More favourable sales terms, lower order fulfilment costs and cuts to expenses the business can do without while continuing to earn all increase profit. Deciding how to increase profit in your company starts with comparing the financial effect of these options over the same period. Increasing volume makes sense where earnings from additional sales will cover the new costs.
I think it is a mistake to respond to a lack of profit by raising the revenue target in the sales plan without calculating fulfilment costs. An employee sells more, the company hires more people, pays for urgent delivery and redoes what was promised to the customer free of charge. Each person is handling a clear task. The business owner ends up with more commitments and the same earnings. Demanding even more active selling will reinforce this way of working.
Profit has to be protected earlier: when we choose what to sell, on what terms and who gets the team's time.
How can a company increase profit?
Removing a specific source of lost profit helps a company increase its profit: unnecessary price concessions, expensive fulfilment, a less profitable mix of sales or unnecessary fixed costs. First compare these causes, then choose the change with the greatest expected effect, given the money and people available.
To make the comparison, you need a month for which the accounts are complete, with income and expenses recorded, and a comparable period. Separate out seasonality, a large one-off order and the launch of a new line of business. Otherwise, the absence of one large delivery will look like poorer performance by all salespeople.
Start with this calculation for a line of business: revenue after discounts and returns minus variable costs — purchases, materials, piecework pay, commissions and delivery costs incurred with orders. The amount left is called contribution. It pays for fixed costs, and what remains becomes profit. This calculation underpins ACCA's analysis of costs, volume and profit.
The list of costs depends on the business. Keep an employee's fixed salary, which stays the same as order numbers change, separate from piecework pay. A finance specialist ensures revenue and expenses use the same approach to VAT. Count each cost once: delivery already deducted from an order's earnings must not reduce the result again under general expenses.
Here is a table for choosing the first action. The owner needs it before discussing a new sales plan.
| What changed | Data to identify the cause | Which option to assess |
|---|---|---|
| The actual selling price fell | Price of the same product after discounts, free extras | New discount terms, charging separately for extras |
| Fulfilment became more expensive | Costs for the same order: materials, contractor, delivery | Change the fulfilment method, what is included or the price |
| Less profitable items are sold more often | Contribution by group and each group's share of sales | Different priorities for the product range and offers |
| Overheads increased | New commitments, space in use, paid services | Stop unnecessary work or find a cheaper way to do it |
| Cash in the account is low despite a profit | Customer debts, stock, advance payments, loan repayments | Payment terms and financing, considered separately from profitability |
Ask the person who handles the finances to prepare this comparison. The owner needs an answer with an amount and a cause: how much is lost on concessions, how much on fulfilment and how much on running the company. The general conclusion “we need to cut costs” leaves the choice exactly where it was before the report.
Which orders should get the team's time?
When one part of the operation is at full capacity, it is more profitable to give its time to orders with a higher contribution per hour in that part. High earnings from an order alone do not show how much other work it displaces.
Take two types of order competing for one specialist or machine. For each, divide the contribution by the hours needed from that specific resource. This gives an amount per hour. This comparison method is used in planning with a single limiting resource.
A line for your own figures: “Order ___; revenue ___; variable costs ___; amount left ___; time used in the fully occupied part of the operation ___ hours; amount left per hour ___”.
The key words here are “fully occupied”. Spare warehouse capacity does not solve a shortage of installers. And when installers are idle and there are no other orders, a high figure per hour will not create demand. Comparing which work displaces other work makes sense when there is a real choice between jobs, taking account of deadlines already promised. If there are several constraints, this one-line calculation is not enough.
This gives the owner another way to increase profit: change the mix of orders within the existing workload. An additional salesperson will be needed later if there really are not enough customers for the more profitable work.
How can you increase profit from sales?
Profit from sales grows when the increase in contribution exceeds the added fixed costs. To achieve this, change the price and what is included, reduce fulfilment costs or increase profitable orders; calculate the effect of cutting prices to increase volume separately first.
A discount reduces the price of every sale it applies to. Additional customers must make up that loss before they bring any extra earnings. So the proposal “we'll offer a discount and make money on volume” needs an answer in units: exactly how many orders will be needed on the new terms.
