4 Ways to Increase Business Profits
by NFCU AVP of Commercial Lending Kent Landacre
Have you looked at your business’s income statement lately? Was the business’s pretax profit less than what you budgeted or anticipated it to be? Trying to find a solution can be difficult, but it ultimately boils down to 4 simple options: Cutting fixed costs, cutting the variable cost %, increase sales, or raise the price. Obviously it’s a lot easier said than done, and each option comes with its own set of ramifications. However, these four options will give you and your business a good starting point to identify potential solutions.
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EXAMPLE Business |
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| Sales (10 units at $0.10) | $1.00 |
| – Variable Costs (50% of sales) | – $0.50 |
| = Gross Profit (Contribution Margin) | = $0.50 |
| – Fixed Costs | – $0.25 |
| = Pretax Business Profit | = $0.25 |
1. Cut Fixed Costs:
The first option that you have to increase your business’ profitability is to cut fixed costs such as salaries, office rent, equipment lease payments, etc. Fixed costs are expenses that do not change with an increase or decrease in the amount of products or services that the business produces. By lowering fixed costs you are immediately adding more money to your pretax profit. This is why in times of financial distress, businesses lay off employees or close certain locations. Using the example below we have reduced fixed costs from the original example. Take a look how it increases the business’s pretax profit:
| Sales (10 units at $0.10) | $1.00 |
| – Variable Costs (50% of sales) | – $0.50 |
| = Gross Profit (Contribution Margin) | = $0.50 |
| – Fixed Costs | – $0.15 |
| = Pretax Business Profit | = $0.35 |
2. Cut Variables Costs %:
The second option to increase your business’ profitability is to cut the variable cost percentage of sales or simply become more efficient. Variable costs are expenses that vary with the amount of products or services it produces such as the costs of raw materials, labor costs, commissions, etc. By lowering variable costs % you will be contributing more money to your gross profit, which will lead to a greater pretax profit. Using the example below we have reduced the variable cost % from the original example. Take a look at how it increases the gross profit which translates to a greater pretax profit:
| Sales (10 units at $0.10) | $1.00 |
| – Variable Costs (40% of Sales) | – $0.40 |
| = Gross Profit (Contribution Margin) | = $0.60 |
| – Fixed Costs | – $0.25 |
| = Pretax Profit | = $0.35 |
3. Increase Sales:
The third option to increase your business’ profitability is to simply increase the volume of sales of your product or service. By increasing sales you are increasing your gross profit, which will lead to higher pretax business profit. Using the example below we have increased sales of our product or service from 10 units to 15 units. Take a look at how that increases gross profit which translates to more pretax profit:
| Sales (15 units at $0.10) | $1.50 |
| – Variable Costs (50% of sales) | – $0.75 |
| = Gross Profit (Contribution Margin) | = $0.75 |
| – Fixed Costs | – $0.25 |
| = Pretax Business Profit | = $0.50 |
4. Increase Price:
The final option that you have is to increase the price of your product or service. By raising the price of your product or service you will be generating more money in sales and thus contributing more to your gross profit. However, depending on the demand for your product or service an increase in price could lower demand and thus lead to lower sales. Using the example below we have increased the price of our product or service from $0.10 to $0.15. Take a look at how that increases gross profit which translates to more pretax profit.
| Sales (10 units at $0.15) | $1.50 |
| – Variable Costs (50% of sales) | – $0.75 |
| = Gross Profit (Contribution Margin) | = $0.75 |
| – Fixed Costs | – $0.25 |
| = Pretax Business Profit | = $0.50 |
Our team at Neighbors FCU can help you identify potential solutions to increase profitability. Please reach out to our commercial services team at 225-819-2178 to set up your meeting to go over your business’s financials!