Tips for better bottom lines
In our last post, we looked at how much profit a small business should make.
That was primarily through the lens of its profit margin.
As a reminder, there are 3 distinct ways to calculate profit margin.
Gross profit margin simply compares revenue to the costs of goods sold to determine an ‘excess’ that indicates the value or margins inherent in the product itself.
Operating profit margin adds in further operational costs to give a sense of what selling those products actually costs your business.
And net profit margin gives you the profitability after taxes and interest are taken into account.
Each calculation gives you useful insights into your business and its financial health.
But of course, wouldn’t it be nice if your business was more profitable?
This article will look at ways you can improve your profit margin and make your business more profitable.
Renegotiate with suppliers
Since the cost of goods sold (COGS) is a key component of your profit margin, reducing the wholesale cost you pay for your products can have a significant impact on your profitability. Reach out to your suppliers and see if you can find ways to lower your costs and bring in more per sale as a result.
If you’ve been operating for some time already, you should have a good idea of your demand and how it fluctuates over time. Perhaps you can negotiate a bulk discount during your busiest times when you’re confident of being able to shift stock quickly.
It’s also worth looking into other suppliers that may be able to offer you more competitive terms. Doing so can give you greater bargaining power with your existing supplier or provide the financial incentive to make a switch.
Consolidating your suppliers may also be an option if your business buys a range of products from many different sources. Could you get a better rate by purchasing more items from a single business instead?
Adjust pricing strategies
The other big factor in your gross profit is of course your revenue, and that is a function of the amount of products you sell and the price you sell them at. While there is plenty of guidance out there on how to sell more products, setting the right price is just as critical.
Reviewing your prices periodically and testing price changes with new customers will give you valuable insights into how you can keep revenue increasing even as costs rise too. Typically, it’s best to focus on your highest-demand products, since even a small uptick in their prices can transform your cash flow thanks to the high volume of sales.
Of course, it’s worth trying to find ways to justify your price increases beyond simply inflation. If you’re regularly improving your products or the services you offer, explain price increases in the context of new features.
Maximise operational efficiency
The next piece of the puzzle is your operating costs, which factor into your operating profit margin. That means looking for ways to streamline your processes, make employees more efficient, and ultimately lower your variable costs per product sold.
For instance, let’s say your business creates and gift-wraps custom clothing. One of the bottlenecks in the process is the fact that your high-end gift-wrapping takes 10 minutes per item, when you could invest in a new method or tool that cuts that time down to just a minute.
Reducing the processing time could shave a few pounds of the cost to your business of each item, ultimately increasing your profit margin as your employees will be freed up to contribute elsewhere. Of course, having a flexible employee scheduling solution will help you to redeploy them effectively!
Reduce waste and returns
Businesses in the UK produce a whopping 34 million tonnes of waste each year. This figure could be significantly reduced, and doing your part will save your business money too. Properly categorising your waste and disposing of it correctly is a big part of this, especially since the Simpler Recycling reforms that began in 2025.
Returns can play a role in how much waste a business produces, as some returned products may not be able to be resold. You can reduce returns in a number of ways. Increasing product quality is an obvious one, but you should investigate other return reasons too. Maybe your product descriptions and photographs need to be clearer and more representative, or perhaps you can provide potential purchasers with additional guidance to ensure they select the right product the first time around.
Review financial commitments
Finally, we come on to your net profit margin, which includes tax and interest. There are ways to reduce both. Intelligent financial planning and tax reporting can help you to take advantage of tax-relief schemes, legal loopholes, and reduced rates. Consult a financial planner or tax advisor to find out what your business's options are.
Meanwhile, taking stock of the interest you’re paying on loans is an important step you should carry out regularly. Are there ways to lower the interest rate, negotiate terms, or pay off some of that investment early for a healthier long-term outlook?
When you’ve considered all these factors, your profit margin is likely to look far better!