$$\text{Gross profit margin} = \frac{\text{Gross profit}}{\text{Total revenue}} \times 100$$

Generating consistent profits is a key sign of a healthy business. However, decreasing gross and net profit margins can signal challenges in areas such as pricing, sales and costs.

Profit margins and ratios can be used to compare your business's performance with industry averages. It's important that you compare performance within your sector as profit margins vary widely across different industries. Learn how to measure performance and set targets.

Rising costs in areas such as materials, utilities, rent, marketing and staffing will have a significant impact on your profit margins. Understanding your costs—especially where they are rising—is essential. This will allow you to put more efficient processes and supply arrangements in place to maximise profits. Learn how to reduce business costs to increase profits.

Productivity can be increased through efficient business processes to build healthy profit margins. Work with your staff to analyse your operational and financial processes to identify ways of increasing efficiency and productivity.

If you want to generate higher profit margins, you may need to develop new business strategies. Consider what target markets you'd like to appeal to, and how your existing products and services could be marketed to them. You may be able to change your products and services to better meet the needs of your most profitable customers.

Find examples of strategies to increase your revenue.

Reducing the amount of damaged or unsellable products during your production process will help increase your sales and your profits.

The error rate ratio will help you evaluate the quality of your production and whether the cost of producing your goods is too high.

A high number may indicate you need to look at your production processes. For example, your goal might be to achieve an error rate of less than 1% (i.e. less than 10 items rejected in 1,000 produced).

Formula: Error rate ratio = (total items rejected ÷ total items produced) × 100

#### Calculate your error rate ratio

$$\text{Error rate ratio} = \frac{\text{Total items rejected}}{\text{Total items produced}} \times 100$$

## Understanding profit drivers

Profit drivers are the internal and external factors that affect your business's bottom line. Understanding your profit drivers and how they affect your business is key to developing effective strategies to improve your profits.

Trading accounts and profit and loss statements usually contain information on profit drivers for a particular business. Identifying and focusing on the profit drivers in your business can help maximise your profits and achieve better growth results.

Profit drivers can be categorised as financial and non-financial.

### Financial profit drivers

Financial profit drivers are directly associated with dollar figures and are considered the most common in relation to profit. Examples include:

• price
• fixed costs
• variable costs
• sales volume
• cost of debt
• inventory.

A financial profit driver ratio may be expressed as a:

• number (e.g. average number of sales per month)
• dollar figure (e.g. the average sale per customer)
• percentage (e.g. percentage of customers who are repeat business).

### Non-financial profit drivers

Non-financial profit drivers also impact your bottom line but aren't expressed in dollar terms. For example, customer satisfaction will always impact the number of goods sold and increase or decrease profit.

Non-financial profit drivers include:

• productivity
• customer satisfaction
• quality of the product or service
• training of employees
• employee satisfaction and morale
• product and process innovation
• market share
• employee safety.

The top profit drivers common to most businesses include:

• increasing sales (turnover)
• improving gross profit by either increasing price or reducing input costs
• reducing overhead expenses by improving efficiency.

This can be accomplished in several ways. For example, you could improve the quality of your product for a similar price and set the sale price higher, reduce overheads by improving inventory management, and increase repeat business by improving customer satisfaction.

### Measuring profit drivers

Keep track of your profit drivers and regularly measure their impact to evaluate the success of your strategies.

Use these ratios and calculators to measure and monitor your profit drivers.

## Strategies to increase sales revenue

• Develop new product lines—ask your customers about what new products or services they are interested in.
• Focus on your most profitable customers—it may be more profitable to sell fewer products to higher spending customers than to focus on increasing sales volume alone.
• Work with your best customers—find out who your best customers are, what they buy and when they buy it. You can use this information to market and advertise to them more effectively.
• Find new markets—use market research to see if there are opportunities to expand into new areas.
• Customer service—improve your customer service and develop a staff training program.
• Increase your pricesreview the prices of products regularly and adjust accordingly. You may increase a small amount at a time.
• Price discounts—consider price discounts and promotions to increase your customer base (e.g. 2-for-1 deals or happy hour).
• Increase productivity of your staff—recognise and reward staff with staff performance reviews. Regularly upskill and educate staff with training.
• Retail displays—use effective retail displays to increase sales.

## Strategies to decrease costs

• Decrease inventory—use stock control to streamline your business and improve profit and cash flow. The less money you have tied up in slow-moving inventory the more profit you can make.
• Decrease direct costs—build relationships with the right suppliers for your business and negotiate better process or discounts for buying in bulk. Don't make unnecessary purchases.
• Decrease indirect costs—minimise waste, train staff to be efficient and use low-cost marketing techniques.
• Decrease overheadssave money in areas like energy consumption and find cheaper suppliers.
• Remove unprofitable products and services—concentrate on popular products or services with the highest gross profit margin.