If you run or operate a small business, cash flow and profits are never far from your thoughts. All business owners are on the lookout for opportunities to improve profits. After all, profits are the main reason for owning or operating a small business.

In today’s economy, profits are sometimes extremely elusive due to rising costs, falling sales, and margins under pressure. The competition is tough as some companies cut prices to the point where they are busy but not making money. To help you make business decisions, I have simplified the profit generation process. There are only three ways to increase profits and these should be considered when making all business decisions.

Let’s face it, there are only three fundamental ways to increase business profits: –

Reduce fixed costs (overheads) and variable costs of our business.

Raise the sale prices of our products and services (or lower the discounts).

Increase the volume of sales.

Cost reduction is a logical first step because money saved is better than money earned. (This should be obvious. If it isn’t, think about it until it becomes obvious.)

If we consider a simple example, we can apply some simple changes.

1. Sales equal $ 100.
2. Product manufacturing equals $ 50. These are variable costs for materials and labor.
3. Fixed costs are $ 40. These are overhead.
4. Gross profit, profit before tax, is $ 10

Note. Of course, as sales volume increases, variable costs sometimes increase proportionately. However, the fixed costs (the overhead) remain the same. The only time they will be upset is if the increase in sales is very large.

That is the theory. However, in many organizations, each time sales increase, fixed costs seem to increase proportionately, along with variable costs. And if costs are reduced, the savings do not seem to be reflected in the final gross profit. Often times, costs seem to grow to absorb savings elsewhere in the business, so that we gain nothing in the bottom line.

The same happens when we raise prices or reduce discounts. Rather than this being directly reflected in the bottom line, we seem to find a reduction in sales turnover, and this is attributed to the higher prices, of course.

If you set a goal of achieving only a 1% improvement in three key areas, reducing costs, increasing prices, and increasing sales, would you be sure you could achieve it without adverse reactions from other parts of your operation?

Calculate what makes a 1% improvement to each of the three fundamentals for the profit figures. Determine how much of gross profit will be improved if we could reduce fixed and variable costs by 1%, increase our prices or cut discounts by 1%, and increase our sales volume by 1%, all at the same time. Remember, this is without any of these changes having an adverse effect on the rest of your business.

Remember the original figures.

1. Sales $ 100.
2. Variable costs $ 50
3. Fixed costs $ 40.
4. The profit before tax is $ 10

Can you increase sales by 1% to $ 101?

Can you reduce variable costs by 1% to $ 49?

Can you reduce fixed costs by 1% to $ 39?

Can you increase prices by 1%?

If you can, your profit before taxes will increase by 40%. Everyone in business should have this model firmly planted in their head and it should be verified when making decisions.