Profit doesn't appear by accident. It's built by design. If you want to increase profit, you don't need a new product or a massive rebrand. You need better insights, better systems and better alignment. This is Boosting your Financial IQ, where I help business professionals with financial responsibility to elevate their careers and run profitable companies. My hope is that you'll apply these lessons to achieve your greatest ambitions, cheers and enjoy.

If you want to increase profit in your business, there are four levers. First, there is pricing. That just involves increasing your prices. But you have to make sure that the perceived value that you're delivering to your customers exceeds pricing. Otherwise you're just going to increase your pricing and lose customers. All right, so that's lever number one. Lever number two is increase volume. So just go out there and grow your business. Do more sales. Number three is reduce your cost of goods sold, which involves just reducing the costs required to deliver your product or service. That's making your material purchases more efficient, making your labor more efficient. Maybe use subcontractors and you're buying out more expensive subcontractors. You can reduce that, but it's just reducing the cost of delivery. That's cost of goods sold. And then the last lever is OpEx. That's just reducing your overhead. You're selling general and administrative expenses, your fixed costs, et cetera all the costs associated with running your business. Those are the four levers right. So if anybody ever asks you how can you increase the profit running your business, those are the four levers right. So if anybody ever asks you how can you increase the profit in your business, that's the short answer.

But in this episode I want to go beyond those four levers and I want to talk about proven strategies to increase profit in your business, no matter what industry you're in. So in this episode I'm going to cover a few things. Here are the takeaways. Number one revenue is only half the equation. Profit is the true driver of long-term success. Next, margins matter over volume. Optimize what you already sell before chasing new business. The next takeaway efficiency unlocks cashflow. Improve operations, not just output. Another takeaway is strategic pricing changes everything Price based on outcomes, not just output. Another takeaway is strategic pricing changes everything Price based on outcomes, not just inputs. And then the last takeaway that I want to leave you with is profit follows clarity. When you use KPIs, key performance indicators, forecasts and financial discipline, you're going to be able to steer your business towards growth and better financial results. All right, so that's just a high level summary of what I'm going to leave you with. But let's jump into the details and the nuances, and I'm going to give you a step-by-step playbook in this episode of how you can improve profit in your business.

All right, so let's talk about this first. Profit is not the engine, it's the outcome. So for many business owners, profit feels like whatever's left over after payroll bills and taxes. But here's the deal. Most successful founders know that profit isn't what's left, it's what's planned. It's not a passive result of growth, it's a strategic objective that gets built into your operations, your pricing, your team and your forecasting. So at Coltivar, we help companies move from chaotic growth to intentional value creation, and that's what I'm going to share with you today is my experience as a CEO, as a CFO of multiple companies, as an investor, as a specialist.

I'm going to share with you the strategies that shift the understanding of one simple truth that more sales don't automatically lead to more profit. I've seen this over and over again. Companies are out there and they're like we just need to do more sales, we need to just grow ourselves to profitability. But here's the fact without the right systems, more sales can actually create more complexity, more overhead and even more risks, and it could bankrupt your business, in fact. So let's talk about how do you actually increase profit? And the answer is you stop chasing every dollar and you start designing a business that keeps more of what it earns. So let's get into that.

There are seven steps that I want to share with you. Number one is understand what drives profitability All right before you can increase profit. So if you know your company isn't performing as well as it should be, what you need to do first is to understand what's really moving the numbers behind the scenes. This involves doing a financial assessment. So when we bring on a client, the first thing we do is we get their historical financials and we organize it in a way where we can understand the true economics of a company. Too often, especially with small businesses, they have expenses that should be up in cost of goods sold down in operating expenses. Their balance sheet's a mess and we have to clean all that up and normalize it so we can understand the true economics of what's going on in the business. Because if not, how do you know where to start?

Once you understand the numbers and the story behind the numbers, it's not about just selling more and spending less. Instead, profit is driven by the relationship between three core efficiencies, and I've talked about this before, but I'm just going to reiterate this over and over again until it like sinks in, because these three efficiencies are what ultimately drives value in a business. Number one is sales efficiency. Are you acquiring the right customers at the right cost? You measure this through your LTGP to CAC, your lifetime gross profit to customer acquisition cost ratio. Right, it has to be at least three to one, right, that's the starting point.

