10 Simple Steps to Reduce Operating Costs and Expenses

In simple terms, operating costs are the costs involved with running your business. This encompasses all the things you pay for in order to keep your business going and generating revenue, including cost of goods sold (COGS) and operating expenses (OPEX). Below we’ll explain these terms, tell you how to determine your total operating costs, and provide some helpful tips for reducing them.

How to Calculate Operating Costs

Subtracting your operating costs from your total sales will give you your operating profit or income. But first you have to calculate your operating costs. You can do this with one simple equation: cost of goods sold (COGS) + operating expenses (OPEX). 

COGS covers all the costs associated with creating the goods you sell, including the direct costs of materials and labor, rent for production facilities, equipment maintenance and repairs, wages and other benefits for production workers, and utility costs and taxes for production facilities. 

OPEX are the ongoing expenses that your business incurs as it operates. This includes the maintenance and administrative costs of running the business on a daily basis, such as employee salaries and commissions, office supplies, rent and utilities, advertising and marketing materials, and travel expenses. On your company’s balance sheet, OPEX are reflected as a unique subcategory of liabilities.

What Is the Operating Cost Ratio?

The operating cost ratio compares a company’s OPEX to its net sales. It’s a way of determining whether the company’s management is able to keep costs low while still generating the expected sales or revenue. This makes it a good indicator of your company’s financial health. It can also help you see where you rank within your industry. To put it simply, the lower your operating ratio, the more efficient your business.

How Can You Reduce Operating Costs and Expenses?

The easy answer is to spend less. If you’re spending a lot on payroll, then reducing salaries or headcount will lower that figure. But this is common sense; most businesses don’t actively try to spend more money than they need to.

If a company has high operating costs and expenses, it’s probably because those costs seem necessary to stay competitive. In some cases this might be true. However, it’s almost always possible to cut costs without affecting the company’s ability to function effectively or keep up with competitors.

Below are some steps that any organization can take to find and remove excess costs, plus areas of spending that should be regularly reevaluated.

1. Rethink Your Marketing Spend

How much you need to spend on marketing depends on multiple factors. Are you a newcomer or an established player in the market? Are you targeting an existing niche or carving out a new one? Either way, you can reduce marketing expenses by finding cheaper (or free) ways to promote your products or services. You can also analyze your marketing spend to see which parts of it are most effective, and eliminate the rest.

2. Reconsider Travel Budgets

Not that long ago, all long-distance business had to be done in person, which necessitated travel expenses. These days the world is much more receptive to virtual meetings, and almost all business can be conducted online. Not only does this reduce the costs associated with travel—whether for gas, airfare, or hotels—but it’s also better for the environment. Plus, cutting down travel time increases productivity and efficiency, and makes expense management simpler.

3. Identify and Address Inefficiencies

Every business should keep an eye out for inefficiencies. There might be complex processes that could be streamlined, expensive contractors that could be replaced with salaried staff, or pricey subscriptions to services you never use. Even if you did a cost-benefit analysis for these business expenses originally, circumstances change—and they might not be serving you well anymore.

Since many inefficiencies have to do with redundant expenses, you can easily cut costs without actually impacting your business. You might even find ways to improve operations; for example, by implementing automation to replace tedious manual processes.

4. Consider Remote Work

Many employees prefer a flexible work-from-home or hybrid model. But remote work isn’t just about making your staff happier or attracting new candidates; it can also help you reduce operating costs. Having a fully remote workforce means you don’t have to worry about renting office space, paying for utilities, or buying office supplies. And even if you just reduce the number of in-office days per week, you can still cut your spending significantly.

5. Consider a Four-Day Work Week

Although this might seem counterintuitive, studies have shown that implementing a four-day work week can actually increase revenue—while greatly improving employee well-being. You might find that your staff is more productive during those four days than they were during five. This can help prevent burnout and staff turnover, which helps you save on recruitment and training.

A four-day work week also allows you to reduce some of the daily costs of running a business. For example, if you have an office, it means you’ll have one less day of utilities to pay for. This is a big change, and you have to make sure it works for both your employees and your customers. But if it does, it can be a fantastic way to lower expenses while raising morale.

6. Automate Manual Processes

Over time, the costs of doing business increase. Some experts estimate that operating expenses double every 14 years. Luckily, this trend is matched by the emergence of new tools that improve efficiency—but it’s up to you to implement those tools. Automation is one of the most important resources at your disposal, and it’s constantly improving. It can help you streamline repetitive manual work, reduce human error, free up staff for high-value tasks, and scale your business. In other words, automation drives down costs and boosts revenue at the same time.

7. Reduce Energy Consumption

Energy consumption refers to all the energy used to perform an action. Reducing it can not only lower your company’s environmental footprint, but also cut down your operating costs. The choices you make about energy consumption can greatly influence your business’s overall cost structure.

Here are a few ways to reduce energy consumption:

• Use excess energy during off-peak times 
• Replace incandescent bulbs with long-lasting LED bulbs
• Perform an energy audit 
• Turn off equipment when it’s not in use 
• Educate employees on energy-saving features built into your office equipment

8. Negotiate Better Rates

One simple and effective way to reduce operating costs and expenses is to do a financial review every 6–12 months. Do your research and compare rates for different services, such as insurance, to see if you can negotiate a better deal. You might also be able to request pre-payment or early payment discounts. For example, a lot of lenders offer discounts based on payment history and reliability.

9. Consolidate Incidentals & Cut Unnecessary Expenses

Finding places to cut costs might seem impossible, especially if you’re already on a budget. But there are almost always unnecessary expenses to be found. For example, consolidating incidentals can lead to huge annual savings. You might be able to combine training days or celebrations to reduce costs. Keep an eye on staff performance to see if you can redesign roles or redistribute responsibilities—and don’t be afraid to eliminate positions that aren’t worth the time and money.

10. Outsource Non-Core Activities

Outsourcing means obtaining a good or service from an external provider. It can help you cut spending by transferring part of the workload to a more cost-effective third party. According to recent studies, almost 30% of organizations outsource to some degree to help reduce operating costs. Outsourcing can also help companies stay competitive. It allows you to focus on core business activities, which can give you an edge over competitors that are wasting resources on less valuable tasks.

Cut Operating Costs & Expenses With an Automated Spend Management Platform

When it comes to operating costs and expenses, most businesses aren’t as efficient as they could be. The steps above are a great place to start, and can help you get into the right mindset for cutting costs. But if you want to truly optimize your expenses, a spend management solution might be the answer. It can help you control expenditure with minimal effort by identifying inefficiencies and opportunities for savings. Best of all, automating spend management means you won’t have to waste resources on the process of reducing costs—the most time-consuming parts will be automatically done for you.

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