If you reduce operating costs and expenses, you’ll be able to improve your profits and have a successful business. That is especially true during an economic downturn when you need to be a savvy spender.
Once you understand operational costs and expenses and why they matter, you can determine a few options for reducing them. This article will help you achieve just that.
What Are Operating Costs And Operating Expenses?
Operating costs refer to how much money you spend to keep your business going.
- costs of goods sold (COGS)
- operating expenses (OPEX)
You can calculate them using the following formula:
Operating cost = COGS + OPEX
However, operating expenses refer to specific maintenance and administrative costs you incur
, such as:
- salaries and wages
- rent and leases
- insurance equipment expenses
- repairs & maintenance
- travel expenses
You can calculate OPEX by adding up all the expenses listed above. Then, if you want to know what’s your operating expense ratio, use the following formula:
Operating expense ratio = Operating cost / Revenue
Both operating costs and expenses are important to running a successful business. Keeping them down is crucial, specially during an inflationary economy.
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How To Cut Operating Costs And Expenses: 12 Tips
When you have a small business, you should take steps to reduce operational costs. Here are a few options that you can do to reduce expenses in your business.
One easy option is to convert to a fully-remote team because that means you can lower infrastructure costs.
As a result, working remotely has become more prevalent in recent years.
You can allow your employees to work from home or while they travel. Set up a hybrid team if remote work isn't possible for every position.
Then, you can switch to a smaller office space to save money on your monthly lease. You'll also save on utilities and other in-office expenses.
Offering remote and hybrid work can also help you attract and retain employees. Then, you can save money on the recruiting process.
Rethink The Way You Hire
Labor costs can be one of the major expenses businesses incur in.
You could look into hiring freelancers instead of employees for smaller projects.
For example, a freelancer can help you finish a big project by a deadline.
Freelancers can do just about anything, from digital marketing to accounting.
Also, you only have to pay them for the work they do. That means you don't have to pay for employee benefits, like paid leave or health insurance. Also, freelancers often work remotely, which can further help you save on office space.
You could also consider hiring interns
if your small business. You can partner with a university to find good interns to work for you for a semester and cut costs simultaneously.
You can pay your interns, which costs less than a full-time employee, or exchange the work for college credit.
And, as with freelancers, you usually don't have to pay for benefits. You also don't have to hire them long-term, so you can choose to stop hiring interns if it gets to be too expensive.
Make sure to review your locality’s labor laws.
Negotiate With Suppliers
Another one of the best ways to reduce operating expenses is to negotiate costs. For example, you might negotiate on the price of your phone or internet bill or order products in bulk to cut costs per unit
Whenever you're looking for a new service, shop around. You can ask for a better deal, especially if you plan to order products in bulk.
Sometimes, telling a supplier you have an offer from someone else could help. Don't lie about having other offers, but a supplier might be willing to match the competitor's price.
Then, you can get a good deal on whatever service you're considering.
Automate Tasks And Increase Efficiency
Automating certain repetitive tasks, such as social media scheduling, also offers time and cost savings.
In addition, it will free up your employees to do things you can't automate.
For instance, you can use software to automate bookkeeping, invoicing, and payroll. You can also set up automatic scheduled social media posts. Automating these tasks can save you a lot of time and money.
You can use an online booking system or online project management tools.
For example, some accounting software makes automating easy since you can connect your bank account. When you do that, the software will pull in all of your transactions, and you can sort them into categories.
Automations will also make your employees more efficient, giving them more time to work on other assignments.
Adjust Your Benefits
You might want to look at your employee benefits package to help reduce operating costs.
Companies can do a few things to save on employee benefits and perks. One way is to offer less comprehensive packages. But unfortunately, this means that employees will have to pay more out of pocket for things like health insurance or retirement savings.
Now, you don't want to cut benefits so much that you'll lose your best employees to another company.
If possible, look into what benefits your competitors offer. That can help you decide what benefits to keep so that you can retain your workers.
If you don't want to cut down on perks, you could negotiate better rates with vendors or purchase a package that bundles several benefits or coverages at a discounted rate.
Finally, you can think outside the traditional benefits box to find creative ways to save. For example, you can offer employees stipends to use for their health and wellness initiatives or allow them to work from home one day per week to save on office costs.
However, you should find a balance between good benefits and affordability. Then, you'll be able to keep your operating costs low.
Pay Your Bills On Time And Save Money
You can also reduce operating costs by paying your bills on time or early. How? Even one late payment can come with a significant late fee, and those fees add up.
If you can't afford your bills, consider getting external capital for your business. A loan can help you pay your bills.
You can also use the money to try and increase sales so that you have even more money for necessary bills. Plus, you'll be able to pay off bills and get rid of the expenses you don't need.
Consider using an online bill and pay software program.
Switch To Free Tools
If you spend money on software and computer programs, the next option for how to reduce operating expenses is to switch to free tools. For example, maybe you use a project management tool but pay for the most expensive tier.
Consider if you're using all of the paid features and need them. If not, switch to the free version.
You might need to change your processes if you lose certain paid features. However, that can be worth it in the long run, especially for tools that charge per user rather than a flat rate.
If you do have a tool that charges per user, you can also evaluate if everyone needs access. Then, you can remove those extra people to help reduce your expenses.