The next efficiency is your operational efficiency. Are your people, processes and tools delivering results without waste? You measure this through return on labor. And then the last efficiency is value creation, or just value efficiency. And this considers are you reinvesting profits into high return initiatives that fuel growth? This is measured through your return on invested capital. And to compute your return on invested capital, you just take NOPAT net operating profit after tax and you divide that by your invested capital and invested. Take NOPAT net operating profit after tax and you divide that by your invested capital, and invested capital is made up of working capital and your net property, plant and equipment.

When you see your business through this lens, profit becomes a performance metric, not just an accounting result, but you have to be tracking sales efficiency, operational efficiency and value creation efficiency. Otherwise you're going to have no clue what really drives profitability in your business. And, like I said, it's not as simple as selling more and lowering your cost. You have to understand these efficiencies because they act as flywheels in your business and if you get them spinning, that's when you're going to scale, and you're going to scale really profitably, all right. Step two is raise your prices without losing customers. So one of the fastest ways to increase profit is also the most underused raising your prices. Many business owners and maybe this is you, and this is okay, I've been there before they underpriced their services out of fear fear of losing deals, fear of upsetting loyal customers or fear of pricing themselves out of the market.

Back in the day when I had my landscape company here, I was a teenager and I was going to these homes of my clients and they were really nice. They had way more money than I did and I didn't have the confidence. So when I'd present my bid to them, I'm like hey, here's a bid for your landscape. And I'd be like I know it's kind of expensive this patio. Maybe we could save money here and there. And I just I wasn't confident. I didn't come across like I knew my numbers. I was confident with my numbers and it showed through and it probably made my customers really like sketched out with me.

But when I changed my sales approach because I had experience and I started to understand my numbers better, I could go in and sell not with better tactics but with more confidence, because I'd say, hey, here's this water feature it's $30,000. In this fire pit, it's 20,000. And it's going to transform your backyard and make it into this beautiful place. And if they say to me, wow, you know that seems really expensive. Then I joke back with them. I say you think that's expensive? Imagine hiring the wrong contractor. And they laugh, ha ha, ha. Right, we would go on. But like I had to know my numbers and I had to be confident that we were delivering that value. So that's the big thing.

I was just doing a workshop with another company teaching them sales and marketing principles and that was a big anchor point in my presentation is just selling with more confidence, like you have to own it, you have to know your numbers, you have to believe that you're delivering value, that you're actually changing their lives. You're solving a problem. And when you could do this, you don't have to have fear of losing deals, upsetting customers or pricing yourself out of the market. You could go in there and you can act confidently. But here's the deal. The truth is this If you're delivering real value, your customers, they're often willing to pay more. What they need is a clear understanding of the outcome you help them to achieve. So when you anchor your pricing to results time saved, revenue generated, risk that's avoided you stop selling a commodity and start selling a solution, and that's what I'm talking about here.

So start by identifying your most profitable services or your products, package them, enhance them, improve your offer, make sure your offer is really clear and it's so good that they'd feel dumb saying no and then raise the price. Even a five to 10% increase, if done right, can significantly improve your bottom line without increasing volume. Pricing is the greatest lever of improving the bottom line. Just remember that All right. Step three improve your gross margin. Gross margin is the oxygen of your business. If it's tight, everything downstream becomes harder Hiring, investing, innovating, et cetera. That's why increasing profit often starts by tightening your cost of goods sold.

