How to increase profit in a business?

Think cutting costs or selling more is the only way to boost profit? Think again. In this video, Steve shares a practical framework to help you uncover hidden profit potential—using nothing more than your income statement.

You’ll learn how to spot the real drivers behind your profitability, identify what’s draining your margins, and use simple, strategic levers to create big impact. Whether you’re running a small business or scaling up, this approach will help you increase profit without guesswork.

TRANSCRIPT:

If you're building a business and you want to increase your profit, I'm going to show you exactly how to do that right now. What I would do is I'd pull the income statement for the last 12 months in your business, right? And what I'm going to do is just list out some main categories on the income statement. We have revenue.

This represents all the income generated from selling your products or services. Underneath revenue, we have cost of goods sold, COGS for short. This represents all the costs associated with fulfilling your revenue, all right? Delivering that product or service into the hands of customers.

And I'll just list out a few main categories. We have materials, we have labor, and then we have other, just to name a few. Then underneath revenue minus cost of goods sold, we have gross profit, right? We're not done yet.

We need to get down to operating profit. That's what I'm most concerned about in this video. So we have op-ex.

That's just short for operating expense. This represents your company's overhead. Now, there are three main categories under op-ex.

We have sales and marketing. We have general and administrative expenses. And I'll just list out a few here.

We have, let's just say salaries. We have professional fees, office, and IT, travel and entertainment, et cetera, right? There are a bunch, but that gives you a rough idea of what categories are under this section. If we take gross profit minus op-ex, we arrive at operating profit or loss, but hopefully operating profit, right? Now, underneath here, if you want to get to income before taxes, we also have other income and expense, but these items are not related to the core operations of the business.

And since I want to walk you through how to increase your operating profit, I'm not going to go into much detail here, but if you take operating profit, other income and expense, and you net those out, you'll arrive at income before taxes. All right. Hopefully you can read my handwriting and follow along with my abbreviations, but what you'll do here is you'll list out all these items.

Now, let me just put some numbers to this so we can understand how this all works out, but this is your current state. And we'll just use some nice round numbers to make it simple. So let's just say revenue is a thousand underneath cost of goods sold.

That's 600. And that is made up of these sub-accounts. All right.

So the sub-account materials, I'll just indent a little bit. Let's just say this is 200. This is 300.

And this is 100. 200 plus 300 plus 100 equals total cost of goods sold of 600. All right.

So 1000 minus 600 leaves us with $400. And then our OPEX, let's just say OPEX is 375. That's terrible, but that leaves us with a meager $25.

All right. Let me put some numbers to each of these categories. Let's say sales and marketing is 75.

Let's say salaries and wages for general administrative employees is 200. Professional fees is 50. Office and IT is 25.

And this is 25. All right. I'm just making this up.

And so if we take 75 plus 200 plus 50 plus 25 plus 25, that equals 375. How embarrassing would that be if that was not the case? But if we take 400 minus this 375, we arrive at 25 bucks. And then we may have some other income and expense of let's just say 30.

And that means we are losing $5. We're in the red. All right.

From an income before taxes perspective. Now, if this is your business and you're losing money or you're not earning sufficient profit, like I said, I'd pull this for the last 12 months. Okay.

So do that. Pull your income statement. And then I would export it to Excel or Google Sheets, whatever you're most comfortable with.

And between here, we're going to create a another column and we're going to call this improvements. All right. And then in the far column, we're going to have potential, right? With improvements.

I'll just abbreviate there. Okay. And start potential with improvements.

What I would do next is either do this exercise by yourself as the business leader, or you could do it with your team. Now, there are four main levers of profitability to impact profit. First is price.

You can increase your price. Second, you can lower your COGS. Third, you can lower your OPEX.

Or fourth, you can do more volume. Those are the four levers. That's it.

Pretty easy to remember here. But this is what we're going to be exploring as we improve these numbers over here. All right.

Let's make this thing rainbow bright, full of colors. All right. I always give my team, you know, grief if they ever build a model and they have a bunch of colors in Excel.

It's like yellow and green and pink and purple. I'm like, oh my gosh, it's rainbow bright. They're much better.

But sometimes clients will send me over files and I'm like, wow, you're sending me over a rainbow bright spreadsheet. And we get a good chuckle off that. Nonetheless, here we go.

This is our current state. This is bad. This is sad face right here.

We don't want that. So what I would do is I wouldn't talk with the team or go through this and apply strategy. So I'd say, okay, what are the strategies that we could pursue? In other words, what are the actions we can take in our business that will improve each of these line items? So for example, with revenue, we can start here and we say, okay, revenue is driven by price and by volume.

So we can increase our pricing by 5%. All right. And we can get away with that because we deliver so much value and value is going to exceed price and customers are cool with that.

So we can add right here, 50. All right. And we may say, okay, we can also do more volume, right? And if we do more volume, we go out there and we go get more leads and we close at a higher rate and we have better conversion, better retention, better referrals, right? And we do all this, we'll increase our volume and this will have, let's say a $200 impact on revenue.

Then we could keep going down the line material costs. Okay. What if we go to our suppliers and we renegotiate? Don't beat them up.

