Profit margins are a crucial metric for assessing a company’s financial health and is a key objective for improvement for small businesses.

But appreciating the importance of higher profit margins is one thing and knowing how to improve margins is another. In this article, we’ll outline what a profit margin is and help you devise strategies for improving your business’s. 

What is a Profit Margin?

In short, a profit margin represents the percentage of a company’s revenue that is transformed into profit once you have stripped out all of the expenses.

Here’s a breakdown of the difference between revenue, profit, and a profit margin.

Revenue

Revenue is the total amount of money that a business generates. If you sell 1,000 items for $2 each then your revenue will be $2,000.

Profit

Profit is the total amount of money that is left over once you have subtracted all expenses from the total revenue. In the example above, if it costs you $500 to produce and sell 1,000 items then your profit will be $1,500 i.e., $2000-$500. 

Profit Margin

Profit margin, on the other hand, measures the efficiency of your business’s operations by indicating how much of each individual dollar of that $2,000 revenue was converted into profit.

Gross profit margins vs net profit margins

Gross Profit Margin – This margin measures the percentage of revenue that remains after you’ve stripped out the cost of the goods sold. It reflects how efficient your business is in production and how good your pricing strategy is.

You can calculate the margin by dividing the gross profit of your business by the total revenue and then multiplying by 100 to get a percentage. 

Net Profit Margin – This margin represents the percentage of revenue that translates into profit after deducting not just the cost of the goods sold but operating expenses, taxes and interest. It is used to measure the overall profitability of a business. 

To calculate the net profit margin, divide the net income by the total revenue and then multiple by 100 to get the percentage.

Tips For Small Business To Improve Profit Margins 

1. Streamline Operations

Inefficiencies in your operations and processes could mean that productivity is lowered (i.e., less goods and services provided so less revenue) or that your expenditure is unnecessarily high.

Streamlining your operations can help with both of these items and can be done in one or a few ways, such as:

  • Automating repetitive tasks
  • Using custom software and programs
  • Renegotiating supplier contracts
  • Optimising inventory management

2. Increase Prices

Increasing prices is an obvious and self-evident strategy. After all, higher prices means higher revenue-right? Not always.

Increasing prices when they are lower than the market average, do not reflect the value of the goods or services you provide or are not reflective of the levels of inelasticity of demand for your products/services is a smart thing to do. But this should be done modestly and should be done after a thorough analysis of the pricing strategy and market. 

3. Focus on High-Margin Products and Services

Evaluating your business’s products and service offerings will give you the opportunity to identify demand trends and those offerings with the highest profit margins. This can be highly informative when deciding what to focus your marketing efforts on.

Promoting the offerings that both maximise profitability and are in demand with your target market will help you drive up revenue and, in turn, your profit margin. 

4. Reduce Overhead Costs

While raising prices helps to increase revenue, when that is not the best or a possible solution, reducing business expenditure is another option.

While we outlined some strategies above, such as renegotiating supplier contracts, there are other costs that can be reviewed to ensure there is no unnecessary expenditure. Consider your business subscriptions, rent, utilities and other non-production related costs.

5. Invest in Your Team

There are a few ways in which you can leverage your labour resources to improve profit margin. For one thing, employee training and upskilling can help to improve customer satisfaction and retention, contribute to cost savings and drive up sales.

Investing in a team also works towards ensuring lower turnover and more experienced team members. Recruiting and training new employees is expensive and can drive costs up and revenue down thus affecting your profit margin. 

6. Implement Cost-Effective Marketing Strategies

In today’s world there are a lot of marketing channels and strategies, digital and otherwise. Focus your investment on those channels and strategies that offer the higher returns on investment.

Targeted advertising, content marketing and even social media platforms can allow for highly effective marketing without the costs associated with more conventional and/or traditional methods. 

7. Improve Cash Flow Management

Efficient cash flow management is essential for maintaining healthy profit margins. Monitoring your cash flow closely will allow you to expedite receivables and delay payables strategically to optimise cash flow cycles. 

It will give you an insight into seasonal sales (and thus revenue) fluctuations and allow for optimisation of business expenditure strategies.

8. Seek Customisable Finance Solutions

Partnering with a specialist lender like ScotPac can help you find customisable finance solutions tailored to your business needs. 

Whether it’s Invoice Finance, Trade Finance, Asset Finance or traditional Business Loans leveraging specialised financial services can ensure you have the access you need to fuel your business’s profit margin growth.

ScotPac – Australia’s biggest non-bank lending institution

Enhancing your small business’s profit margins is important for helping ensure your company thrives and succeeds. In addition to following our tips for improving your profit margin, why not give our lending specialist a call today to explore what financial solutions may be suitable for your business to achieve the success it deserves.

 

Find out more or contact us today here.