The Only 5 Ways To Increase Profits

_{[Read time: 4 minutes]}

Revenue is great.

Profit is greater.

Generate all the revenue you want — but if it never touches the bottom line, you’ll be job hunting soon.

Here are the only 5 ways to grow profits.

1. Cut Costs & Manage Cash

The more you grow, the more things bloat (or break).

The upside to cost-cutting measures is they are effective and direct — meaning they hit the bottom line.

The downside is there is a limit to what you can cut.

For example, if you have only $40,000 in expenses, the maximum you could ever increase your profit by cost-cutting is $40,000.

I know it’s unrealistic for a business to cut every expense (but you get the point).

The key is to focus on costs that (when cut) don’t impact revenue or time to fulfill your product or service.

I included managing cash here, too, because the act of managing cash also involves cutting costs.

While it is a bit more nuanced, here are some of the simple strategies:

• Investing dormant cash balances into higher-yield accounts

• Using credit cards for points and extra days of cash float

• Mixing forms of short-term debt (with your balances)

• Invoicing fast (and providing benefits for faster payment)

Less obvious methods are automatic payments and money movement processes.

I’m surprised how often I see businesses pay fees or miss due dates — so building a simple money movement system is easy and effective.

Side note: When I partner with businesses to increase profit — I always review costs and cash first because it's the most straightforward (and requires the least overhaul) while still being super effective (so long as the accounting is in order).

2. Increase Sales Volume

It might be obvious — but you sell more, you make more.

There are two ways to look at this option:

• Linear — When you make no changes to your operations, increasing sales volume simply means more. If 1 sale equals $1,000, then 10 sales equals $10,000 profit.

• Exponential — Pair operational or cost enhancements with increasing sales, and you will have a greater impact on each unit of input. 1 sale used to equal $1,000. But with improvements, 1 sale now equals $1,500, so 10 sales now equals $15,000 profit.

This is a difference between increasing profits and profitability.

• Increasing profits means growing in absolute terms — the bottom line gets bigger because you did/sold/built more

• Increasing profitability means growing in relative terms — the bottom line gets bigger because you structured operations to retain more

When you increase profitability first, you can grow profits faster with every input.

This means that as long as increasing sales volume doesn’t cost you more (and you can handle more), you will increase profits with more sales.

3. Increase Price

Increasing prices is the single most effective way to increase profits.

If it takes the same amount of time and resources but at a higher price, then you immediately feel the impact.

• Today: If XYZ costs $10 and 1 hour to make, and you sell it for $25, then you net $15.

• Tomorrow: If XYZ still costs you $10 and 1 hour to make — but now you sell it for $50, then you net $40.

In this scenario, a 100% price increase meant 166% profit growth.

While price changes look simple “on paper,” price changes are far from simple in real life. There is still this thing called the market, and it influences your price. That said, you still have some control over the prices of your product or service.

Most business owners fear “losing customers” with price increases, but the truth is, if done right, they’re a good thing. You spend less time making the same amount as before (and sometimes get better customers).

Here’s a general framework for when to start assessing pricing that I use with businesses (especially if you haven’t changed pricing in a while):

• Solo operator — when >70% of your time is spent on fulfillment (doing the work)

• Multi-person operation — when the sum of everyone’s time is >80% on fulfillment and sales have increased at a sustainable rate

• Non-price-sensitive market — increasing the price probably increases the value

4. Add Revenue Streams (For Margin)

This may seem similar to increasing sales, but here, I mean deploying different products and services as add-ons, upcharges, or options.

For example:

• If you’re a custom wine cellar maker — partner with a premium wine vendor to build in a subscription wine service (and collect a subscription or referral fee).

• If you have a remote education business where you teach multiple students — set up the option for one-on-one coaching or tutoring option.

The goal here is to find higher-margin options that support your primary streams — meaning the time-to-profit or revenue-to-profit is better.

More streams aren’t always better because some take time to evolve. However, if done correctly, these streams increase the value of the customer experience over the long run and could even influence the pricing (and profitability) of your primary offering.

5. Shift Time (To Higher Revenue Or Profit Activities)

Entrepreneurship is all about trading up your time.

This means shifting your time to work on activities that generate higher revenue or profit.

Let me take a step back — because this requires some context.

There are 3 types of activities in any business:

• revenue/profit-generating

• business development

• non-revenue/profit-generating

Fulfillment is an example of a revenue/profit-generating activity. You perform the service to be paid by the customer.

Marketing is an example of a business development activity. You are positioning yourself for future sales or fulfillment.

Bookkeeping is a non-revenue/profit-generating activity. You are keeping the business going and organized, but there isn’t a direct revenue tied to your time.

Another way to think about this is to outsource work (to people or technology) or eliminate work you shouldn’t be doing.

I’ve shared the two ways to scale your time for solo operators, but the strategy also applies to multi-person businesses.

Implementing these 5 strategies into your business will position it for profit growth and long-term sustainability.

Thank you for reading.

See you next week.

— Peter