Scalable businesses will see profit rise as revenue rises, if costs are kept consistently low and affordable. As a value driver, it shows how effectively your business can generate profit and is an accurate way of benchmarking similar businesses in the same sector.
Net profit margin is the revenue remaining when all expenses are deducted from your sales. It demonstrates your business’ ability to turn revenue into profit, accounting for all expenses including overheads, taxes, and debt.
Why net profit margin matters
It shows how effectively your business can generate profit.
It’s an accurate way to compare and benchmark businesses in the same sector.
It can highlight the effectiveness of valuable business strategies.
Investors use it to determine value and potential future growth.
The following 7 strategies can cut unnecessary costs, improve productivity, and significantly boost profits in your business.
1. Develop your pricing strategy
Explore the 4 P's framework and develop a pricing strategy to boost your position in the market. Consider your competitive position, what else is available in the market, quality, exclusivity, and availability of similar products and then determine which pricing approach is the best fit for your campaign.
Economy pricing: Competitively affordable prices. They’re set low because overheads like branding and advertising are kept to a minimum.
Price skimming: A temporary high price for a brand new product or service. Prices could be reduced later when the market becomes more crowded.
Penetration pricing: Lower than average pricing to encourage an initial sales boom. Prices may increase later.
Premium pricing: Higher pricing for something more specialist, luxurious, or higher quality than anything else on the market.
2. Improve cost control
Cost control means cutting unnecessary expenses and considering the value of all your overheads. Cut down on overspending and you could enjoy more profit.
Staff and human resources: Review your team, including permanent staff and contractors. Their contribution to your business can be invaluable, but some roles may be obsolete or too expensive.
Suppliers: Agencies are costly and sometimes nonessential. Just like your immediate staff, suppliers should be contributing meaningfully in a measurable way.
Premises and office space: How much space does your business need? It’s easy to anticipate how much space you could need in the future, but it adds a lot to your rental costs.
3. Buy more effectively
Some business resources are an essential investment, others are less effective and even wasteful.
Physical stock can become ‘dead stock’ if left unused, so over-investing becomes a significant waste of money. Direct debits for digital resources and subscriptions can also eat at your profits if they’re not measured and their value quantified.
Review your smaller outgoings regularly, even if they’re one-offs, and encourage your staff to reuse and repurpose what they already have where possible.
4. Add discipline to invoicing and payment systems
Having strict credit control processes in place will discourage late payment and non-payment. This includes automatically tracking invoices, offering discounts and incentives for early payment, and charging late fees where necessary.
You should also negotiate manageable payment terms and dates with your own creditors, which will help keep cash flow healthy. The longer you’ve worked with them, and the more confidence they have, the more likely you are to have some flexibility.
5. Leverage tax relief
Some businesses can benefit from tax relief, helping them hold onto more of their profit.
SMEs can claim back the costs of Research & Development (R&D), even if the project was unsuccessful.
To qualify you must:
Have attempted to advance science or technology, and overcome uncertainty.
Have created a new product or service, or developed an existing one.
Be able to demonstrate that another professional in your field could not have solved the problem.
Have fewer than 500 staff.
Have a turnover of under €100 million OR a balance sheet total under €86 million.
How to apply:
You can claim R&D tax relief through HMRC’s online services, or with the help of an R&D tax specialist, up to 2 years after the end of the accounting period.
6. Boost productivity
Once your operating costs have been reduced, better productivity means better profits.
To improve efficiency across people, processes and systems, assess what is and isn’t currently delivering high value and high returns. Your audit will reveal which elements are slowing productivity down, and which need more time and investment.
7. Concentrate your sales efforts
A highly targeted sales strategy is one of the most measurable and scalable ways to improve profits and productivity.
Powerful sales strategies:
Refine your sales funnel
Focus on increasing average sales value
Expand products and services
Examine new audiences, resources, and channels
Keep measuring and testing
Improving sales could involve committing more people and time, redistributing resources, and developing more sophisticated sales collateral.
Improving your business’ profits
Profitability is a significant measure of your business’ short and long-term success.
Invest in your sales processes, audit all your overheads, and it will translate to your net profit margin.
WANT TO KNOW MORE
Selina Bolton is a business strategist and the founder of Seed.Partners; a mergers & acquisitions firm specialising in attracting investment and creating opportunities for small to medium-sized businesses to scale and build value at pace.
Contact Us to find out how we can partner with you to accelerate your business growth.