You rarely need to double your sales to double your profit. Your fixed costs, such as rent, salaries and utilities, stay roughly the same however much you sell, so once you're past break-even, extra margin goes mostly to profit. The five levers are: raise prices, cut direct costs, sell more of your most profitable work, increase the average sale, and deliver value that keeps customers coming back. Start with monthly management accounts so you know which lever matters most.
Why profit can double faster than sales
Here's a simple example. A business turns over £500,000. Delivering the work costs £250,000, leaving £250,000 gross profit. Overheads are £200,000, so the profit is £50,000.
Now put prices up by 10% and keep the same customers. Turnover becomes £550,000, delivery costs stay at £250,000 and overheads stay at £200,000. Profit is now £100,000. A 10% price rise has doubled the profit.
Real life is rarely that tidy, but the point stands: small changes in price and margin have a big effect on the bottom line.
Know your numbers first
You can't pull the right lever if you don't know your numbers. Ask yourself:
- Which of your products or services make the most profit?
- When did you last go through your costs line by line?
If you take one thing from this article, make it this: produce monthly management accounts. They're essential.
The five levers
1. Raise your prices
A small price rise can make a big difference to profit without losing many sales. If you consistently deliver great value, customers will usually pay a little more. When did you last put your prices up?
2. Cut your direct costs
Negotiate better deals with suppliers, or find cheaper options that keep the quality. Cutting costs doesn't mean cutting corners. While you're at it, check your subscriptions and fixed costs too.
3. Sell more of your most profitable work
Find the products or services with the best margins and put more of your marketing behind them. You can only do this if you're tracking margin by product or service.
4. Increase the average sale
Train your team to offer extras or a premium version. A higher average sale boosts profit without the cost of winning new customers. For many businesses, average sale value is one of the key numbers to watch.
5. Deliver exceptional value
Doubling profit isn't only about prices and costs. Customers who get more than they expected come back, recommend you and are more relaxed about price rises. They're also less likely to be tempted away by competitors.
Questions to think about
- Do all your products and services earn a good return?
- How could you make what you offer feel more valuable?
- Which processes could you streamline to save time and money?
- Do you produce monthly management accounts?
If you couldn't answer some of these, that's normal, and it's the place to start. You might also like where the hidden profit sits in a service business.
Frequently asked questions
Do I need to double my sales to double my profit? Usually not. Because fixed costs stay roughly the same, a modest rise in prices or margin can have a much bigger effect on profit. In the example above, a 10% price rise doubles the profit.
What are management accounts? A monthly report of your income, costs and profit, so you can see how the business is doing as you go, rather than once a year when the year-end accounts are done.
Want help finding more profit?
Book a free strategy call and we'll look at your numbers together and pick the lever that will make the biggest difference.