In order to grow your business, and increase profits, it is very important to understand how to cut operating costs and expenses. Operating costs and expenses are the building blocks of any organization in the growth of the business.
In today’s economy, being adaptable is crucial for businesses to thrive. We understand that many business owners are seeking ways to boost profits and reduce costs.
Although you might not have full control over increasing sales, there’s still an opportunity to enhance profitability by making significant cuts to your operational expenses.
As your business expands, so do your operating costs, resulting in a greater portion of your revenue being lost. Trimming down these costs can help maximize profit margins, manage current expenses effectively, and ensure continued success even amidst market uncertainties.
What is Operating Cost?
In simple terms, operating costs refer to all the expenses you incur to keep your business running smoothly. Running a business involves various expenses, and for it to thrive, the operating costs must only make up a small portion of the revenue generated.
So, what exactly constitutes these operating costs?
They encompass essential expenditures such as payroll, inventory, insurance, bills, and other necessary items. You can determine this figure by adding up your operating expenses along with the cost of goods sold (COGS).
Hence,
Operating costs = operating expenses + COGS.
What are Operating Expenses?
Operating expenses, also known as OPEX, are the ongoing maintenance and administrative costs required to keep your business operational every day. They’re the additional costs that aren’t directly linked to your product or service but are essential for the smooth running of your operations.
Few of the examples of operating expenses:
- Payroll for staff
- Insurance
- License fees
- Rent
- Research
- Marketing (including for social channels like Facebook)
- Accounting fees
- Building maintenance and repairs
- Office supplies
- Utilities
- Attorney fees
- Property taxes on real estate
- Vehicle expenses
- Travel expenses
- Overhead costs
Cost of Goods Sold
The cost of goods sold (COGS) encompasses all the expenses incurred in producing your product or service. This includes payments for materials, manufacturing, labor, packaging, storage, equipment, or any other essential element needed for creating and selling your product.
A useful metric for your business to consider is operating income. Operating income indicates the amount you’re actually earning after covering your operating costs.
It’s simply a figure and will differ significantly from one business to another, but it can serve as a valuable indicator of growth or loss over a specific period.
Hence,
Operating income = Total revenue – operating cost.
Operating Expense Ratio
A more informative metric, which you might share with your board or potential investors, is your operating expense ratio. This ratio serves as a reliable gauge of your financial well-being and provides insights into your standing within your industry.
Generally, the lower your ratio, the more efficiently your business operates.
Hence,
Operating expense ratio = Operating cost/revenue.
[8 Ways] How to Cut Operating Costs And Expenses?
While a lot of business owners concentrate on boosting sales and maximizing revenue to enhance their profit margins, small business owners might discover more success by lowering their operating expenses.
After calculating your operating costs and operating expense ratio, you might realize that your operating expenses aren’t at a healthy level.
Reducing costs is both feasible and impactful. It’s essential for all small business owners to carefully evaluate their operating expenses and seek ways to trim costs without compromising quality or overloading their human resources.
We’re offering a range of tips for cutting your operating costs to achieve improved financial success in both the short and long term.
How to cut operating costs and expenses?
Here are 8 ways to cut operating costs and expenses:
- Normalize remote work
- Save money on insurance
- Consider a four-day workweek
- Work smarter with technology
- Outsource when necessary
- Negotiate & shop around
- Pay smart
- Identify inefficiencies
1. Normalize remote work
Amid COVID-19 restrictions, many companies have shifted to a fully remote workforce.
Although transitioning to full-time work from home had its challenges initially, almost 43% of full-time employees express a desire to continue remote work even after the economy fully reopens.
Facilitating remote work for employees brings numerous cost-saving advantages, particularly in terms of overhead expenses. If you haven’t yet ensured that employees have efficient remote work setups, investing in this aspect for the future could prove beneficial.
You might want to explore the option of selling or leasing unused office space as a strategy to offset costs.
2. Save money on insurance
If you’re aiming to reduce your financial outlays, it could be beneficial to reassess your benefits package for potential cost savings. It’s important to ensure that your insurance offerings remain competitive, but also explore opportunities to trim expenses where possible.
Consider seeking bundled deals, where multiple offerings such as dental and vision coverage are included under a single policy.
Take the time to shop around with various insurance brokers to ensure you’re securing the best rates tailored to your specific business requirements. Keep in mind that brokers may earn commissions from insurance sales, so not all of them might be motivated to help you save money.
