How to improve your profit margin

4 steps to improve your profit margin

1. Analyze your company’s strengths and weaknesses

Start by examining your business with a focus on profitability to identify areas for improvement. One way to do this is to look at your income statement line by line to see how much various revenue items and expenses affect your profitability. 

If you look at revenue, for example, the first question is whether you have enough sales to run a business profitably. If that’s a problem, then you can focus on sales and marketing. 

If your cost of goods is too high, you should look at operations to see if your processes are as effective as needed. 

If a significant proportion of your expenses are salaries, then you should ask if your payroll is sustainable and efficient. Maybe you have high turnover, leading to high severance costs for employees leaving, slow growth, and low productivity due to hiring, onboarding, and training costs. What looks like a high payroll on an income statement may be a more systematic problem with culture and management. In that case, it makes sense to prioritize transforming your culture and the way you manage people. 

Maybe your people are wasting time because they can't find the information they are looking for. Perhaps you have too many technical issues stopping people from doing their work.

The idea is to take a systematic look at your business, asking questions to zero in on areas of potential improvement. It’s about finding the right opportunities for your business.  

Figure 1: Questions to ask to analyze your current state

The key will be to keep your efforts focused. You want to assess the different spheres of your business to see where your company is lacking or where there could be improvements.

2. Look at external trends

Understanding external trends is crucial for selecting investment opportunities with the highest ROI. This includes knowing what external factors will impact your company in the coming months and years.  

A good way to do this is to complete a SWOT analysis (strengths, weaknesses, opportunities and threats). Analyzing your external environment will help you figure out the trends and threats your business will be facing in the near future. 

What about AI?

One such example is artificial intelligence (AI). AI has been all the buzz in business circles lately and with reason. The potential of this technology is amazing. But what does it mean concretely? 

We believe AI and other technologies like it can impact your productivity and your ability to bring value to clients. 

For example, some businesses are using document analysis AI to screen applicants. AI can also automate payroll and benefits administration.

In customer service, AI-powered chatbots can provide customers with quick and accurate responses to their questions anytime. It can help monitor and optimize inventory levels. In manufacturing, it can monitor equipment and predict when maintenance will be needed. These are just a few examples.

But AI doesn’t just happen. Just like any technology purchase, investing in AI should be done thoughtfully and as part of a deliberate approach to consider the strategic and technical implications. 

A focus on sustainability can give you an edge with clients

Sustainability is another opportunity that can be worth investigating.

Now, many of you probably see sustainability as more of a cost. But it’s a bigger opportunity than it can appear at first glance. Both business-to-business and business-to-consumer companies can use sustainability as a way to attract clients—most of them are asking for it. 

Our surveys show that 82% of major buyers in Canada require that their suppliers meet at least one ESG criterion. Meanwhile, 61% of Canadians believe that companies should put more emphasis on the environment and sustainability.

And it doesn’t have to be complicated.

For example, we have seen businesses using recycled materials and plastics without publicizing it. Putting forward what you are already doing concerning the environment or inclusion in the workplace can be an excellent way to add value to your brand.

Many clients will be willing to pay more to purchase from a company they know is doing their part to help the environment and society, helping boost your margins.

As a bonus, it’s also a great employee recruitment and retention tool.  

3. Prioritize your efforts

After gathering ideas and analyzing your internal and external environment, the next step is to create a focused plan to improve your margins.. This will help get your entire team focused on the same goals. It will also provide you with an objective assessment of your progress toward these goals. To be a success, the plan needs to be centred around practical steps to regain control of margins. 

For example, if you have a challenge with low revenue, then you may want to focus on high-margin products or customer segments. Or you can review your brand to make sure you are well positioned in your market. 

If financial management is a key concern for your team, then you may want to review how you gather and present your financial data. And so on. 

Profit margin protection and expansion require a focused approach.

You need to evaluate all available options and tailor them to your reality. The strategies also need regular review and adjustments to adapt to changing circumstances; your strategies are not as linear and disconnected as they might seem. It’s essential to identify the root causes of challenges when making decisions. 

As you analyze your options, you will identify several strategies to increase your margins. Here are some possible tactics that you could use.

Figure 2: Examples of tactics you can use to improve your margins

With limited resources, choosing initiatives with high impact and lower costs and efforts are most desirable. You will also want to calculate the expected ROI to select the highest-impact opportunities.

Figure 3: Classifying opportunities according to their effort-to-benefits ratio is a good way to prioritize ideas

In the example above, the company has determined that focusing on high-margin products will rapidly have an impact, while other initiatives will either take more time to impact the company’s bottom line or won’t impact profits as much.

At this stage, it’s important to think about the value for clients, not just for yourself. 

Actions identified as priorities will ultimately be incorporated into an action plan that will include a timetable, ownership of each initiative and a cost estimate. Here is an example of what an action plan could look like for your company.

Figure 4: Example of an action plan

A strategic plan is a living document that must be regularly updated and adjusted to new circumstances. Focusing on your profit margin will give you a clear metric against which to measure improvements.

Don’t forget, it’s easy to have blind spots. Working with an experienced specialist can help avoid conflicts or sidestep common mistakes. 

Investment decisions will have long-lasting impacts on your business. It’s best not to pull the trigger after a quick review. Don’t hesitate to seek expert advice to address the right problem and fix it.

4. Set things in motion

Implementing your plan is just as crucial as creating it.

First, you will want to communicate your plan and make sure your team understands the vision for the company.
Break your plan into different manageable objectives to ensure you take things one step at a time. Doing this will also help track progress and identify potential roadblocks.

Lastly, you want to measure results and schedule reviews of your plan. For example, if you’ve achieved a 1% profit increase, you want to see what worked and adjust your plan accordingly.

Small improvements can add up to make a huge difference

We believe these simple steps can help give your company a clear direction to improve profit margins.

By themselves, these ideas won’t necessarily change everything in your business. However, several small changes taken together can make a huge difference. 

If you manage to improve revenue by 1%, reduce costs by 1%, improve productivity by 1%, and so on, it can all add up to have a significant effect. 

For example, a 10% net profit margin on a million dollars in sales will give you $100,000 in profit. Improving your net profit margin by 5% will net $50,000 going straight into your pocket. 

And this is a gift that keeps on giving because anytime you're feeling a bit tight, you can go through this exercise again and find where you can improve.

Even the smallest adjustments can yield significant improvements in profit margins. By systematically analyzing your operations, leveraging your strengths, addressing weaknesses and staying attuned to external trends, you can create a positive impact on your bottom line.

Take action today—every dollar saved or earned contributes directly to your financial success. Remember, the journey to greater profitability starts with a single step. Make that step count.

Next step

Don’t hesitate to fill out a form if you want to talk with an expert about where to find the biggest opportunities for profit growth in your business.