25 Ways to Increase Your Business Profitability Without Working Harder
The fastest ways to increase business profitability are rarely dramatic. They are simple habits: getting accurate financial statements on time, pricing in dollars instead of percentages, knowing how much revenue every expense requires, and tracking a handful of trends every month.
Here are the 25 I’ve used with business owners for decades. They are simple to do. However, you must execute them, and they must become habits.
Start With One Question: Why Do You Want to Be More Profitable?
You MUST have an answer to this question. Otherwise, you won’t do the work.
If you’re still struggling to make a profit, your answer is probably survival. That’s a fine answer. But once you’re past the survival stage, ask again. “To grow.” Why do you want to grow? “To sell the business,” “to pass it to the next generation,” “to travel,” “to send my kids to college.”
Keep asking. I’ve watched owners sell their business for a good price and then get totally bored, because they never answered the question “then what?”
Profitability to do what? Once you have an answer you believe, you’ll do the 25 actions below.
The Basics: See Your Numbers Clearly
1. Get a timely, accurate financial statement every month
You need an accurate profit and loss statement and balance sheet by the 15th of each month, and preferably by the 10th. You can see your bank activity online every day, so there’s no reason to wait.
Along with your statements, get an aged accounts receivable report and an aged accounts payable report. If the aged receivables don’t match the receivables on your balance sheet, or the aged payables don’t match accounts payable, something is VERY wrong.
This is your starting point. Spend a few minutes checking for obvious mistakes, then spend 30 minutes or less on profit and loss statement analysis so you spot minor issues before they become major crises.
2. Get a weekly cash flow report
A weekly cash flow report doesn’t improve profitability by itself, but it keeps your eye on cash, which is critical for survival.
Each week you should see your beginning cash, plus the cash that came in from collections, asset sales, loans and interest. That’s your total available cash. Then subtract disbursements, usually payroll, accounts payable and loan payments. That gives you your ending cash. Finally, estimate next week’s inflows and outflows.
Your bookkeeper should put this report on your desk every Friday afternoon, with the aged receivables and payables attached. You can see a sample on our weekly cash flow report page.
3. Look at your bank accounts every day
It takes less than five minutes. Look at the checks, the automatic withdrawals and the deposits, and make sure they make sense.
One client’s bookkeeper did this (the owner did not) and noticed two tiny deposits of less than $1.00 each. He assumed the owner was setting up a new account. The next day, the bank called to ask whether the owner had authorized a $50,000 withdrawal. He hadn’t. Those two tiny deposits were someone testing whether the account was valid. Read more about why to check your bank accounts daily.
At a minimum, keep three bank accounts: one for operations, one for payroll, and a savings account where you put 1% of revenue every week.
Pricing: Get Paid in Dollars, Not Percentages
4. Stop pricing with percentages
You cannot take a percentage to the bank. Imagine asking a teller to deposit your 10% net profit. You can only deposit dollars.
Suppose two projects each take 16 hours. One is priced at $10,000 and the other at $5,000. If you assign overhead as 25% of price, the first project carries $2,500 of overhead and the second carries $1,250. That’s wrong. Both take the same 16 hours, so both should carry the same overhead.
Percentages also shift with revenue. Your rent is roughly the same every year, but as a percentage it rises in slow years and falls in busy ones.
Price using dollars, and measure your bottom line in dollars. The one percentage I do watch is gross margin, which is gross profit divided by sales. I don’t care what the number is. I care that it’s consistent.
5. Know your net profit per unit of revenue
Divide your net profit by your unit of revenue. For a car wash, that’s cars washed. For an accounting firm, it’s billable hours.
If you like the result, keep achieving it. If you don’t, adjust your prices, cut costs or increase productivity to raise it gradually.
6. Know your overhead cost per unit of revenue
Divide your total overhead by your revenue units. Suppose your overhead is $50 per unit and your competitor’s is $30. On an 8 unit job, yours is $400 and theirs is $240. Your competitor can charge the same price and earn $160 more, or charge $160 less and win the job.
To lower it, ask your team. If you ask how to cut $1,000 a month, nobody will have an answer, because the number is too big to picture. If you ask how to shave $100 a month, you’ll get great ideas. Implement the simple ones. The more units you produce, the lower your overhead per unit.
7. Price from the bottom up
Most owners take their costs and divide by 1 minus the gross margin. That ignores overhead completely.
Start with the net profit you want instead. One HVAC client constantly complained that he could never make money on duct jobs. I asked him what net profit per hour he wanted on them. He told me, we built the prices from that number, and he agreed not to take the work if a customer wouldn’t pay it. I never heard another complaint about duct jobs.
Here’s the method:
- Decide the net profit you want per hour.
