As a small business owner, understanding your profit margins is essential to making smarter financial decisions. Yet, many entrepreneurs focus only on revenue without realising they might be losing money due to narrow or negative margins. As accountants who work closely with small business owners, we are here to break it down and show you how to improve your profit margins for long-term success.

What are profit margins?

Profit margin is a key financial term that tells you how much money your business keeps from every pound earned. It is one of the best indicators of your business’s financial health.

There are two main types of profit margins that small business owners should focus on:

• Gross Profit Margin

This shows how much money is left after deducting the cost of goods sold (COGS) from your revenue.

• Net Profit Margin

This represents the bottom line. What remains after all expenses (including rent, salaries, and marketing) are subtracted from total revenue.

Why profit margins matter for small business owners

Profit margins aren’t just accounting jargon; they’re essential for understanding whether your business is profitable. A high profit margin means your business is efficient and sustainable. A low or negative margin could signal serious financial issues, even if sales appear strong.

Focusing on improving your small business profit margin can lead to:

• More cash flow
• Greater financial stability
• Easier access to loans or investment
• Better planning for growth
• Increased valuation if you plan to sell your business

Understanding your margins also helps you price better, manage overheads, and prepare for slower periods. This is particularly important for seasonal businesses. For businesses with tight cash flow, knowing your margin can be the difference between surviving and thriving.

How to improve profit margins in a small business

If your margins are lower than you’d like, here are five proven strategies to boost them:

1. Reevaluate your pricing strategy

Ensure your prices reflect the value you deliver and cover all your costs. Research competitors and don’t be afraid to raise prices, especially if your product or service quality justifies it.

2. Cut unnecessary costs

Audit your expenses regularly. Are you overpaying for supplies? Are there software subscriptions or services you don’t use? Every cost-saving measure, even small ones, directly boosts your profit margin.

Quick wins: Switch to more affordable suppliers, reduce energy bills, and renegotiate contracts annually.

3. Promote high-margin products or services

Identify which of your offerings generate the most profit and focus your marketing and sales strategies there. Consider phasing out or adjusting low-margin items that add little to your bottom line.

Example: If your service business has one offering that requires fewer resources but sells well, focus your campaigns on it.

4. Improve operational efficiency

Streamline processes, automate repetitive tasks, and invest in training and tools that increase productivity. The more efficiently your team works, the more revenue you retain per sale.

Tools like inventory management software or CRM systems can reduce human error and improve decision-making.

5. Monitor your margins regularly

Track your gross and net profit margins monthly or quarterly. Use accounting software to automate reports. Analyse trends and make informed decisions from the results.

Don’t just track numbers, interpret them. Look for seasonal trends, customer behaviour changes, or unusual cost spikes.

Compare your margins to industry benchmarks. This will help you identify whether your margins are in line with similar businesses or if there’s room for improvement. Trade associations, industry reports, or your accountant can provide relevant benchmarks.

Profit Margins Reflect the Health of Your Business. Improving your businesses profitability starts with understanding your numbers. Profit margins provide a clear, actionable snapshot of your business’s financial performance.

By pricing smartly, managing costs, and focusing on efficiency, you can increase your margins and grow with confidence.