I'm not talking about being a miser right and beating up your vendors to save a buck here or there. I'm not talking about being a miser right and beating up your vendors to save a buck here or there. I'm talking about making your labor more efficient, being more productive, increasing your throughput. So look at your direct expenses and labor is going to be the biggest one of them all. Now, sure, you may have some improvements with materials. Maybe you don't know how to do takeoffs when you're bidding and you're under bidding your projects, or you have a lot of waste in the system, or you're procuring materials and you could find them a lot cheaper somewhere else. Sure, you know. But oftentimes the improvement is in labor and production costs. Right, so are there inefficiencies in your supply chain? Are you overpaying vendors? Maybe, but can you implement technology, upskill your employees, reduce complication to maximize the return on your labor? That's going to be like where it is really so small improvements in margin, even just like 1% to 2%, can compound very fast. And here's the best part. Unlike sales, growth margin gains require no new marketing spend. That's the beautiful part. Unlike sales, growth margin gains require no new marketing spend. That's the beautiful part of it. And at the end of this episode I'm going to share with you the four levers again and then I'm going to tell you, based on a 1% improvement on each of them, what that impact will have on the bottom line for just the average company. I did some research. I'm going to share that with you here in just a minute, all right.

Step four audit and streamline overhead. So as your company scales, expenses often grow unchecked. So software subscriptions check that. Underutilized tools, bloated teams, legacy systems all these things can eat into your profit. What I like to do is conduct a zero-based budget review. So don't just ask, like, what you spent last year and then roll that over to the next year.

Instead, do this, and this makes people uncomfortable. Just imagine you fire everybody in your company. Don't go fire people, all right, but imagine you fire people and then you take your overhead dollars right, that you spent last year and you rebuild the business. How would you do that? That's zero based budgeting, basically. So what a lot of companies do is they just take their overhead from last year and they just roll it forward. But what you could do instead is say, okay, we spent $500,000 last year in overhead, I'm going to fire everybody. Don't really fire everybody. Just imagine this and then I'm going to take that $500,000 and I'm going to rebuild a company. How would I do it? That's how you should audit and streamline your overhead. So just cut what's not essential, automate what's repeatable and focus your resources on what improves your return on investment or your return on invested capital, roic. But, like I said, this isn't about just slashing expenses for the sake of saving money. It's about realigning spend with strategic impact. The goal is to fund growth, not carry weight. The goal is to fund growth, not carry weight.

Step five increase your customer lifetime value or, better yet, your customer LTGP, your customer lifetime gross profit. Most businesses they work too hard to bring in customers and not hard enough to keep them, and that's a problem, obviously. So increasing profit doesn't always require new sales. Often it comes from getting more out of your existing customer base. So here's some ways to do that. Number one, upsell and cross sell with value added services. Next, improve onboarding and retention. Third, create recurring revenue or loyalty programs. And fourth, systematize customer success and follow-up. So when you do this, the math is simple the longer your customers stay, the more money they're going to spend and the higher your profit will be per acquisition and hence your LTGP, your lifetime gross profit of your customer, will increase. Right? So that's step five. Step six align your team with profit goals.

Every single person on your team should be able to answer this question how does my role impact profitability? Too often employees are disconnected from financial results. They don't even look at financials. Right, and I'm not saying you have to show your financials every single thing in the financials, the income statement, balance sheet statement, cash flows to every employee. But employees should have some type of visibility into at least the KPIs of your company, your key performance indicators, your employees. They work hard, but not always on the things that matter the most. That's the problem. So if you tie every member's responsibilities to a measurable outcome cost savings, revenue growth, margin improvement or customer retention then you're going to get everybody aligned on driving value.

At Coltivar, we use IARs. This is a framework I came up with years ago. I wrote about it in my second book called Outsizing. It's called Initiatives, actions and Results IARs, and it helps leaders to turn big goals into everyday execution. So think about it. A goal is broken up into three parts an initiative, it has action and it has a result tied to it. So that's just a goal broken down into its component parts IARs. So when your team sees how their work moves the needle, they're going to take ownership when they can see a KPI and they see a graph. That's why at Coltivar, we have this dashboard and it's like you open up return on invested capital. You could see the last three years like graphically, like on this graph, right, and you're like, okay, it's been down, ticking down for the last three months. Then you'll know, okay, I need to take action. That's where ownership comes in. But when you don't have visibility and you're not even measuring these things, how the heck can you expect your employees to be focused on driving value, increasing profits, right, you can't. So when everybody rose in the same direction, profit becomes a shared result, not a solo burden of just like the CFO or controller or the CEO, right, that's ridiculous. All right.

