How to Turn Costs Into Profit

Cost centers are just one of those necessary evils associated with running a business. After all, it takes money to make money. 

From equipment maintenance costs to inventory to web hosting fees, automation tools, and your Google Ads budget, expenses are a reality of doing business. 

That said, there may be some opportunities hiding in your monthly financials, whether that’s a hidden revenue stream, an opportunity to work smarter, or even a way to turn some expenses into profit.

In this article, I’m going to go over a simple strategy for turning costs into profit. Read on to learn more about my process. 

Let’s Talk Financials

If you’re used to measuring performance by glancing at sales and revenue numbers semi-regularly, you’re missing out on a lot of insights. 

However, if you want to find opportunities to turn costs into profits, you’ll need to take a deeper dive.

Your monthly financials offer more insights than you might imagine, allowing you to identify gaps in your savings and expenses, and flag potential issues before they put your bottom line at risk.

Dig into Your Revenue

Revenue is the money you’re bringing in from sales of services or goods. Total revenue represents your break-even point, meaning the first thing you’ll want to check out is that you’re earning more than you spend. 

Common sense, right?

The next piece of the revenue puzzle is a bit more complicated. You’ll want to look at where your revenue is actually coming from. 

• Are some revenue sources overly time-consuming?
• Do any of your revenue streams yield very low margins? 
• Where is your money coming from? Do you have multiple revenue streams or is one product/service doing all the work?

Calculate Profitability by Client

Another area you’ll want to look at is what you’re making per client. While some clients might seem profitable, they might be costing you in terms of time or additional expenses. 

You can calculate what you’re making per client by using the following two formulas. 

Total Paid by Client – Total Project Expenses = Gross Profit per Project

Gross Profit / Total Hours Invested = Hourly Wage

Looking at how much you’re making per client can give you a sense of whether you need to raise prices or which types of customers to target with your lead gen efforts. 

Acquisition Costs & Churn Rates

Customer acquisition cost is the amount you spend to get a new customer. Costs include salaries, marketing costs, and the time investment involved in creating marketing materials and selling the product.

The other side of this is avoiding churn. In other words, you might get new customers, but do they stick around? A low churn rate can make up for high acquisition costs, as repeat purchases will eventually cover those marketing costs.

Accounts Receivable

How many accounts are past due? If a large share of your customers aren’t paying up, then that could mean trouble. First of all, are you following up on these accounts? 

Slow turnover could be a sign that your customers lack financial stability, which puts your business at risk. 

Return on Assets

Return on assets (ROA) is a ratio that represents how much profit a company brings in compared to the value of its assets. As a point of reference, assets include everything from accounts receivable to equipment, vehicles, and inventory.

To calculate ROA, follow this simple formula:

Net Income / Total Value of Assets = ROA

A higher percentage is better, as it indicates that your company manages its assets responsibly—though it’s worth noting that company selling digital products/services will likely have fewer assets than a car dealer.

Audit Your Productivity

Take stock of the tasks that you and your employees perform each day and see if you can automate any of them. 

• Are there cumbersome activities that are eating chunks of your time? 
• Do you have to re-enter any data or perform certain steps more than once?
• Are employees frequently working overtime?
• Does it take a long time to close deals?
• Are you still using a lot of manual record-keeping processes?

What kind of tools might help you out here? A CRM, for example, can help you increase revenue by making actionable data more accessible.

While employees themselves are a significant expense, it might be worthwhile to hire someone that can help you identify new revenue streams and put them into action. 

ID Your Potential Revenue Streams

After you’ve established a baseline for your productivity and profitability, you’ll then want to start looking at potential ways to boost profits.

Keep in mind, you don’t necessarily need to create a whole new product line. In fact, you might just need to make a few tweaks.

Emphasize the Upsell

What can you do to increase the dollar amount of each sale? Are there upsells, cross-sells, or add-ons that complement your primary revenue streams?

Let’s say you’re working as a content marketer, you might make a habit of recommending additional new services each time you bring on a new client. For example, if a client signs up for a monthly package of eight blog posts, you might offer to help them repurpose those posts into a YouTube series or offer a social media amplification service.

Can You Turn a Service into a Product?

Again, let’s imagine that your primary source of income is through offering marketing services.  

Consider how you might turn that service into a product–that might mean teaching other people how to do what you do, offering personalized insights, or downloadable assets.

Some examples include:

• Personalized reports–If you’re already conducting research in your day to day activities, consider charging customers for a personalized report with market insights and recommendations. 
• Downloadable templates–WordPress themes, graphics, photos, or other digital assets could be offered as a product alongside your existing services. The benefit here is, if there’s a market for your work, downloads are a passive revenue stream.
• Online courses–you might offer paid courses that teach your customers to use YouTube, dig into copywriting best practices, write a great blog post, the list goes on.

According to Gartner, the key thing here is to focus on selling assets that others find valuable. While that seems like a no-brainer, it means that you should spend some time researching whether your idea fills a gap in the market.

Or Repackage Your Services?

Another idea is offering one-off services like an SEO audit or detailed market research that helps clients get started with their own marketing efforts at a flat rate. 

This might help you attract clients reluctant to commit to ongoing services, as they can quickly assess whether they can afford a one-off package and make a decision.

Another idea is looking toward a relationship-based sales model that aims to bring in new clients by offering a yearly subscription at a reduced rate. Keep in mind, you’ll need to pay close attention to customer satisfaction so that members renew their contracts when the time comes. 

Can Some Expenses Be Reinvented as Revenue?

Turning your cost centers into a revenue stream isn’t always possible, many businesses have been able to recoup some of their expenses by thinking creatively. 

Here are a few ways you might be able to get some of those losses back–or better yet, turn a profit.

• Is there extra space you can rent to another business? Whether we’re talking storage space or renting out an office to a remote worker, if you have extra capacity, it might be worth turning into some extra cash.
• Can you turn your tech investment into digital products? Whether you’re in marketing, sales, or professional services, chances are, you’re spending a decent chunk of change on automation tools, paid advertising, and other business intelligence tools. 
• What about equipment? If you have industrial equipment, you might consider allowing other companies to use your machinery during-off hours. While you’ll need to think about wear and tear when you set your prices, renting out your equipment on an hourly basis might be a good way to offset costs.

Build a Strategy

1. Document potential opportunities. Write down the potential profit-drivers hidden in your financials. 
2. Determine if there is a potential profit margin. What value does this new solution bring to customers? How much do competitors charge for something similar?
3. Create a model to exchange the service. What will you need to get started? How many people will need to be involved? What kind of marketing costs are required, and what needs to happen in order to start offering your new product or service? Even if your revenue stream is as simple as loaning out space, you’ll need to do some legwork to find people to fill that vacancy.
4. Make sure there is time for a transition. In other words, how much time/money will you need to invest in this new revenue stream before it starts generating a profit? 
5. What does success look like? Whether you’re aiming to boost retention, increase sales, or turn your expenses into revenue, you’ll need to define those metrics that represent success before launching a new initiative,

Wrapping Up

Sometimes the answer to improving your bottom line is right there, hiding in your routine reports. The tips I’ve outlined above prove that driving up your profits doesn’t necessarily mean you need to completely reimagine your business model.