Does wanting to make more money in your business ever make you feel…guilty? Do you worry that you seem greedy for focusing on profit margins instead of just "serving your customers"?
What if I told you that the most successful business owners don't just stumble into profitability? Instead, they plan for it, measure it, and optimize it systematically.
In this article, you'll discover the exact step-by-step process to calculate your current profit margin, set realistic goals based on industry benchmarks, and implement proven strategies that can increase your profitability. All without compromising the quality of service your customers expect.
You’ll get a clear roadmap to guilt-free profitability and the confidence to implement it starting today.
Why Most Business Owners Struggle with Profitability
Before diving into solutions, let's address the big question: Why do so many businesses struggle to maintain healthy profit margins?
The Revenue Trap
I learned this lesson the hard way during my first three years running Patrick Accounting. My revenue was climbing significantly (which felt amazing, btw), but I was making roughly the same amount of money in year three as I did in year one.
More revenue doesn't automatically equal more profit. Without proper systems and planning, increased sales often just mean increased expenses, longer hours, and more complexity without the financial rewards you're working so hard to achieve.
Industry Confusion About Good Profit Margin
One of the things I’ve realized is that many business owners have no idea what a "good" profit margin looks like in their industry. They're operating blindly, hoping their numbers are reasonable. But they have no benchmark to measure against.
The Guilt Factor
There’s a cultural narrative that says focusing on profit is somehow selfish or greedy. This leads many business owners to undercharge, overdeliver without compensation, and avoid the strategic thinking necessary for sustainable profitability.
But you need to understand that profit isn't greed. It's sustainability. Without healthy margins, you can't invest in better equipment, hire quality employees, serve customers well, or weather unexpected challenges.
These struggles are common, but they aren’t permanent. With the right framework, you can move from feeling uncertain to making intentional, data-driven decisions that increase profitability.
Step 1: Calculate Your Current Profit Margin
You can't improve what you don't measure. Knowing where you stand today and understanding how to calculate your profit margin is the first step to improving it.
The Simple Formula
Net Profit Margin = (Total Revenue - Total Expenses) ÷ Total Revenue × 100
For example, if your business generated $500,000 in revenue and had $425,000 in expenses:
- Net Profit = $75,000
- Profit Margin = $75,000 ÷ $500,000 × 100 = 15%
Look at Trends
Don't just calculate one month or one year. Pull your profit margins for the last 2-3 years to identify trends. Are your margins improving, declining, or staying flat? This historical view will help you understand whether your current strategies are working.
Where to Find This Information
If you have clean financial statements, this calculation should be straightforward. If you're struggling to get accurate numbers, that's a red flag that your bookkeeping needs attention before you can effectively work on profitability.
Step 2: Research Industry Profit Benchmarks
Context matters. A 5% profit margin might be excellent for one industry but concerning for another. Understanding your industry standards helps you set realistic goals and identify opportunities.
NYU's Stern School of Business maintains updated industry margin data that can serve as a helpful reference point (use “net margin”). Additionally, industry associations often publish financial benchmarks for their members.
Remember, these are averages. Top-performing businesses often significantly exceed industry averages through streamlined operations, pricing strategies, and intentional cost management.
Step 3: Set Realistic Profit Goals
Now that you know where you stand and what's possible, it's time to set specific, measurable goals.
The 3-6-12-Month Framework for Goal Setting
Here are some milestones to consider:
3 Months: Focus on quick wins you can implement immediately, such as cutting expenses, adjusting prices, or improving operations.
6 Months: Target medium-term improvements like new revenue streams, system upgrades, or staff productivity enhancements.
12 Months: Plan major strategic changes such as market expansion, significant technology investments, or business model adjustments.
Setting a goal is powerful, but specificity makes it actionable.
Make Your Goals Specific
Instead of saying something general like "I want to be more profitable," try specific goals like:
- "I want to increase net profit margin from 12% to 15% within 6 months."
- "I want to add $50,000 in annual profit through new service offerings."
- "I want to reduce operating expenses by 3% without compromising quality."
