- What are operating expenses in business?
- Why you need to be careful when cutting operating expenses
- Best areas to cut operating expenses to raise margins
Q: What can I do to reduce operating expenses for my business?
A: Each business is different, but there are several ways to reduce your operating costs. Anything from switching to remote work, outsourcing labor, and utilizing digital tools can help you bring down the overhead for your business.
As a business owner, you likely dream about how to reduce your operating expenses. Profit margins are one of the biggest concerns for all business owners, especially motivated individuals hoping to expand.
Although it would be nice to tear through your business and cut costs in every department imaginable, you need to weigh these decisions against the opportunity costs.
Potential operating expenses depend largely on the type of business you’re running. Whether you’re curious about how to reduce operating expenses in retail, how to reduce business costs in manufacturing, or even how to reduce business travel expenses, we’ve got you covered.
Combine low-profit margins and high business costs, and you’ll quickly send your dream business straight into bankruptcy. Successful businesses make money, and spending too much on day-to-day operations will eat into your profits quicker than you might expect.
If your business is struggling with extreme operating expenses, fear not. According to Gallup, business expenses related to turnover rates have cost businesses over a trillion dollars per year.
That’s right, over a trillion dollars just on turnovers, but fear not. Entrepreneurs wondering how to reduce operating expenses in business should see this figure as a warning – if you’ve found solid employees – do everything in your power to keep them.
Below, we will define operating expenses, explain why you need to be careful when cutting costs, and the best areas to reduce business expenses. If you’ve ever wondered how to reduce operating expenses in business – keep reading!
- What are operating expenses in business?
- Why you need to be careful when cutting operating expenses
- Best areas to cut operating expenses to raise margins
- Moving forward once you’ve determined where and how to reduce operating expenses in business
What are operating expenses in business?
Operating expenses are pretty straightforward. These are the expenses your business accrues simply by performing its primary functions.
This includes, but isn’t limited to:
- Marketing costs
- Shipping costs
- Office supplies
All of these are operating expenses — otherwise known as “business costs.”
Operating costs are typically recurring — especially in the long term.
The longer your business exists, the more you will have to spend. Focusing on how to reduce operating expenses in business sooner rather than later gives entrepreneurs the chance to start saving on long-term expenses before they start piling up.
This isn’t a bad thing. Over time, you will learn where costs can be cut and how to increase profitability. Unfortunately, these longer-term, recurring expenses aren’t the only kind of business costs you’ll be experiencing.
There are many unique, specific operating expenses you’ll face on a day-to-day basis. As with all business costs, these expenses depend on the kind of business you are running.
Read more: Running A Business? Don’t Overspend On These 14 Common Expenses
What are some examples of operating expenses?
Fixed operating expenses and variable operating expenses are the two main types of operating expenses that you’ll face.
As stated above, fixed operating expenses are regular and stable expenses that happen repeatedly, whereas variable operating expenses are sporadic and not as easy to predict.
Within these two categories, there are several examples of operating expenses that vary by business type – take a look below!
- Labor costs
- Labor costs include employee salaries, which are fixed operating expenses.
- Raw materials
- This is simply the cost of raw materials used to fabricate goods, and it is another fixed operating expense.
- Utility costs
- Utility costs include expenses for lighting and electricity, and they are another fixed operating expense.
- Travel costs
- If you’re required to travel for business, the resulting expenses are variable operating costs — unless these trips occur on a regular, fixed basis.
- Legal fees
- Legal fees can either be variable or fixed, depending on the circumstances. If you’re dealing with a slip and fall that threatens the core of your operations, this is a variable cost. However, if you’re paying legal fees to keep attorneys on retainer, it becomes a fixed expense.
- Advertising costs
- These costs can also be fixed or variable depending on the nature of the expense. If you’ve decided to try a one-off marketing campaign with no long-term contracts signed, this is a variable expense. If you’ve created a long-term marketing campaign that will run over an extended period, the expense is variable.
As you can see, there are many different kinds of operating expenses that can either be classified as fixed or variable. Determining how to reduce operating expenses in business relies on your ability to identify these costs and how to cut them.
Example: For business owners fabricating a particular kind of material or product, you might find that you require a new piece of machinery that you’ll ostensibly never need to replace. Or perhaps you own a retail store and want to purchase a piece of software that will last for the foreseeable future. Both are examples of one-off, variable expenses.
Anything related to your business’s core operations can be classified as a business cost. The main thing to remember is to avoid overspending on these expenses while keeping your business firing on all cylinders.