Okay. Don't beat them up, but renegotiate with them. And we can reduce this by let's say $30.

So it's a $30 pickup labor. We can make it more efficient, right? So we could do more volume, right? And we are either going to stay flat or we're going to have efficiencies because we could do more with less. We can increase our throughput.

We could train our employees. We could upskill them. We could give them technology right to do their job more efficiently.

We could eliminate friction. We can invest in better equipment. All these things will improve your labor.

And let's just say there's a $50 impact here. I'm just making up these numbers. Other, maybe there's some waste here.

10 bucks. Great. All right.

So we just, we're going down the line and we're counting things up. Now with sales and marketing, in order to do more revenue, maybe we have to spend even more. So I'm just going to do minus 50, right? Because we're going to have to spend 50 more dollars to do this and that's fine.

So we're going to differentiate that salaries. We will keep flat, but we'll make some reductions because we're going to optimize some of the functions in the business and outsource. So we'll actually say, let's say $40 professional fees, some reductions here, office and it we'll just say is flat travel and entertainment.

Maybe there's a little bit of waste here. 10. And I think you get the point.

You go down the line and you pinpoint exactly what the upside will be. If you improve any of these. Now, this is where strategy comes into play because I'm a big strategy finance guy.

I love to combine strategy with finance to drive greater value. And when you start putting in place strategies, right, to make these improvements, you have to identify specifically what those actions are. Now at Coltivar, we follow this approach with strategy.

First, we identify the strategic problem. Once we identify the problem, we then define initiatives, actions, and results. We call this the IAR framework.

And really what we're referring to here are the actions that the company will take in order to make these improvements. So you have to be very specific with the actions. We are going to raise our pricing by this date.

We're going to send out this letter to customers. We're going to do this and this and spell out the actions, what it is, assign it to somebody. So there's accountability and then put a deadline on each of the actions.

And when you do this and your overall initiative is to improve performance, perhaps you'll have all the actions listed out. You'll know what the key result is because we're about to quantify that. And that's how you can increase profitability in your business.

So let's build out this over here. We'll just do it in green. So now revenue goes from $1,000 plus $50 plus $200 to $1,250.

Our cost of goods sold goes from $200. And this is subtracting out $30 because that's a $30 upside. So we go $170.

Here, this goes to $250 and this goes to $90. So if I add all these together right here, it's $510. I take $1,250 minus $510, that leaves me with $740 in gross profit.

Look at that improvement just right there, $400 to $740. Then we're going to look at OpEx. So OpEx, we're actually going up $50.

So this goes to $125. We're going down by $40. So this is $160.

This goes to $40. This stays flat at $25, office and IT, and then travel and entertainment goes to $15. Now, if I add this all up, we arrive at $365.

So we really only reduced our OpEx by $10, but we reallocated $50 to sales marketing, which is going to have a bigger impact on the top line. And oftentimes, companies, it's not like they're spending too much in OpEx and operating expenses. In other words, it's not that their overhead's too high.

It's just the dollars they're spending on their overhead are not efficient and they're not driving value in other parts of the business. That's what we're doing here is we're tightening things up. So if I take $740 minus $365, we arrive at $375.

Let's say other income and expense stays the same at $30. Bam, we arrive at $345. Hopefully, that wasn't too much math for you, but check this out.

We went from right here, an operating profit of $25 to $375 and an income before tax of negative $5 to $345. Massive improvement. This is a 15X improvement.

And what's beautiful about this is we didn't have to make 15X cuts right here. We didn't have to do radical things with our overhead. We just made some slight tweaks to the business.

Now, all of this is theoretical. These are just a bunch of numbers. I just used a very generic example, but I wanted to provide you with a framework and a way, a methodology to look at your current state, account for improvements, apply strategy, use initiatives, actions, results, this whole framework here in order to drive your potential with improvements.

When you can do this in your business, and I do this all the time when I'm turning around and growing businesses, it will make all the difference in the world. And it's just a good exercise to go through and pinpoint exactly what you're going to do in your business to improve financial and operational performance. In order to do all this, you need some level of financial literacy.

That's why understanding the story behind the numbers is so critical. And that's why I'm such an advocate for strategy and finance combined together. Because think about if you're going to do this from a financial standpoint, you just come in here and be like, cut that, cut that, cut that, cut it all by 20% and you destroy your business.

I've seen this happen over and over again. Don't destroy your business. Be very methodical, use strategy, use finance, combine them together, and amazing things will happen in your business.

All right. I have a bonus for you. If you go to coltivar.com and you navigate to the tools page, we have a tool called the levers of profit calculator.

You can populate that in 10 seconds or less with two numbers. And it'll tell you exactly which of these levers to pull in what order, because it will show you the precise impact on your bottom line. It's customized to you.

There's also a break-even calculator, a valuation calculator. There are a ton of tools prepared for you. Just go to coltivar.com, like I said, on the tools page.

And at the end of the day, if you need help with any of this, or you want to talk strategy, you can always connect with us at coltivar.com. All the success to you. And until next time, take care of yourself. Cheers.