- Add your overhead cost per hour. The total is your gross profit per hour.
- Multiply that by the hours the job will take.
- Add the job’s direct costs, including commission.
The result is your selling price.
Ruth’s Rules: Know the Revenue Every Expense Requires
I developed Ruth’s Rules years ago to calculate the revenue needed to pay for any expense.
8. Ruth’s Rule #1: Revenue needed for direct costs
Sales = Direct expense ÷ (1 – gross margin)
Say you’re considering a field employee who wants $40 an hour. Your service department’s gross margin is 52%, benefits are 30% of wages, his truck costs $10 an hour, and he works 2,080 hours a year.
- Wages: $40 × 2,080 × 1.3 = $108,160
- Truck: $10 × 2,080 = $20,800
- Total: $128,960
- Revenue needed: $128,960 ÷ 0.48 = about $268,667
Can he generate that much a year? If so, his $40 an hour is justified. Run this calculation for every direct cost employee.
9. Ruth’s Rule #2: Break even revenue for overhead expenses
Sales at break even = Overhead expense ÷ gross margin
Your social media and website cost $1,000 a month and your gross margin is 55%. That means those channels must generate $1,818.18 a month just to break even. If they don’t, fix them, find help, or stop.
It works for raises too. Your office manager wants to go from $50,000 to $60,000, and your gross margin is 35%. Leaving out payroll taxes for simplicity, $10,000 ÷ 35% = $28,571.43. Ask her how she’ll help the company bring in that much more revenue.
10. Ruth’s Rule #3: Revenue needed for an expense, including the profit you want
Sales = Overhead expense ÷ (gross margin % – desired profit %)
You’re considering a spring postcard campaign: 1,600 cards at a cost of $800. Your gross margin is 45%, and you want a 15% profit. $800 ÷ 30% = $2,666.67. If the offer is for a $100 product, you need 27 sales. That’s unlikely from a cold list, but possible from past customers you mail regularly.
Hiring an office employee at $20 an hour plus 30% benefits, with a 48% gross margin and a 10% profit target, works the same way. $20 × 2,080 × 1.3 = $54,080, and $54,080 ÷ 38% = $142,315.79. Can you increase revenue, or save that much by hiring her?
Productivity: Make Billable Hours Count
11. Know your productivity ratio
Customers write your paychecks, so the time your team spends producing for them matters. Your productivity ratio, also called the compensation percentage, answers one question: for each dollar of revenue, how much do you spend on payroll and payroll taxes?
Productivity ratio = (Total payroll + payroll taxes) ÷ sales
Include all payroll, including your own salary and commissions, plus FICA, Medicare, and state and federal unemployment taxes. Leave out health insurance, retirement, workers’ comp and other benefits.
The lower the ratio, the more productive your team. Generally, aim for under 40% over the long term. It rises in slow seasons and falls in busy ones. If it ever passes 100%, you’re spending more on payroll than you bring in. Track your productivity ratio trends monthly.
12. Post your productivity ratio weekly
What gets watched gets better. Once you know your baseline, post the company total where everyone can see it, explain why it matters, and update it weekly. A month between updates is too long, and people lose focus.
Ask for ideas to lower it. Your employees know who’s wasting time. Post only the aggregate number. If one person is unproductive, talk with that person privately.
13. Bonus based on estimated hours
Calculate how much your bottom line improves for each percentage point the ratio drops, and share a portion of that increase with the team.
You can also bonus on individual jobs. If a project is estimated at 16 hours and done in 14, pay a bonus of, say, $5 per estimated hour. That’s $80, and you can build it into the estimate. Only pay it when the work was done correctly with no warranty callbacks, so nobody rushes.
Inventory: Stop Losing Money on the Shelf
14. Eliminate warehouse supermarkets
I once watched a technician walk into an unlocked parts room and leave with an armful of parts. He didn’t write anything down or tell anyone. Were they replacements? Parts he thought he might need? Stock for his own future business? You don’t know.
If field employees can walk freely through your warehouse, you have a warehouse supermarket. Lost, unaccounted for and damaged parts go straight against your bottom line. If your balance sheet shows $25,255 in inventory but the count is $15,255, that $10,000 gap goes to job cost and cuts profit by $10,000.
Inventory is a bet that you’ll sell what you bought. How good have your bets been?
15. Know your inventory days
Inventory days measure the average time between buying a part and using it on a job.
- Inventory turns = annualized cost of goods sold ÷ inventory
- Inventory days = 365 ÷ inventory turns
I use cost of goods sold rather than material expense because a part can’t be installed without labor. Commercial contractors typically run 10 days or less, and residential contractors under 30. Dell once bragged about two days. Watch how small changes in receivable and inventory days affect your cash.