Read more: Types of Costs for Small Businesses: Don’t Miss this Crucial Disctinction
Marketing is one of the biggest potential money pits – even for well-established business owners. With the advent of so many easily trackable metrics, it’s easy to get lost in counting views, clicks, and likes, when in reality, you should focus on how these are generating sales. And how that translates into profit.
Because we are inundated by the advertisements of successful corporations with big marketing budgets, it becomes easy to justify ineffective marketing spending as something that will pay off in the future. Learning how to assess the profitability of your marketing dollars is crucial and more important than the total amount spent on marketing.
Example: Spending $1,000 to make $5,000 is profitable. Spending $100 to make $0.00 is not.
Reducing operating expenses in business can include making hard decisions; cutting ineffective marketing campaigns, or even dismissing marketers can often fall into this category.
Before you spend exorbitant sums, ensure that the logistical and day-to-day aspects of your business are functioning like a well-oiled machine. Several marketing agencies would be more than happy to start taking your money before you’re actually ready to turn that marketing budget into profit.
Fortunately, there are several cost-cutting methods that will help you find a marketing agency that fits your business perfectly. Even better, you can begin this process whenever you’re ready.
Keep reading to understand why being careful is a must when cutting operating expenses.
Why you need to be careful when cutting operating expenses
There’s always a way to reduce operating expenses, whether it’s from substitutions, job eliminations, or trading your time.
The hard part is learning to cut operating expenses without causing a detriment to your business.
Understanding how to reduce operating expenses in a business without creating a net-negative effect is key to a business’s success.
All too often, cuts denigrate output, quality, or marketing — all crucial areas that can’t really be sacrificed.
The most important aspect of cutting operating expenses is making sure that you’re properly tracking your business costs. Whether you use an accountant, an auditor, or an outside consultant, keeping track of your business expenses gives you the ability to analyze this data before beginning the arduous task of making cuts.
Unfortunately, without reliable data, the costs you cut will be nothing more than blind guesses. Using reliable data helps you cut costs efficiently.
When it comes to cutting your operating costs, the main goal is to increase your profit margins. The only way to effectively do this is to cut your operating expenses or increase revenues.
Increasing your revenues is easier said than done, so cutting business expenses is often the first step in boosting profit margins. In order to cut these costs effectively, you must understand how to reduce operating expenses in business.
Cutting these operating expenses incorrectly can have a seriously adverse effect on your business.
You can cut operating costs by reducing output, reducing the quality of your products, or reducing a successful marketing budget. Unfortunately, these reductions often lead to lower sales, which is the opposite of what you’re trying to achieve.
These reductions often result in a net profit loss. This means that even though you might have saved money on labor, materials, or manufacturing, you would have made more in additional sales if you’d simply kept going with your original budget.
Caution is key when it comes to figuring out how to reduce operating expenses in business.
If you cut costs too freely, your profit margins will suffer. If you are too cautious and refuse to reduce business costs, your profit margins will also suffer.
Fortunately, we’ve listed some of the best areas to cut operating expenses and raise your profit margins.
Best areas to cut operating expenses to raise margins
Now that you’ve learned the definition of operating expenses, their different forms, and the importance of cutting business operating expenses carefully, it’s time to learn about the best areas to cut down on business costs.
If you’re considering how to reduce operating expenses in business, you might want to outsource rather than hire full-time employees.
Of course, this isn’t always a possibility. There are some positions that need to be filled by full-time employees. In recent years, labor costs have been some of the biggest operating costs for businesses in the United States.
Read more: Lots of companies are saying they have ‘operating leverage’ – that’s just code for firing people
So what does this mean for your business? Whether you’re wondering how to reduce operating expenses in retail or how to reduce operating expenses in manufacturing, cutting labor costs should be your first priority.
Although outsourcing isn’t always possible, it almost always makes sense financially. Instead of paying employees for full-time labor, you can pay for labor only when and where you need it.
By outsourcing these specific jobs and cutting down on your full-time workforce, you can save money without sacrificing growth.
For example, let’s say you’re running a retail store and you see a boom in business around Christmas each year. In this situation, you might consider hiring seasonal employees while cutting back on the full-time, year-round positions.
On the other hand, you might run a business that focuses on manufacturing. In this case, you can use data you’ve collected to determine if there are positions that you could make seasonal or part-time.
Finding excellent employees isn’t easy. With the rise of remote work and a slew of new businesses, it’s tough to find a reliable individual who checks all the boxes.
By outsourcing some of these jobs and creating temporary or seasonal positions, you’re no longer required to find an employee that perfectly meshes with your business. Instead, you’re given the ability to have someone work for a set amount of time with no obligations on either end.