Fill in the calculation for one product you sell regularly. Use the same period — for example, a month. The amounts in the table relate to that product; expansion costs relate to the same period.
| Calculation item | Now | After the change |
|---|---|---|
| Price per unit after concessions | ___ | ___ |
| Variable costs per unit | ___ | ___ |
| Contribution per unit: price minus costs | M₀ = ___ | M₁ = ___ |
| Number of sales in the period | K₀ = ___ | K₁ = ___ |
| New fixed costs needed for this volume | — | F = ___ |
| Desired increase in the result before interest and taxes | — | D = ___ |
Required volume: K₁ = (K₀ × M₀ + F + D) ÷ M₁. For whole items, round up. If the aim is to maintain the previous result, set D = 0. The formula comes from equating contribution before and after the decision, allowing for the added costs.
The calculation applies when M₁ is positive, all other costs stay the same and the chosen unit costs apply. If M₁ is zero or negative, increasing the quantity will not cover fixed costs. If growing volume brings a jump in costs — a second warehouse or a new shift is needed — add that cost to F and recalculate the threshold. Financing interest and taxes are included when calculating net profit.
The same logic applies to a price increase. With all other conditions unchanged, the threshold K₁ shows how many sales you need to retain. This helps you discuss the risk of losing some customers without arguing over whether any fall in order numbers is bad. The formula assesses the financial effect of the decision; actual offers show how customers react.
Start with one product group and one date for the change in terms. Before you start, set an observation period, for example a month, and a minimum result based on the calculation. Compare actual concessions, costs and quantities for completed orders. If fulfilment takes longer than a month, draw your final conclusion after fulfilment: contracts do not yet show the cost of rework and urgent call-outs.
How can you increase net profit?
To increase net profit, you need to retain the extra earnings from sales and the savings after all the period's expenses, interest and taxes. Bring the changes together in a profit and loss report, and assess each cut alongside replacement costs and lost earnings.
I think starting with an equal cut to every budget is a poor decision. An unnecessary paid subscription and an employee whose absence causes orders to fail will both be subject to the same reduction. With the subscription, you simply stop renewing it. For necessary work, you first need to find another way to do it and calculate its cost.
Write down the calculation of pre-tax savings for the chosen period: cancelled expenses ___ minus replacement costs ___ minus lost contribution ___ minus transition costs relating to the period ___. Record separately the date on which the obligation to pay ends. Deferring payment for a service already provided does not reduce this expense.
When closing a line of business, include only costs that will actually disappear. A share of rent or accounting salaries allocated to that line in the report often remains with the company after closure. Its entire contribution will be lost. The difference between allocated costs and costs that can be eliminated is explained in ACCA's material on costs for decision-making.
A cut where the owner takes over the work for free also needs a separate record: how many hours they give it and until what date. Profit will improve in the report. For a lasting arrangement, you will need to put back the cost of the person the owner hands this work over to. Otherwise, the next sales plan will again assume the owner works unpaid in the evenings.
Why has profit grown without an increase in cash?
Profit and the account balance differ because of payment timing and transactions that change cash without the same change in profit. A customer has not yet paid for a completed order; the company has bought stock; it has repaid the amount borrowed — these causes call for different actions.
Taking out a loan does not in itself create earnings, and repaying the amount borrowed is not an expense in the profit calculation. The distinction between cash flows and financial results is reflected in IAS 7. I covered the practical side of deal terms in the article “Sales are coming in, but there's no money”.
That is why a growth decision needs two calculations: how much the company will earn and when it will need money to fulfil the orders. If purchases have to be paid for before the customer's money arrives, the calculation must include the source and cost of financing. A profitable order can cause a cash shortage before payment.
When nobody brings together the figures from different departments
Salespeople know the price, the people doing the work know its cost, and accounting knows the commitments. If the owner gathers these parts personally every time, choosing between a discount, a new employee and cost cuts remains their second job. They need a specialist who will connect the calculation made before the decision with the actual result after fulfilment.
At RENTROP, an outsourced finance director takes on this work: financial record-keeping, regular analysis and planning; you can start with part of a working day. The data, systems and access rights stay within the client's business.
When the financial calculation has already identified profitable orders, but the shortfall comes from how enquiries and repeat purchases are handled, the next task is sales growth. Here, the work concerns response speed, seeing proposals through to a decision and bringing customers back: increase the volume for which you have already done the financial calculation.
Keeping an important customer at the cost of some profit is an acceptable decision. It should have a specified cost and a deadline after which the terms are reviewed. When a concession is called an investment in the relationship, the owner understands what they are paying for. Recording it as profit growth without a calculation means hiding the cost of that decision from yourself.