How to Maximise Profit in Business: Maximising Your Margins

While there’s so much more that goes into running a business than just making money, it is still an important aspect for both the short- and long-term viability of your business. Profit generation can be tricky though, with many businesses operating with slim profit margins that can restrict growth opportunities. 

Feel like you’re ready to step your business up? Here are our insights on how to maximise your profit margin.

What is a profit margin?

Let’s start with the basics. A profit margin is one of the most common metrics used to assess the health and sustainability of a business, but it is also one of the most important. In simple terms, your profit margin is the percentage of your sales revenue that ends up as profit when also accounting for the costs of labour, inventory and business operation. Your profit margin shows how much money your business really makes, demonstrating its overall financial health.

Knowing your sales and profit numbers is extremely important for the daily and long-term running of a business. You can’t make the right decisions about growth without knowing the margins you’re currently working with. So before you can maximise your margins, you have to figure out what they are. This comes down to two main profit metrics: gross profit margin, and net profit margin.

How to calculate gross profit

Your gross profit margin is the amount of profit you earn after you’ve accounted for the cost of your services or goods, based on how much you sell them for. The formula for gross profit margin is:

(Revenue - Cost of Goods Solds) / Revenue x 100

For example, say you run a pest control business and your hourly rate is $35. You have a two-hour job where you also have to factor in $15 for your materials, making your direct cost of goods sold $85. If you charged $125 for this particular job, your margin would be:

(125 - 85 / 125) x 100 = 32%

In this case, you earn 32% of that sale as gross profit. The gross margin is beneficial when analysing the profitability of a particular product or service, knowing how much you earn off of the work you do compared to how much it costs to provide the work. This can help you target low margin services and improve their value. However, it is a less useful metric when evaluating the health of your business as a whole — this is where your net profit margin comes in.

How to calculate net profit

Your net profit margin provides a fuller view of your financial situation, taking into account revenue and COGS, but also accounting for all your business and operating expenses. These can include rent, payroll, utility bills, insurance, tax payments and any advertising. The formula for net profit margin is:

(Total Revenue - Total Costs) / Total Revenue x 100

For example, if that same pest control business earned $500,000 in a calendar year, but the combined cost of their labour, rent, inventory and everything else was $430,000, the margin would be:

(500,000 - 430,000) / 500,000 x 100 = 14%

The net profit is always lower than the gross profit, because it has to account for a lot more cost factors. However, this gives a more detailed indication of your business’ financial situation.

If you aren't into doing the numbers yourself, you can use our free profit margin calculator instead:

Gross profit vs net profit — what should you focus on?

Your gross profit is the primary basis of your overall cash flow and ties directly to your services and work. It helps you to quickly see products and services that are underperforming or providing significant value. However, the net margin indicates how successful and viable your overall business model is, not just your services. Net profit can help you make accurate forecasts for future growth decisions, including expansion, raises or new hires, and is the best measure of total financial health.

What is a reasonable profit margin?

What is considered a reasonable profit margin will vary depending on the size of your business, how long you’ve been operating, and the industry that you work in. There is no one-size-fits-all figure. For long term viability, it’s important to have enough revenue to cover your regular costs and have some extra that you can put into areas such as promotion or debt repayments.

But what is a healthy net profit margin for your business? In general, a healthy profit margin for a trade or service business is around 15%. This gives you enough revenue to cover staff costs and regular operation, while also leaving enough leftover for you to use to grow the business.

How to improve net profit margin

Ok, now that you know what your profit margins are, it’s time to start maximising them. Trying to improve profitability and build a net increase can take a bit of work, but thankfully there are a variety of ways you can go about it.

Set the right rates and prices

When you review how much you charge, ensure your prices reflect the value of the services you provide. This isn’t about price-gouging your clients; it’s about being provided a fair return for your work and knowing what your staff’s time is worth.

Spend some time doing research into the market rates for what you offer, and compare how much you charge with your direct costs. You can also consider using flexible models, such as retainers or project-based pricing. This can give you some secure, regular income and a chance to maximise the amount you earn.

Track your expenses

Maintaining a regular review of the amount you’re spending as a business can help you identify where you might be overspending and different opportunities you have to save. This could include renegotiating contracts you have with subcontractors or vendors to ensure you’re receiving the best value.

With clear understanding of your expenses you can also work at reducing your operating costs like rent or office supplies. With less money going out, you get to keep a higher percentage of everything the business earns.

Increase the value of each job

For service businesses, the more work you can do at each job you go to can add a lot of value. One way to do this is upselling, which might feel very pushy but can be done well without creating a negative impression. If you recognise a genuine opportunity to provide more value or see something that needs to be done, don’t be afraid to suggest it, but be transparent about how much it would cost. 

If a client is interested in an extra service, great! That can earn you some extra cash without paying for more travel. But if they say no, move on. It’s much better to do one thing for a customer who will trust your business in the future, than to do three things for a customer who will never use you again.

Retain your customers

Like we just alluded to, making sure your clients keep coming back is essential! The value of loyalty is huge, and reducing customer churn will help you maintain a regular flow of jobs, giving you more consistency in your financial situation. Establishing loyalty and referral benefit programs can be a good way to earn their trust and also build your name.

Customer retention is all about providing quality services and working with integrity. You should always be upfront about costs, processes and timing, and quick to make it up whenever you make a mistake of some kind. Customers value honesty and are much more likely to be an asset for your business if they have a positive relationship with your brand.

Focus on efficiency

Improving profits can also be an internal pursuit by improving the efficiency of your work, including planning time-saving routes, and consolidating processes and tasks where possible. You can also invest in upskilling your staff to improve the quality and speed of their work, increasing billable hours and leading to more satisfied clients.

The quickest and easiest way to improve efficiency is to sign up to Mira, the all-in-one business management platform. Mira helps you plan your jobs better and cut down on admin time, giving you more hours you can use for work and building client relationships. Start with an obligation-free trial and we’re sure you’ll see the improvements quickly.

Benefits of maximising your profit margins

Finding the optimal balance between pricing and output can take some time, but is always a worthwhile practice. The primary benefit of profit maximisation is so you can grow your business; having more revenue means you can invest in more staff, add new services and expand your reach. The bigger you are, the more likely you are to find an advantage over your competitors, and more clients will be willing to try you out.

Amplify your business with Mira

Boasting job scheduling, invoice creation, staff management and more, investing in Mira is an efficient and effective way to supercharge your business and help you generate more revenue. Start a free trial and check out our suite of features, or get in touch for a demo to learn more about how Mira can help your business.