Be aware that with rising turnover rates and a seemingly endless supply of jobs for employees to pick from, it might benefit your business to keep an individual around if they’ve proven their worth.
Read more: 9 Ways to Avoid Losing Good Employees
Ineffective marketing is one of the biggest money-sinks for businesses everywhere.
As mentioned before, it’s easy to get caught up in the numerous tracked metrics available for your social media marketing tactics. In reality, all you should be worried about is how your marketing is generating sales.
By staying on top of these marketing efforts and quickly identifying ineffective marketing tactics, you can easily cut back on campaigns that are not serving their intended purpose.
Again, the only point of marketing is to generate sales.
Clicks, likes, retweets, and favorites all do a great job of showing your business to individuals who might not have heard of you. Unfortunately, this alone just isn’t good enough, and for every company that goes viral, there are a couple hundred more that have gone broke trying to break through.
Although it’s one of the best solutions if you’re wondering how to reduce business expenses, cutting down on ineffective marketing is sometimes difficult. This is especially true if you’re working with an agency that is promising you the world.
That’s why tracking your marketing initiatives is paramount to the success of your business. Customer acquisition costs aren’t always easy to identify, but once you’ve found an effective way to track exactly how much in sales your marketing initiatives are generating, it becomes far easier to determine where you can make some cuts.
How to reduce business travel expenses
This is a fun one. Not all business owners are required to travel, but as anyone who racks up frequent flier miles will tell you, it’s not cheap.
Many individuals don’t even consider the possibility of driving or taking a bus instead of flying, but they should. So many businesses are wasting money hand over fist sending individuals to conferences, keynote speakers, and other travel-requiring ventures that could be either eliminated entirely. At the very least, carpooling or other money-saving travel methods can help lower costs.
Regardless of your personal feelings on driving or Greyhound buses, these options are historically far cheaper than their airborne counterparts. If you or your employees are required to travel frequently, take a look at some of the less glamorous options.
Outside of the actual traveling aspect of your traveling expenses, you can also cut down on some of the things you or your employees do when you’ve reached your destination. All too often, business owners wondering how to reduce operating expenses in business will forego reducing traveling costs because these trips seem independent from the day-to-day regular business; this is a mistake.
Instead of staying at the nicest hotel and treating yourself to a beautiful and expensive dinner, consider tightening up that corporate travel policy, packing a sandwich, and staying at a reasonably priced hotel. Rather than treating corporate travel as a vacation, consider it just another cost-cutting opportunity.
With sound planning, you can purchase your tickets and hotel reservations far enough in advance to save money. Paired with a tighter corporate travel policy, you’ll be reducing travel expenses in no time.
Finally, one of the most surefire ways to dramatically cut down on business costs is by ditching your physical business address altogether.
With the recent technological boom and skyrocketing work-from-home numbers, a majority of businesses can operate equally as effectively from a home office.
Virtual offices are very handy for business owners. A virtual office gives your business a physical address that’s separate from your home address, which allows you to maintain privacy for a fraction of the cost of a traditional physical location.
Switching to a virtual office also allows you to save money on rent, utilities, and everything else that goes along with operating a physical location.
Sure, some businesses won’t be able to make such a transition. But even if your business is reliant on a physical location, it doesn’t hurt to explore different rental options in your area. The worst-case scenario is that you don’t find a cheaper location.
Combine a virtual office with other effective cost-cutting methods, and it should be relatively easy to reduce operating expenses for your business.
Moving forward once you’ve determined where and how to reduce operating expenses in business
Cutting costs isn’t always easy — especially when you’re operating a business that you care deeply about.
It can be difficult to end marketing initiatives you’re excited about, cut down on travel costs, and outsource positions — especially if you have created positive relationships with your employees.
Regardless of how these reductions make you feel, they are necessary to increase profit margins and give your business the best possible chance of continued success.
As previously discussed, operating expenses are the expenses incurred through your business’s core functions. Although it might be possible to cut costs in every single area, it’s necessary to weigh the opportunity cost of making such decisions.
Saving on ineffective marketing, unnecessary labor, and expensive office rentals are all excellent solutions if you’re wondering how to reduce business operating costs without sacrificing growth.
Whether you need help getting your small business venture off the ground or you’re an experienced business owner, consider reaching out to Alliance Virtual Offices for help.
Not only does Alliance Virtual Offices offer several tools to help your business thrive and grow like Live Receptionists, Meeting Rooms, and Virtual Phone Numbers, but we also have Virtual Offices available for business owners looking to cut down on office rental costs.
Our experienced and professional team can help you determine how to reduce operating expenses for your business. Contact us to get started!
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