Balance Sheet Trends: Are You Really Profitable?
Your P&L tells you whether you were profitable for a period. Your balance sheet tells you whether you’re really profitable. These three liquidity trends, part of balance sheet ratio analysis, show which direction you’re heading.
16. Track your current ratio trend
Current ratio = current assets ÷ current liabilities
Current assets are cash and anything that becomes cash within a year, usually receivables, inventory and prepaid expenses, plus underbillings for construction companies. Current liabilities are obligations due within a year, usually accounts payable, taxes payable, deferred income and the current portion of long term debt, plus overbillings.
This ratio must stay above 1, and the only lasting way to raise it is profitable sales. A rising current ratio generally means rising profitability. A large asset purchase, like a truck, will move it temporarily.
17. Track your acid test trend
Bankers ask whether you could still pay your bills without your inventory. The acid test, also called the quick ratio, answers that.
Acid test = (current assets – inventory) ÷ current liabilities
Watch the gap between the two ratios. If your current ratio is 2, your acid test should be 1 or higher. If your current ratio rises while your acid test stays flat, you’re building inventory, so find out why. See current ratio vs. acid test for more detail.
18. Track your accounts receivable to accounts payable trend
AR to AP ratio = customer receivables ÷ vendor payables
Count only receivables from customers, not from owners or employees. If more than half your business is COD, add cash to receivables. Count only vendor payables, not taxes or owner payables, and add credit card balances if you track them separately.
A rising ratio is good if your receivable days are steady. If receivable days are rising too, a collection problem is coming. Learn more about the accounts receivable to accounts payable ratio.
Customers, Marketing and Sales
19. Communicate with your customers
Years ago, a company did a phenomenal job cleaning a rug that’s been in my family for more than 50 years, and then left no way to contact them. I finally found them through a Google review search. When I told the owner, he started putting a laminated card on the back of every rug.
Staying in touch costs some time and money, but it pays off. It can be a monthly or quarterly email, a postcard, a newsletter, a refrigerator magnet, or a card on the back of the rug. Track the results, and you’ll see revenue and profit increase.
20. Reactivate inactive customers
Find every customer who hasn’t done business with you in 18 months. Segment them by what they’ve spent. Lower spenders get a postcard offer, and anyone over $5,000 gets a phone call.
Keep it light: “Mrs. Customer, I’m NAME, the CEO of COMPANY. I probably don’t want to know the answer to this question, but I need to know. We haven’t worked with you in a while. What did we do to cause that?” Listen. Then ask, “How can we get you back?” Listen again, and don’t offer anything until you’ve heard the answer.
Don’t be surprised to hear “I thought you went out of business.” It’s a very common response, and reactivating customers is one of the easiest ways to increase revenue and profit.
21. Know which marketing activities produce the best results
Effective marketing is the right message, sent to the right customer, through the right medium. Know the purpose of each campaign and the action you want people to take. Target the people who make the decisions, within a distance you can serve profitably.
Ask every new caller how they found you, then tally the answers. Put your marketing effort where the results are.
22. Know which salespeople produce the best results
Burning leads is one of the highest hidden costs in a business. If Salesperson A closes 25% and Salesperson B closes 50% at the same average sale, A wins two and a half jobs from every ten leads and B wins five. Give more leads to B, or train A to close better.
23. Know who your most profitable customers are
Which customers produce the highest net profit per hour? Which ones always negotiate, or are never profitable? Profile both, then market to the profitable type.
Growth and Cash
24. Make sure you’re not growing too fast
Annualized sales ÷ working capital should be 10 or less
Working capital is current assets minus current liabilities. To annualize mid-year, take year-to-date sales, multiply by 12, and divide by the number of months so far. If the result is above 10, check that your prices are profitable and watch cash closely so you don’t grow yourself out of business. Track your working capital trend monthly.
25. Watch your receivables
Receivables you don’t collect turn into bad debt, which is an expense on your P&L. Collect at the time of service whenever possible.
Before a commercial job starts, call the customer’s accounts payable person and find out exactly what they need in order to pay you on time. If an invoice is due in 30 days, someone should make a friendly call on day 31. Review the aged receivables attached to your weekly cash flow report every week.
Where to Start
You don’t have to do all 25 at once. Choose a few, start this week, and watch your bottom line.
For business owners: Want to see your profitability trends without building spreadsheets? Financially Fit Business turns your P&L and balance sheet into clear graphs of the ratios in this guide in minutes. Book a walkthrough to see your own numbers.
For accountants and financial advisors: These 25 ways make a ready-made advisory conversation with every client. See how Financially Fit Business helps financial professionals deliver this analysis, and how our advisory certification prepares your team to lead it.