3. Consider a four-day workweek
As the mental advantages of a four-day workweek gain broader recognition, there are also notable cost benefits linked to fewer working hours.
Transitioning to a four-day week inherently cuts down 20% of variable overhead expenses, resulting in substantial annual savings on items like electricity, office supplies, and even cleaning services. Additionally, it can lessen the necessity for fringe benefits such as office snacks, food, and commuter expenses.
Companies like Microsoft have reported a 40% surge in productivity after adopting a four-day workweek. With reduced overhead costs and happier employees, embracing a shorter workweek could prove highly beneficial for your business.
4. Work smarter with technology
Adopting technology may feel awkward initially and could involve some initial expenses, but in the long term, it can lead to cost reduction. Online systems and software have the potential to enhance efficiency and free up time for employees across all levels of your business.
Incorporating forms of artificial intelligence (AI) can accelerate data processing and minimize human errors. Moreover, technology can enhance communication within your organization and throughout the entire business supply chain.
5. Outsource when necessary
As a business owner, you might find yourself stretched thin, especially if you’re running a new venture. New businesses must make the most of every employee’s effectiveness to avoid overspending during startup.
While it might seem tempting to take on all the different roles yourself or burden your staff with extra tasks, you could end up wasting countless hours trying to handle specialized tasks with limited experience.
Delegating or outsourcing work to professionals could actually significantly reduce your operating costs while boosting your revenue.
Seeking help from experts in areas such as advertising, marketing, financial advice, legal matters, and other specialized fields can yield much more efficient results and free up valuable working hours for meaningful progress.
You might also realize that hiring a full-time accountant or legal counsel isn’t always necessary, and you can save costs by outsourcing work for fewer hours. While it’s not always the perfect solution, it’s certainly something worth considering.
6. Negotiate & shop around
Many business owners often realize belatedly that they’ve been paying too much for goods or services for an extended period. A savvy and immediate approach to reducing your operating costs is to lower your expenses on goods and services.
You could establish a process that involves obtaining bids from various vendors for each project.
There’s a possibility that you could negotiate lower prices through loyalty or exclusivity deals, or by purchasing in bulk or collaborating with other small businesses on group purchases. Be innovative and don’t hesitate to explore newer, more cost-effective alternatives.
7. Pay smart
You’re probably aware that late payments can be both costly and troublesome. Not only can they result in expensive fees, but they can also have a negative impact on your business credit.
To steer clear of these issues, consider setting up automatic payments. Additionally, look into whether making early payments can lead to savings. Many times, vendors offer discounts of up to 5% for early payment on invoices.
Making extra or early payments on loans and debts can reduce the total interest you’ll pay over time.
8. Identify inefficiencies
Nobody likes to entertain the idea that their company might be full of inefficiencies, but the truth is, it’s a common aspect of human operations. Almost every business can uncover overlooked issues when they closely examine their operations.
These inefficiencies not only waste time but also cost money, whether they’re minor time-wasters or serious cases of fraud.
When was the last time you checked your automatic (but unused) subscriptions or evaluated whether you’re wasting man-hours on repetitive tasks? These inefficiencies are impacting your bottom line.
Streamlining your existing processes and procedures can help eliminate costly errors and free up time for your employees to focus on more productive tasks. Did you know that occupational fraud affects nearly all businesses?
According to the 2018 annual report by the Association of Certified Fraud Examiners (ACFE), internal fraud “is likely the largest and most prevalent threat” to organizational resources. Some businesses have found success by offering rewards to employees who identify inefficiencies or even whistleblow.
Final Thoughts
If you’re finding it challenging to reduce your operating costs and expenses, or if you just want to accelerate your financial progress, you can focus on strategies that boost your incoming cash flow.
By increasing your revenue, you naturally shrink the portion lost to operating costs, thus maintaining a robust capital structure.
Consider trying out a few of these ideas to bring in more cash for your business:
- Increase prices, especially of popular items or services
- Invoice customers more quickly
- Decrease payment windows and follow up on unpaid invoices
- Employ a business line of credit
- Bring in new business with better marketing
- Sell or rent unused space or equipment
Hey, I am Sachin Ramdurg. I run and manage futuredecider.com website that helps students, graduates, and professionals, to find and decide on their future career with ultimate future career advices and future career guides. I have an overall 12+ years of career guidance experience in multiple domains which has helped multiple students, graduates, and professionals to find the best career path for their future.