When running a business, the two most essential steps in maximizing profit levels are improving revenue and minimizing expenditure. In most instances, minimizing expense can be quite strenuous for businesses as it often requires a lot of sacrifices. However, reducing costs can be quite useful in salvaging particular situations.
What are Operating Expenses?
Operating expenses, or operating costs, refer to the expenses or costs for the daily running of a business. These expenses cover a range of costs involved in running a business ranging from labor costs, sales commissions, maintenance costs, amortization, etc.
Understanding how to measure your business’s operating costs is essential. This is because it helps you to find ways to minimize these costs. Apart from the costs, the operating cost ratios are also important metrics as they help derive other essential business metrics, such as the operating income and operating expense ratio.
Ways to Reduce Operating Expenses
For small to medium scale businesses, cutting operating costs helps the business in several ways, particularly with profit optimization. Reducing operating costs does not in any way require or necessitate the reduction in the quality of the services you offer. Some practical ways to optimally reduce operating costs in your business include:
- Get the Best Rates
Suppose your business requires working with vendors regularly. In that case, one of the most efficient ways to reduce operating expenses is to look out for the best rates when procuring a product or service. Before engaging any vendor, ensure that you have essential details on their work scope and the best rates they can offer. Once you have obtained this information, you can then effectively compare each vendor’s offering and choose the vendor that offers the best pricing for the product/service offered.
However, while looking to save money by getting the best rates, ensure the best-priced deals come from an equally qualified vendor. You don’t want to shoot yourself in the leg by paying less for a service only to have it poorly executed. In such a case, you may end up spending more than you ever planned or imagined. So, do your research well and trust your intuition to avoid stories that touch.
- Make Early Payments
Another way to reduce your operational costs with vendors is by paying your invoices early. As much as it might not seem like you are saving much, you get to save some percentage on the cost by paying invoices early. Apart from this, early payment also helps prevent some fees attached to late payments by some vendors. The same principle applies to business loans and other debts. Not paying early enough can lead to an increase in the amount you are supposed to pay.
Of course, other vendors want to make money too. So, if you choose to pay them in installments, some attached costs may spread over the payment schedule selected. So, again, it boils down to choosing the best deals – if you can afford to pay upfront and save money, by all means, do that! But if you feel you can make more money from the deal by paying in installments, then go for it!
- Optimize Technology
Technology now offers businesses several affordable solutions that help them save a lot of operational costs. With the right technology, your business can now automate and streamline several business functions that lead to reduced operating costs. Automation and streamlining go a long way in helping companies reduce the amount they spend on labor.
Another way to optimize the use of technology in running your business is through remote working. By having some of your staff work from home, you get to save some of the cost associated with getting a large workspace to accommodate your employees per time. This spills over and helps you save other costs as you may have to pay employees significantly lesser due to the freedom to work from home.
All you need to do in remote working is to ensure that your team optimally uses selected telecommunication means efficiently. Interestingly, some postulations posit that having your staff work remotely helps improve their productivity as they get to work in their preferred space.
- Outsource Some Processes
For small and middle scale businesses, outsourcing is also an efficient strategy in cutting operational costs. Rather than incur some avoidable labor costs, you can outsource the tasks to third-party individuals or organizations. Doing this will help you reduce the HR cost involved in the entire process as hiring staff might require advertisement, hiring, and even training costs.
- Carry out Timely Review
One practical approach to minimizing costs on your business is carrying out a timely review to identify what works and what doesn’t. Then from there on, you cut the cost of inefficient processes. This reduces wastage of resources and time. And if you ask me, time and resources is golden in business! Incorporate this review into your company culture so anyone can efficiently identify what works for the company and work on them.
- Maximize Employee’s Efficiency
Several small businesses often make the mistake of overstaffing. One effective way to reduce operational costs is to optimize your staff’s efficiencies. Identify the strengths of your most valuable staff and leverage them rather than hiring multiple people for the various roles within the organization. If you do this, you will effectively minimize labor costs.
- Minimize Extra Perks and Bonuses
When minimizing costs in your business, it is essential to carry your staff along in the process. This way, they are aware of the reasons why you make any seemingly drastic decisions. Cutting extra bonuses and perks is one of the ways to minimize operational costs. However, rather than cutting these bonuses and extra perks abruptly, you can start by attaching employee targets to these bonuses to serve as a way of optimizing cost.
- Review and Cancel Unused Services
Most businesses tend to have a couple of unused or underused services. If you are trying to cut costs as a business, it is only rational that you carry out a thorough review of all the paid services you are engaging as a business and retain only the most important ones. You might get to find out that not all these services are as important as they seem after all.
- Explore Conservative Options
With the increasing awareness of the effects of some activities on climate change, implementing some environmentally friendly changes in your business might just be another way to save cost. For instance, rather than go for the typical light bulbs for your office space, choosing energy-saving light bulbs are a more cost-effective choice as they tend to last for much longer and do not have any heating problems. That way, you save costs on electricity bills. Creating a natural space helps reduce the cost of disposing of physical waste and some other monthly office supplies.
In conclusion, if you want to improve your profit margins significantly, you may want to look for smart ways to cut or reduce business operating expenses. But watch out for the effects of what operational cost you reduce and make amends when need be.
In business, you’re always in a constate state of flux, so adapting should be a part of your core strength. In all, ensure that you don’t compromise the quality of your product or service. Remember, you’re only just trying to build a successful brand for yourself – don’t kill it!