Know When To Invest
It may seem counterintuitive, but spending a bit of money now could help overall. Invest in newer, faster equipment.
For example, maybe you've had your computers for multiple years, so they run a little slow or aren't compatible with the latest software.
You could try and make the computers work, but consider upgrading. The investment will cost a lot now, but it could help your team work much faster and more efficiently.
Another cost reduction idea
is getting energy-efficient equipment.
Then, your sales reps could process more orders, or your retail staff won't have to make customers wait as long. If that happens, you could make the investment back and more.
Another way to reduce expenses is to switch from paper to digital. You can do this with everything from internal memos to customer receipts.
Especially if you print off a lot of pages, you can save on paper and ink. You might also be able to get rid of your printer and not need to buy a new one.
If you frequently send contracts, use a digital signature tool, some of which are free or cheap. Then, send customers their receipts through email or a text message.
Email your employees with updates rather than sending them print copies of new processes. Then, you can get rid of paper or only use it occasionally.
If you and your team travel frequently, try to cut back. Travel is one of the most expensive things you can pay for, especially if you fly and stay in hotels.
You can still meet with clients or customers in other cities, but you might do so with a video call. That way, you'll see everyone's faces, but you can all save money.
Consider other digital forms of communication, including email and phone calls. You don't have to get rid of travel completely because it's necessary sometimes.
However, think about whether you have to take a trip. If you need to travel, use more affordable options, such as driving and staying in a smaller hotel or an Airbnb.
Become More Efficient
Inefficiencies can lead to wasting money and resources. And the truth is that they are simply a part of any operation, no matter how well-oiled.
The key is to find a way to fix them.
- One way to identify inefficiencies is to track the company's spending to find discrepancies.
- Another way is to track employee productivity by seeing if they’re meeting productivity goals.
- Finally, you can identify inefficiencies by analyzing customer complaints.
When you’ve identified these inefficiencies, you can find ways to fix them. One is to streamline your processes, so there are fewer opportunities for inefficiencies to crop up.
Another is to create a system of checks and balances so that you can catch errors and correct them before they cause too much damage.
Whatever method you choose, the important thing is to be proactive about addressing inefficiencies. Then, by taking steps to fix them, you can help ensure that your business doesn’t waste money on operating costs and expenses that are not bringing in a profit.
Cancel Unused Subscription Services
Businesses often sign up for services or subscriptions they end up not using. This can be a waste of money and tie up valuable resources they could use elsewhere.
There are a few ways to identify unused services or subscriptions:
- First, check your company's financial records for recurring charges from providers you don't recognize or don't remember signing up for.
- Ask your employees if they are using a particular service or subscription. If no one is using it, there's no reason to keep it.
- Go through your company's list of active services and subscriptions and see if there are any that you are no longer using.
Be sure to follow the cancellation procedure for each service or subscription to avoid any penalties or fees.
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Benefits Of Reducing Operating Costs
There are many benefits to reducing expenses:
- First, reducing costs means you can pocket the savings as extra profit. Of course, the average profit margin can vary between industries, and some businesses only profit about 4%.
- Another advantage of knowing how to reduce operating expenses is that you could attract more investors. While many other factors come into play, having a good profit margin can help you stand out.
- You can invest in things your business needs to survive an economic downturn and come out of it even more successfully. Having the extra money can also help you to get through a recession.
- When you reduce operating costs, you can also determine what is most important to pay for. Then, you can allocate more funding to those things rather than random supplies.
Can A Loan Help Cover Operational Expenses?
Operational expenses are the day-to-day costs of running your business. They can include everything from rent and marketing to employee salaries and office supplies.
Many small businesses struggle to cover their operational expenses each month, which is where external financing can come into the picture.
A loan can provide the capital necessary to cover operational expenses, giving you the cash flow you need to achieve business growth.
A Camino Financial loan may be your best option if you're looking for a way to cover operational expenses and costs.
We have minimal requirements and an easy and fast application process.
Apply for a loan today to get the financial help you need.
How to reduce business operating costs?
To reduce operational costs, consider going remote and reducing office space, hiring freelancers, canceling unused services, and paying your bills on time.
Then, you can enjoy the benefits, such as increasing your profit margins and saving money for emergencies.
How to reduce operating expenses in manufacturing?
Manufacturing companies can reduce business expenses by switching to a more affordable supplier. Other options include eliminating excessive packaging, buying more energy-efficient equipment, and using more efficient delivery routes.
How can an eCommerce business reduce operating costs?
One option for reducing operating expenses in business for eCommerce is to negotiate a bulk discount with manufacturers.
You can also focus on organic marketing strategies to save money on ads. Another alternative is dropshipping, which can save you the money you usually spend on storage space for your inventory.
Why is it important to reduce operating costs?
Reducing expenses can help you save money for slow periods in your business. It can also help you prepare for taxes or pass the savings on to your customers to help get more sales.
What does reducing operating costs mean?
Reducing operational costs means lowering the amount you spend to run your small business. Since operating costs include the cost of goods sold, it could involve lowering your production costs or reducing your spending on other things.
What are examples of operational costs?
Operational costs can include things such as rent, utilities, and travel expenses. It might also cover office supplies, insurance, repairs, and property taxes. If your business sells a product, your operating costs will also include production costs.