Profit has many purposes for a business. It can fund growth, pay salaries, provide staff bonuses or generate a return on investment for shareholders. Due to this, it’s essential to make sure your business can operate profitably.
Profit clearly comes by ensuring that your revenue is as greater than your cost of sales and overhead. This is where net profit margins come in.
Net profit margins refer to how much profit you can make per sale. It’s usually calculated by dividing your net income by your revenue or your net profit by gross sales over a set period. The higher your net profit margin is, the more profit you will make per sale – which will help you to boost overall profitability.
If your net profit margin is lower than you would like, it might suggest that your costs per sale are too high. By shifting the balance, you can grow your margins. There are many ways that businesses can do this.
We’ve listed our top methods for increasing your net profit margins to boost your overall profitability.
Lower your costs
One of the easiest ways to increase your profit margins is to lower the cost per sale. Of course, the key is to ensure that cutting these costs does not impede quality and thereby your sales potential.
Look for areas where you could scale back or find cheaper alternatives. Firstly, you should consider undertaking an expense audit to identify anywhere that you are overspending. This should be done regularly to prevent costs from mounting.
Based on your audit findings, it may be worth shopping around your to identify ways to lower your costs. This could apply to production materials, energy, service contracts and so on. In some cases, you may be able to negotiate a better deal by communicating with the existing provider. If not, consider switching to a new supplier if someone else is offering more competitive prices.
Next, you need to ensure that you have the staff to operate efficiently, without having excessive resources. If you believe you have more staff than you need, consider whether roles could be combined or team members placed elsewhere to make more of their hours.
You should also look into how you can make your operations more cost-effective, such as by upping productivity, reducing downtime or finding more efficient processes (e.g. using systems with less power consumption or higher output). This will enable you to bring down your operating costs, which can add up substantially over time.
Finally, consider where you could reduce your overheads. As overheads aren’t directly related to your products and services, many businesses might look for the opportunity to lower these, but make sure that this doesn’t affect the quality of what you produce. Determine if any of your overheads can be reduced (for example, do you have too many admin staff? Could you find a better deal for your building insurance or utilities?). By eliminating or reducing unnecessary costs, you will improve profit without compromising your operations.
Sell more products
More sales will spell more profit, generally speaking. However, selling more can also grow your profit margins, provided you take a cost-efficient approach.
There are several ways to boost your business sales. Embracing marketing, utilising sales tactics or diversifying your target market are all tried-and-tested approaches to drum up more demand and increase your customer base.
Whichever approach you take, you need to ensure that it doesn’t make your expenses skyrocket. You will undoubtedly need to invest some money into your sales to reach more people and experience better results, but the revenue growth you experience should outweigh this eventually. If it doesn’t, it could harm your profitability by reducing the margins.
You must have a robust pricing model that allows you to generate enough profit per sale, rather than just attracting more costs by delivering higher demand.
Clever planning should also help to facilitate demand and turn it into profit. For example, if you are making more sales, you might lower supply costs by buying materials in bulk, meaning the cost per sale is decreased, this is often referred to as obtaining economies of scale. By considering this in advance, you should be able to negotiate favourable deals that enable you to meet a higher level of sales while maintaining a good balance between income and outcome.
Look to expand
Though investing money to grow your business may seem counter-intuitive, scaling up your production or services will improve your profit in the long run if you do it right.
If you want to grow sales, expansion will be essential to meet higher demand. However, you must expand responsibly, implementing efficient processes and measures whilst enabling you to manage costs.
Expansion can also introduce economies of scale into your business. Using this principle, larger companies tend to profit more as costs are reduced. The costs associated with production, marketing, admin, development and so on are spread out against a larger volume of sales (reducing the cost of each sale).
By expanding with a considered, long-term strategy, you can maximise your production capacity (whether it be a service or product), allowing you to make more sales while still reducing the cost per sale. This will enable you to increase your profit margins, so you generate more profit overall.
Conclusion
Having healthy net profit margins is key to driving your business’s profitability through growing your revenue and reducing your costs base accordingly.
If you want to boost your profit, looking at your margins is a good place to start. There are many approaches you can take to improve profit margins, from lowering costs or driving sales. Understanding your business and its strengths should enable you to decide the correct route.
If you’re looking to improve profits in your business, we can provide support. We’ve worked with many SMEs to help them grow their revenue and experience better gains – and we’re here to help you too.