Step 4: Build Your Profit Improvement Team
Sustainable profit improvement isn't an individual project. This isn't something you want to do alone. You need the right people providing guidance, accountability, and expertise.
Your Accountant as Strategic Partner
Your accountant should be more than someone who files your taxes once a year. The right accounting partner will help you:
- Track progress toward profit goals
- Identify opportunities to reduce expenses
- Understand the financial impact of your business decisions
- Plan for tax implications of increased profitability
Internal Team Alignment
Make sure your key employees understand the importance of profitability and their role in achieving it. When your team understands how their actions impact the bottom line, they become more invested in the business’s profit and take ownership of their role in achieving it.
Now that you’ve established your baseline, set clear goals, and built your support team, it’s time to roll up your sleeves and get to work. With your goals in place, here are five proven ways to increase small business profitability without compromising service or overextending your team.
5 Proven Strategies to Increase Your Profit Margin
Here are specific, actionable strategies we've seen work across different industries:
1. Be Strategic with Expense Management
This isn't about cutting everything. It's about intelligent cost analysis. Here are some areas you can start:
- Audit subscriptions and recurring expenses monthly.
- Negotiate with vendors annually. Many offer discounts for loyal customers.
- Analyze cost per transaction to identify inefficiencies.
- Invest in automation tools for repetitive tasks that consume employee time.
2. Look for Revenue Opportunities with Existing Customers
Typically, it’s more expensive to acquire new customers than to sell additional services to existing ones. Here are a few ideas to consider:
- Upsell complementary services to current clients/customers.
- Implement annual price increases that reflect value and market rates.
- Create bundled service packages that increase average transaction value.
- Develop recurring revenue streams for more predictable cash flow.
3. Look for Ways to Improve Processes
Small process improvements can create significant margin improvements over time. For example:
- Track time spent on key activities to identify bottlenecks.
- Standardize procedures to reduce errors and training time.
- Invest in tools and technology that enhance employee productivity.
- Cross-train employees to reduce dependency on specific individuals.
4. Make Strategic Pricing Adjustments
One of the biggest hidden profit leaks we see is underpricing. It’s often driven by fear of losing customers, but with the right data and messaging, you can adjust your pricing confidently:
- Research competitor pricing to make sure you're not leaving money on the table.
- Calculate the true cost of delivering your service, including overhead.
- Test price increases with new customers before rolling out to existing ones.
- Focus on value communication rather than competing on price alone.
5. Optimize Your Financial Systems
Better financial management directly impacts profitability. Here are some steps you can take:
- Implement cash flow forecasting to avoid expensive emergency financing.
- Negotiate payment terms to improve working capital.
- Take advantage of early payment discounts from vendors.
- Review and update business insurance annually.
The Mindset Shift That Will Change Everything for Your Business
Here's what changed the game for me and transformed my business: Put profit first, not last. It all started when I read the first two chapters of "Profit First" by Mike Michalowicz.
The Traditional (Broken) Formula
Revenue - Expenses = Profit
This approach treats profit as whatever's left after expenses. The problem with this is that there’s rarely anything left over, because expenses generally expand to consume available revenue.
The Profit First Approach
Revenue - Profit = Expenses
By allocating profit first (even if it’s 1%-5% of revenue), you force your business to operate more efficiently with the remaining funds. This one shift creates immediate profit improvement and builds sustainable financial habits.
Why does the Profit First method work?
Because it's about more than just numbers. It’s all about human behavior. We tend to consume whatever we see as available. By taking profit first and setting it aside, you adjust your budget to what is actually available for expenses. Not the other way around.
Your Path to Guilt-Free Profitability
Increasing your business profit margin isn't about greed. It's actually about sustainability, growth, and creating value for everyone your business touches. When your business is profitable, you can invest in better service, hire great employees, and weather economic challenges.
The strategies we've outlined work, but they require commitment, measurement, and often some outside expertise to implement effectively.
At Patrick Accounting, we specialize in helping small business owners like you build more profitable, sustainable businesses through strategic financial management and proven systems.
Don't let another year slip by with flat margins and financial uncertainty. Check out our step-by-step Profit First setup guide. We’ll show you exactly where to start and how to succeed.
