How to Increase Profits

Sep 14, 2018

Profit is defined as “the difference between the amount earned and the amount spent in buying, operating, or producing something”. So looking at the situation simply, to improve profits you need to increase the difference between the amount earned and the amount spent. It’s a numbers game so it helps to understand the numbers and the calculations that lead to the profit figure.

The key numbers

  • Leads is the number of prospective customers who are in contact with the business.
  • The Conversion Rate is the percentage of prospects who make a purchase and become customers.
  • The Average Value of Sale is the typical amount spent by customers.
  • The number of Transactions is the number of sales made.
  • The Profit Margin is the profit percentage of each sale.

The key calculations

  • Leads x Conversion Rate = Number of Customers
  • Number of Customers x Average Value of Sale x Number of Transactions = Revenue
  • Revenue x Profit Margin = Profit

The key numbers and calculations provide an understanding of where you can direct your efforts in order to improve your profits. So, for example, by improving your marketing and the sales process you can affect the first calculation. Also, by tweaking your pricing you can impact the second part of the second calculation. By cutting your costs you can impact the second element of the third calculation.

So now you know the mathematics, let’s look at some of the practical steps you can take to improve profit.

You can set about cutting your costs by, for example:

  • negotiating lower prices from your suppliers;
  • outsourcing by bringing in freelancers or contractors for short-term jobs;
  • hiring interns;
  • cutting down on credit costs by, for example, negotiating lower credit card APRs;
  • buying used instead of new equipment;
  • cutting down on meetings and travel costs;
  • getting better deals on items such as telecom costs, insurance, rents and utilities; and
  • eliminating wastage of time or money.

You can set about increasing your revenues by, for example:

  • entering new markets and distribution channels;
  • optimizing your marketing; and
  • retraining your sales staff.

Too many business owners get hooked on simply growing their revenues without thinking about profitability. The problem with that approach is that revenue growth without profit is simply more work. Whereas by focusing on growing profitability, you are building a valuable business that you can one day sell.

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