BUSINESS ADVISORY | NEW ZEALAND
How to Improve Business Profitability in New Zealand: A Practical Guide for Business Owners
Improving profitability isn’t simply about increasing sales. Business owners also need to understand margins, pricing, costs, cash flow and financial performance. This guide explains practical ways to assess profitability and make better-informed business decisions.
How Can You Improve Business Profitability?
Improving profitability starts with understanding what is driving your financial results. Businesses can review gross margins, pricing, operating costs, customer and service profitability, productivity and cash flow, then use forecasting and financial modelling to assess potential changes before making significant decisions.
Revenue Growth Doesn’t Always Mean Profit Growth
Increasing revenue is an important goal for many businesses. However, higher sales do not automatically translate into higher profitability.
Additional revenue can come with additional wages, supplier costs, marketing expenses, technology costs, financing costs and other overheads.
Consider this illustrative example:
Illustrative Example
This is an illustrative calculation and is not based on a DFK client.
Business B generates $500,000 more revenue but produces the same $150,000 profit.
The example highlights an important point: revenue growth and profitable growth are not necessarily the same thing.
What Is Business Profitability?
Profitability measures how effectively a business converts its revenue into profit after accounting for the costs involved in operating the business.
Gross Profit
For example, if a business generates $500,000 in revenue and has $300,000 of direct costs:
Gross Profit Margin
In this example:
Net Profit
Net profit considers the other expenses involved in operating the business.
Looking at both gross and net profitability can help business owners understand where financial performance is changing.
What Should Business Owners Look at First?
Riz Khan, CPA | Associate Partner
“When reviewing profitability, it’s important to understand what is driving the result rather than looking at the bottom-line number alone. We consider factors such as margins, pricing, costs, cash flow and the assumptions behind the business owner’s future plans.”
Business advisory insight reviewed and approved by Riz Khan, CPA, Associate Partner, DFK Orb360 O’Halloran.
1. Understand Your Gross Profit Margin
One of the first areas to investigate is your gross profit margin. This helps show how much revenue remains after the direct costs associated with delivering your products or services.
Depending on your business, review:
- Revenue by product or service
- Direct costs
- Gross profit
- Gross profit margin
- Supplier cost changes
- Pricing changes
A business may find that its highest-selling product or service isn’t necessarily its most profitable.
Illustrative Example
Service A generates more revenue, while Service B generates more gross profit in this illustrative example.
2. Review Your Pricing Strategy
Pricing has a direct relationship with revenue and margins, so reviewing your pricing structure can be an important part of a profitability review.
Ask:
- When did you last review your prices?
- Have supplier or labour costs changed?
- Are some products or services underpriced?
- Are discounts affecting your margins?
- Does your pricing reflect the value being delivered?
Illustrative Calculation
If a business generates $500,000 in revenue at a 20% gross margin:
At a 23% margin:
That’s a $15,000 difference in gross profit without increasing revenue.
Actual pricing decisions should consider customer demand, competition, positioning, costs and the value offered.
3. Review Business Costs — Without Cutting Blindly
Reducing costs can improve profitability, but cutting costs without understanding their purpose can create other problems.
Review areas such as:
- Software subscriptions
- Supplier agreements
- Marketing expenditure
- Premises costs
- Professional fees
- Financing costs
- Operational expenses
- Staff and resource utilisation
Ask:
Does this cost support revenue, efficiency, compliance, customer service or another important business objective?
4. Understand Which Customers and Services Are Most Profitable
Revenue alone doesn’t show the full financial value of a customer or service.
Consider the resources required to deliver the work, including staff time, discounts, delivery costs, customer support and administration.
This analysis can help identify where your business may have stronger margins and where further investigation may be useful.
5. Separate Profitability From Cash Flow
Profit and cash flow are not the same thing.
A business can report a profit while still experiencing pressure on available cash.
For example, a business may issue a large invoice but receive payment several weeks later. During that period, it may still have wages, supplier payments, GST, rent, loan repayments and other obligations.
Cash flow forecasting can help business owners understand expected inflows and outflows and identify potential pressure points.
Explore Business Advisory Services →6. Monitor the Financial KPIs That Matter to Your Business
Not every business needs to monitor the same financial indicators. The most useful KPIs depend on your industry, business model and goals.
Depending on your business, these may include:
- Revenue growth
- Gross profit margin
- Net profit margin
- Operating expenses
- Debtor days
- Cash position
- Average transaction value
- Revenue per employee
- Customer acquisition cost
- Recurring revenue
Tracking the number is only the first step. The more important questions are:
What changed? Why did it change? What action should follow?
7. Review Productivity and Resource Utilisation
Productivity can affect profitability because businesses incur costs for employees, contractors, premises, technology and other resources.
Depending on your business model, consider reviewing:
- Billable hours
- Employee utilisation
- Revenue per employee
- Process efficiency
- Administrative workload
- Technology and automation
- Time spent on low-value activities
8. Use Forecasting Before Major Business Decisions
Before making a significant investment, it can be useful to look beyond today’s cash position and consider how the decision could affect future profitability and cash flow.
Financial modelling can be useful when considering:
- Hiring additional employees
- Opening another location
- Purchasing equipment
- Acquiring another business
- Increasing marketing investment
- Entering a new market
Illustrative Scenario Planning
Revenue increases by 5%
Revenue increases by 15%
Revenue remains unchanged
Scenario planning doesn’t predict the future with certainty. It helps business owners understand how different assumptions could affect their financial position.
