You’ve heard that profits are important and that earning more profit is a good thing. This post covers what profits are, why they’re important and simple steps to get more profits in your business.
What is profit?
Here’s the simple equation: profit = revenue minus expenses.
That means there are two ways to increase the profit that we’ll go through later in the post: Increasing revenue or Reducing expenses.
You might call ‘revenue’ something else, like ‘sales’ or ‘income’.
You might call ‘expenses’ another name, like ‘cost of goods sold’ and/or ‘overheads’.
Whatever terms you use, your customers pay you money, you spend some amount of it on expenses, and profit is left over.
Profit isn’t the same as cash
If you’ve ever looked at an income statement (or ‘profit & loss’) or a tax return and asked “if there’s so much profit, why is my bank account empty?!” then this section is for you.
If you’re allergic to the slightest hint of accounting theory, just believe the above heading and skip to the next section.
Profit isn’t the same as cash, for some businesses. Here are a few examples:
- Invoices and bills might be recorded as revenue or expenses when you haven’t received or paid the cash yet.
- Inventory and assets might not be recorded as expenses at the time you pay for them with cash.
- You might pay for an expense with a loan, not cash.
- If you make a loan repayment, only the interest portion is an expense, not the part of the repayment that reduces the loan.
- If you pull money out of the business for yourself or your personal spending, it might not show up as an expense.
- If you transfer cash to shareholders as a dividend, it won’t be recorded as an expense.
Why is profit important?
You might have heard that profit is important, and you may even have an idea that profit means you’re earning money.
Here is a quick list of the reasons why profit is important, including a couple of not-so-obvious reasons:
- Returns for owners: money for you, for your work in the business and as a return on the business as an asset.
- Impressing investors: profits are one way an investor gets a return on their investment in your business.
- Loan repayments and impressing lenders: profits are used to pay down a loan (only the interest portion of repayment is an expense), so lenders want to see you have plenty of profits to repay their loan.
- Savings: you can’t save if you spend all your revenue on expenses.
- Working capital: this is a special type of savings that helps your business survive quieter periods, surprise expenses, and the gap between when you pay for something and when a customer pays you for it.
- Asset purchases: investors, lenders, and savings (see above) are needed to buy or replace assets.
- Business growth: “you need to spend money to make money” goes the old saying, whether that’s on more marketing, growing your team, or any type of growth initiative.
With that question answered, let’s move on to how to grow your profits…
Increasing your profit by increasing your revenue can be the most challenging option, but the potential for profit is not capped like the options in other sections.
Another simple equation: revenue = price multiplied by the quantity of products/services sold.
That’s two options to increase your revenue: increasing your prices, or selling more.
Raise your rates
Increasing your prices is the first piece of advice in many business forums and the last thing a business owner wants to do.
“But my customers will leave!”. Not necessarily, but even if they do, that can be a good thing. Let me illustrate:
- You sell a $100 product or service to 10 customers = $1,000 revenue.
- Double your prices to $200 = $2,000 revenue.
- Half (a huge amount!) of your customers leave = $1,000 revenue.
- Now it seems like you’re back where you started, revenue-wise, but it’s cheaper and quicker to serve half the number of customers, so your profit is higher.
There are other factors to be considered, but the above exercise can help remove some of the fear of raising prices.
Apart from a price rise, you can also increase your revenue by selling more.
That could mean selling more of your existing products or services, by selling again to old customers or by finding more customers. Make sure it doesn’t cost you more in marketing/selling expenses than the profit you make!
You can also sell new products or services. You could create that yourself, or you could connect with a white-label partner to provide the new product or service. Make sure these are profitable for you, of course!
Don’t have the expertise for this, personally or on your team? Experts can be quite affordable.
That’s a few ways to increase your revenue. Now let’s move on to the other side of the profit equation…
This can be a simpler option to increase your profits, but there are only so many expenses you can cut, and only so far you can cut them before your business suffers.
In any business, there are a few big expenses that you need to actively keep an eye on.
The most common big expenses include the cost of the products you sell (“cost of goods sold”), your team, marketing, and office costs. Depending on your business model and industry, there might be other big expenses.
For the products you sell, make sure you are only buying as many as you need when you need them unless there is a really compelling volume discount. Regularly check your costs with other suppliers, and don’t forget the cost of freight, warehousing, and handling.
For your team, remember that your business will change over time, so you’ll need different roles. You might get busy as the business grows, and need to hire a virtual assistant or project manager. Or maybe you need a marketing or website expert. And then maybe you don’t need that role or business slows down or a team member is performing below standard, and it’s time to cut that expense and free up profit.
For marketing expenses, make sure you are getting a good return. Many businesses are wasting money on marketing initiatives that they think (hope!) are working. Or they’re paying too much for their results. Or maybe they’re not spending enough on marketing, meaning there are less potential customers and it’s hard to get them to buy.
For office expenses, remember that each additional team-member will require office space as well as a desk, chair, computer, office supplies, and maybe a parking spot. Remote teams can be a big cost-saving because you don’t have to pay for all those physical requirements and because they give you access to a global talent pool (which can cost a lot less than local staff).
Then there are a lot of little expenses. For these, quickly review and trim these every 1-3 months.
Bonus option: Productivity
This wasn’t part of the profit equation at the beginning. Here it is again as a reminder: profit = revenue less expenses.
But productivity has a big effect on your profit.
Your team is more productive if they get their work done in less time, or get better results for the same amount of time.
Since team time costs money, more productivity means lower team expenses. Lower team expenses means higher profit.
But also think about your personal productivity. If you are more productive, it means you’ll have more time for taking on the business improvement projects that can have a huge impact.
The same concept applies to your skilled team members. Imagine you have the greatest salesperson of all time on your team, and what a waste it would be to have them filing signed sales contracts instead of spending all their time selling.
Similar to the above, and also for the cost savings, make sure tasks are delegated to the least-expensive member of the team that can do it.
Over to you
This post was packed full of ways to increase your profit.
Which are you going to do first?
(P.S. If you want a super-quick exercise to find profits in your business, check out my free Quick Profit Hunt.)
Want the very best staff at the best cost? Eastern European hires are the best in the world! Check out how you can get your next hire now.