Improving Business Profit

If you have found this page without reading our page on Business and the Profitability Quotient, you should read that page first to see how we recommend tracking the profitability of a business. After reading it, there is a link back to this page at the end of the page.

There are very few ways to actually improve the profitability of a business. Here are all of the possible ways. Of course each one can be accomplished by many small factors working together.

Increase Gross Profit, while maintaining current expense levels.
Decrease expenses while maintaining current Gross Profit levels.
Increase Gross Profit and decrease expenses.

Increasing Gross Profit

Remember that Gross Profit is calculated by subtracting cost-of-goods-sold (COGS) from sales. So, to increase Gross Profit, you have to widen the gap between COGS and sales. One way to accomplish this is to try to find the products you are selling for less, but often the easiest thing to do is increase the selling price while maintaining current COGS. Successful businesses are often able to do this without their customers even realizing it is happening. This is accomplished by manipulating the pricing on “blind” items. Blind items are those that customers buy without considering the price and don’t really shop for.

An example from one of my past management positions follows. I ran a small hardware store and we decided to increase our Gross Profit. We realized that our customers did not price plumbing fittings; they just bought them when they needed them. These items were selling for between .15 and 2.00. We simply raised the prices to .25 to 2.49. Almost nobody even realized it and our sales didn’t go down at all. As a matter of fact, because we are tracking sales in dollars sold, our sales went up because we sold the same number of items as before, but sold them for more money. This was just one area where we did this. We actually went through every department in the store finding blind items to increase our Gross Profit. This can be adapted to almost any type of business; you just need to know where to look.

Reducing Expenses

Reducing expenses is one of the hardest areas, but also one of the most important ones, to accomplish when trying to improve the profitability of a business. Probably the easiest way to accomplish reducing expenses is to maintain current expenses while increasing Gross Profit. You need to track every single expense, no matter how small and always look for ways to reduce them.

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