9. Understand Your Break-Even Point
Your break-even point provides an indication of the level of sales required to cover fixed costs based on your assumptions.
Illustrative Example
If fixed costs are $120,000 and the contribution margin is 40%:
Based on those assumptions, the business would need approximately $300,000 in sales to cover its fixed costs.
Break-even analysis can support decisions around pricing, sales targets, hiring, budgeting and expansion.
10. Know When to Seek Professional Business Advice
Financial information is most useful when it helps you make better decisions.
Professional business advice may be useful when you’re:
- Experiencing declining profitability
- Growing rapidly
- Planning an expansion
- Considering a major investment
- Experiencing cash-flow pressure
- Reviewing your pricing strategy
- Considering an acquisition
- Planning business succession
- Preparing for a future sale
- Unsure what your financial reports are telling you
DFK’s 5-Point Profitability Review
When reviewing business profitability, a useful starting point is to connect the financial results with the decisions the business owner is trying to make.
Our five-point framework focuses on:
Revenue
Where is revenue coming from, and how is it changing?
Margin
Which products, services or activities are generating stronger margins?
Costs
Which costs have changed, and what is driving those changes?
Cash
Is the business converting its financial performance into sufficient available cash?
Future Decisions
What upcoming decisions could materially affect profitability, funding or cash flow?
Revenue → Margin → Costs → Cash → Future Decisions
Illustrative New Zealand Business Example: Revenue Increased but Profit Barely Changed
Consider an illustrative Auckland professional services business that increases annual revenue from $800,000 to $1,000,000.
That’s 25% revenue growth.
However, during the same period:
- Staff costs increased
- Contractor costs increased
- Marketing expenditure increased
- Other operating costs increased
Profit therefore increased from $120,000 to only $125,000.
$200,000 additional revenue did not translate into $200,000 of additional profit.
A profitability review could investigate service-level margins, pricing, resource utilisation, customer profitability, operating costs and cash conversion.
Important: This is an illustrative example created to explain the concept. It is not a DFK client case study and should not be presented as one.
New Zealand Business Information and Tax Considerations
Profitability should be considered alongside a business’s wider financial and tax obligations. The exact treatment of expenses, GST, income and other business transactions depends on the circumstances of the business.
For current information about New Zealand tax obligations, business owners should refer to official Inland Revenue guidance or speak with a qualified professional.
For company-related information:
When Should You Speak to a Business Advisor?
You don’t need to wait until your business is struggling before seeking advice.
Professional guidance can be particularly useful when you’re:
- Experiencing declining profitability
- Growing rapidly
- Considering expansion
- Making a significant investment
- Managing unpredictable cash flow
- Reviewing pricing
- Considering an acquisition
- Preparing for succession
- Considering selling the business
- Planning a major financial decision
FAQs: How to Improve Business Profitability
What is the best way to improve business profitability?
There is no single approach that works for every business. Start by understanding revenue, margins, pricing, costs and cash flow, then identify the areas that have the greatest potential to affect profitability.
Does increasing revenue always increase profit?
No. Revenue growth can also increase wages, supplier costs, marketing expenses and other costs. The effect on profit depends on the additional costs associated with generating that revenue.
What is the difference between gross profit and net profit?
Gross profit generally reflects revenue after direct costs, while net profit takes broader operating expenses and other relevant costs into account.
Can a profitable business still have cash-flow problems?
Yes. Profit and cash flow measure different aspects of a business’s financial position. Timing differences between receiving customer payments and paying expenses can create cash-flow pressure.
How often should a business review profitability?
The appropriate frequency depends on the business’s size, industry, complexity and circumstances. Regular management reporting can help business owners identify changes sooner than waiting for annual financial statements.
When should I speak to a business advisor?
Business advice can be useful when you’re making significant decisions around growth, investment, cash flow, profitability, acquisition, restructuring, succession or a potential sale.
Key Takeaways
- Revenue growth does not automatically mean profit growth.
- Gross margins can help reveal where profitability is being created or lost.
- Pricing should be reviewed alongside costs, demand and the value delivered.
- Cost reduction should consider the wider effect on operations and revenue.
- Profit and cash flow should be analysed separately.
- Forecasting can help business owners understand the potential effect of major decisions.
- Financial KPIs should reflect the individual business model.
- Professional business advice can provide additional perspective when decisions become more complex.
Improving Profitability Starts With Understanding Your Numbers
Improving profitability isn’t always about selling more.
Sometimes the opportunity is in better pricing, stronger margins, improved cost management, better cash-flow planning or more informed financial decisions.
The first step is understanding what your financial information is telling you and how it relates to the decisions ahead.
Talk to a DFK Business AdvisorOfficial New Zealand Resources
For current information about New Zealand tax and company obligations, refer to official government sources.
Want to Understand What’s Driving Your Business Profitability?
Your financial results tell a story. Our business advisory team can help you understand what is driving your profitability and identify opportunities to make better-informed decisions.
Whether you’re reviewing your margins, managing cash flow, planning growth or considering a major business decision, DFK Orb360 O’Halloran can provide practical advice backed by accounting, tax and financial expertise.
Talk to a Business Advisor
Tell us a little about your business and what you’d like help with. Our team will get in touch.
09 377 4238
Level 2, 6 Kingdon Street, Newmarket, Auckland
help@orb360.co.nz