Profitability

For a business to succeed long-term, it needs to turn a profit. Profit is made when, over a certain period, the income of the business exceeds the costs. But how much profit is enough? The answer will be different for each business. 

profitability

Whilst a net profit margin of 9% is often cited as the average in the UK, what really matters is how much is needed for:

Paying the business owner

It is common for Limited Company Directors to take their pay from the net profits of the business (after tax) rather than through the payroll (as it is generally more tax efficient). The 2025 average pay for small business owners in the UK was £30,000; but again, the more important question is how much the business owner:

• Needs to cover their household costs

• Would ideally like to take home

Investing in business development

All businesses need to invest in business development to succeed long-term. For an early stage business, there are lots of systems and processes to be created, the first employee to hire, maybe the first premises to lease. Business development is equally important for established businesses - markets change and businesses need to evolve and adapt. That could mean developing new products, introducing new technologies, refreshing a website etc.

Providing a buffer

There is inherently considerable risk in running a business (and there of course can also be considerable rewards!). If there is a downturn in sales or unexpected costs, having some funds to shore up the business, gives you options.

Building the lon-term value of your business

Small businesses are typically valued on the basis of profit. In the end, therefore, what you are able to get out of the business if it is sold is a direct function of the amount of profit you are making.

profit improvement

What are the levers you can pull to improve your business profits?

If profit is a result of your income less your costs, it logically follows that to improve profit you must increase your income or reduce your costs. That may sound simple, but we know from our work with hundreds of small businesses that it’s not always that easy in practice! 

Price

Price is one of the most important drivers of profit in any business. So, setting the right price, and keeping it under review, is essential. However, it’s not always the route to more profit:

• If you put prices up (we recommend at least an annual price review) this will often maintain profits at their existing level. Although you get more income, on the other side inflation is pushing costs up over time (the rate of inflation in April 2025 was 3.5%). 

• It may be that your price is already at the top end of what customers will pay, in which case a significant price increase may turn customers away. Although income from individual customers goes up, there may be less customers and income overall.

Product Mix

Businesses typically offer more than one product or service, and it is common for these to generate different levels of profit. Understanding which are (or could be) the higher margin products or services of your business, and having a strategy to sell more of these, can lead to improved profitability.

More Customers

The most common strategy for businesses to adopt when they want to improve profits is to sell to more customers. Ultimately this is the most important thing for long-term business success - we have to be able to attract enough customers to make the numbers work. 

However, especially for an established business, the path to new customers is not always that clear. The practicalities to consider include:

• Where will new customers come from?

• Are they only interested in discounted prices, potentially eroding your margins?

• What investment in marketing or new products will be required to reach them?

• What exactly will you do differently to stand out and draw them in?

• Will you need to increase production capacity to service the new customers, adding cost?

These can all make a decision on the best approach to customer acquisition more complex, and determining the best approach demands more careful thought than simply ‘getting more people’.

Cost Cutting

Most businesses are not frivilous with their spending, and it can feel like there are no costs that can be cut. However, if you are unable to raise your income and aren’t making the profit you want or need, this is the last lever you can pull.

• Are there unnecessary steps or activities that don’t add value, which could be stopped?

• Is there spare capacity in your production function that you need to downsize?

• Are you using available automations in your software, e.g. automated invoice reminders in Xero?

• Are you paying for subscriptions that you no longer need?

• Are making best use of all the beneficial feattures or systems and subscriptions you pay for?

• Could you consolidate suppliers to improve your buying power?

• Are you still getting the best available deal on rent and utilities?

• Is your marketing spend targeted where you can see the greatest return?