How to Make More Money?
(6 minute read)
How to Make More Money: Three Profit Levers to Boost Your Business Profitability
Improving profitability doesn’t have to mean drastic cost-cutting measures like firing staff or slashing employee perks. In fact, such
actions can often have negative, unintended consequences on workplace morale and long-term performance. Instead, businesses can focus on
three key profit levers outlined in the Profit & Loss (P&L) statement: Sales, Direct Costs, and Operating Expenses. Let’s explore
how pulling these levers can lead to sustainable profitability.
1. The Sales Lever
Sales is the top line on your P&L statement, and it can be adjusted in two main ways:
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Increase Prices: Raising the price of your products or services leads to a direct boost in profit margins. For example, a
10% increase in prices can lead to a 53% improvement in profit because the additional revenue flows straight to the bottom line without
impacting unit costs. However, this strategy requires careful consideration to avoid alienating price-sensitive customers.
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Increase Volume: Selling more units is another way to improve sales. A 10% increase in sales volume can yield a 16% profit
increase. To achieve this, businesses can focus on strategies like upselling and cross-selling, which also enhance customer lifetime value
and loyalty. Leverage customer data to identify opportunities for targeted promotions and nurture existing relationships to drive repeat
purchases.
2. The Direct Costs Lever
Direct costs, or the cost of goods sold (COGS), are expenses directly tied to the production of your products or services. These direct
costs include staff wages and entitlements for your "fee earning" team members. To optimise direct costs:
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Renegotiate with Suppliers: Work with your suppliers to secure better terms, such as discounts for bulk purchases or
long-term contracts.
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Streamline Inventory Management: Reduce waste by optimising stock levels and eliminating excess features that don’t add
value to customers.
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Consolidate Vendors: Analyse vendor performance and consider consolidating suppliers to achieve economies of scale.
These adjustments can significantly reduce variable costs and improve overall profit margins.
3. The Operating Expenses Lever
Operating expenses are fixed costs such as rent, wages, utilities, and subscriptions. Unlike direct costs, these don’t vary with sales
volume, but they can still be optimised:
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Audit Subscriptions and Services: Identify unused or underutilised subscriptions, such as software tools, and cancel or
downgrade as needed.
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Negotiate Overhead Costs: Explore opportunities to renegotiate rent, utility rates, or insurance premiums. (Tip: use
a broker who specialises in this!(
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Adopt Flexible Staffing Solutions: While cutting staff may harm morale, outsourcing or using contractors for non-core
activities can be a cost-efficient alternative.
A comprehensive review of operating expenses can uncover hidden savings without compromising on business performance.
Balancing the Levers
Each profit lever interacts with others, and the most effective strategy depends on the unique circumstances of your business. For instance:
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Increasing prices may lead to higher revenue but could reduce sales volume if customers seek cheaper alternatives. (This may
ultimately result in additional profit if these customers are low margin customers)
- Cutting costs too aggressively might affect product quality or employee satisfaction, ultimately impacting sales.
The key is to take a balanced approach, informed by data and aligned with long-term goals. Leveraging technology, such as advanced analytics
or customer relationship management (CRM) tools, can provide the insights needed to make smarter decisions.
The Order of Priority: Sales, Direct Costs, and Operating Expenses
When it comes to improving profitability, not all levers are created equal. The most effective way to boost profits is by focusing on Sales
first,
followed by Direct Costs, and finally Operating Expenses. This is because increasing sales has the highest
impact on the bottom line, while cost-cutting measures—though useful—have limitations and potential downsides.
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Sales (Most Effective): Growing sales revenue has the greatest impact on profitability because every extra dollar earned
contributes directly to the bottom line. For example, a café that increases coffee prices by 10% without losing customers immediately
sees higher profits without increasing costs.
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Direct Costs (Second Priority): Reducing direct costs increases profit margins but has diminishing returns. For
instance, a manufacturing business that renegotiates bulk discounts with suppliers saves money per unit, but it can only cut so much before
affecting quality.
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Operating Expenses (Least Impactful): Cutting operating expenses helps, but these costs are typically fixed and cannot be
reduced beyond a certain point. For example, a consulting firm that cancels unused software subscriptions may save $500 a month, but
these savings are marginal compared to increasing client billings by 10%.
Prioritising efforts in this order ensures sustainable profitability without compromising product quality, employee satisfaction, or
long-term growth.
Before resorting to drastic cost-cutting measures, consider the three profit levers: Sales, Direct Costs, and Operating Expenses. By
strategically adjusting these areas, you can boost profitability while maintaining a positive workplace culture and strong customer
relationships. The key is to focus on sustainable improvements that benefit both the business and its stakeholders in the long run.
If you’re ready to take your business to the next level and get out of reactive mode, let’s chat. Reach out to us at
hello@accountica.com.au with the subject line “Private,” and we’ll help you build the business of your dreams.
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The information on this website is general in nature and does not consider your personal situation. You should consider whether
the information is appropriate to your needs and, where appropriate, seek professional advice.