Step number seven forecast and monitor profit in real time. So if you're only reviewing financials once a month or once a quarter, you're making decisions too late. Growing your profit requires forward-looking visibility in where your business is headed. This is where KPIs come in. All right, and building a rolling 12-month forecast that maps your revenue, expenses, gross margin and net profit. But better yet, you must forecast free cash flow as well, then update it regularly, based on performance. So use this forecast to test scenarios, plan hiring, evaluate investments and then set realistic growth targets. So you meet with your team, right. You look at your financials, you have KPIs that you're tracking ongoing in real time and then you make adjustments to your strategy, right and the forecast like the future and when you have the right forecasting tools. The beauty of all this is you can spot issues before they hit your P&L, and then you can seize opportunities right when they arise, not later on, right. So this is you could spot issues before they hit your P&L, and then you could seize opportunities right when they arise, not later on. So this is what I want to leave you with.

Profit is a process, it's not a perk. Here's what most people get wrong. They treat profit like a reward, something that just shows up after hard work, growth and time. That was me in the past. Don't make that same mistake. Profit doesn't appear by accident. It's built by design. If you want to increase profit, you don't need a new product or a massive rebrand. You need better insights, better systems and better alignment. You need a shift from reactive decision-making to intentional execution where every move is tied to a measurable financial result. When you get everybody aligned like this, beautiful things happen and your profit will increase. All right.

So that's how you increase profit in a business and, like I told you, I'm gonna leave you with the four levers of profit and their impact. I did a study and this is just for the average company, across industries. So just take these numbers for what they are. They're just generic. You can figure out these same four levers of profit in your business by going to coltivar. com. Go into resources. You'll see tools and I'm going to post this little model that I built. Feel free to download it, use it, enter a few data points and bam, you're going to get the exact impact of profitability in your business. I'm just going to give it to you generically so you can understand what I'm talking about here. But download the tool, like I said at coltivar. com, plug in your own numbers from your financials and then you'll have exact numbers in your company. It's like super powerful.

Just to recap, of the four levers we talked about pricing, volume, cost of goods sold and operating expenses which one of those four do you think has the biggest impact. I kind of told you already, so you should know. Well, it's pricing. So if that's what you're thinking okay, you're right, and obviously you listened to me early on Let me share with you what a 1% impact in any of these areas will result in in the bottom line. So, in other words, a 1% increase in pricing, a 1% increase in volume, a 1% decrease in cost of goods sold and a 1% decrease in OPEX. All right, so here we go. Pricing a 1% increase in pricing on average for the average company will have a 12.5% impact on the bottom line. Volume will have a 4.8% impact. Cost of goods sold. So reducing cost of goods sold by 1% will have a 7.7% impact on the bottom line. And OpEx reducing your overhead will have a 3.8% impact on the bottom line. Like I said, this is for the average company.

Download the tool at cultivarcom. Figure out your own numbers, then communicate this with precision to your team. Figure out your own numbers, then communicate this with precision to your team. So here's how it works. So pricing is the best lever. It's 12.5% impact, right?

So maybe if you're a company, it's 19. So then you could go to your team and say, look, if we discount our products by 1%, it will have a 19% negative impact on our bottom line. Or if we increase our pricing by 1%, I'll have a 19% positive impact on the bottom line. Or hey, if we increase our pricing by one percent, I'll have a 19 positive impact on the bottom line. Or hey, if we can improve our cost to get sold by one percent by making our labor more efficient, we will have a 7.7 impact on our bottom line. That's pretty big. So if you're evaluating a training program, for example, you may say, yeah, we're going to spend ten thousand dollars to do this workshop, but it's going to have a $50,000 impact on our bottom line. Of course, you do the workshop. So when you know these levers and you know how they relate to your business, it's super powerful, trust me. All right, that's what I want to leave you with. All the best until next episode. Take care of yourself, cheers.