23 proven ways to reduce operating cost of your business

How to reduce operating expenses in business?

There’s not only one answer on how to reduce operating expenses in business. It all depends on the industry, nature of business, management, goals etc. However, the following ways to reduce operating cost provide a good starting point.

Half the electricity bill

One of the main operating costs prevalent in my company is the electricity bill. When it got too much, we had to find ways to reduce it. The first technique was by mindful use of electric power. This meant switching off lights when they are not in use, taking full advantage of natural lighting during the day, and switching off all electronic gadgets and machines when closing up the office space. We also replaced all previous bulbs with energy-saving ones, and made sure to purchase energy-efficient equipment only during restocking or replacing periods.

Moreover, you can also consider switching to another energy supplier.

Jay Scott, Proprietor at Pugsquest

Lack of QBE (qualified by experience)

Small companies run on tight margins and even tighter cashflow – the challenge is that if you don’t know something the first person you speak to is an expert. Paid media is a great example – I wasted over 7k pounds in 3 months on so-called experts – using my brain and Google I learnt about what was missing and now I can manage the so-called experts and get a good ROI – more sales means more cash.

Kenneth Nel, Founder and Owner of Digital Coach

Audit the online services you use

Nowadays most small businesses depend upon using online tools and services to manage their businesses and increase productivity. Using these tools and services is a great idea, but soon the amount of monthly recurring costs can increase and drain a good amount of money from your monthly budget.

My tip would be to audit the tools and services you use every 6 months and see if you’re actually using and benefiting from them. If you’re not using all of the features in a service, you can think of downgrading. Or even better, switch to free alternatives if there’s one in the market. This can help you save some good amount of money every single month that can help you save a few extra thousand dollars annually.

Ram Shengale, Founder of Fantastech Solutions

Look at all the recurring SAAS subscriptions your business pays for monthly. Are there any that aren’t being used at all? Any unused licenses? Duplicate subscriptions? Do you have similar services provided by more than one provider? Go through your logins and ask your employees to do the same. Do you need Slack and Teams? Do you need Zoom and RingCentral? Is the free version of Canva sufficient? It only takes a few minutes to change or cancel a subscription while the payout continues monthly in terms of cost avoidance.

Scott Ackerman, Owner of SA Consulting

Get better credit cards

We are a small business, who is always keeping a close eye on our expenses. Something we did to reduce operating cost was switch to a business credit card that offers 2% cashback. We pay all of our expenses with this credit card and pay off the balance weekly. The benefit is that we can effectively reduce all of our expenses by 2%, due to the cashback reward. This has saved us thousands of dollars over the course of the year. But it’s only effective as long as you pay off the balance.

Jeff Neal, Engagement Officer at The Critter Depot

Retool your credit card processing strategy can help with OPEX. You’re probably paying your current servicer too much and can find a better deal. Research processing specifically for your business model, and get several quotes from reputable merchant services providers. Expect this research phase to take upwards of two to three months but shopping around can save a good deal of money in.

fees.

Garrett Greller, Co-Founder of Uncle Bud’s Hemp

Hire interns

One of the best ways to reduce operating cost is to hire interns. Interns are paid less than standard workers since they are still learning to work. This cuts costs in two ways: One, since they are learning on the job, they are paid less but still execute the same tasks as full employees. With an operations management tool at hand, you can automatically assign interns to the fitting (probably, simpler) activities based on their skills. There are also no expenses on allowances and other benefits. Two, they can act as affordable hires once they are through with the training. They can be hired without the costly expenses of training new employees since they already understand the tasks at hand.

James Jason, HR at Mitrade

Leverage your business partner’s higher credit rating

A rather unique way of saving on operating costs is by utilizing the higher credit rating of your supply chain partners to reduce your own borrowing costs.

For example, large companies often arrange for channel financing facilities for their vendors and distributors and use their own financial strength to negotiate favorable terms from the banks. If your company has a business relationship with such a large company, you can benefit from such a facility.

Gaurav Sharma, Founder of BankersByDay.com

Ask yourself do you really need call tracking services

Paying a service to link calls to lead sources like Google Ads and Facebook, can be expensive. By porting your phone numbers away from your tracking service to your existing flat rate VOIP phone service, you can cut 90-100% of this cost, which for us was over $1,000/month. We love the tracking, but during a crisis like this, the data is not normal, so not particularly useful for analysis. And we can bring the service back with a few clicks whenever we want, so it’s a particularly easy savings opportunity.

Eric Niloff, CEO at EverPresent

Digital marketing is a lot more budget-friendly than traditional marketing

While cutting operating expenses is a great way to free up cash, I believe it should not affect the top line and the brand’s reputation. At our company, we found creative ways to cut marketing expenses and grow revenues at the same time. We reduced marketing costs, representing approximately 7% of our total costs, and switched to free forms of advertising.

We introduced a B2B referral program, leveraged our social media channels with freelancers’ help, and negotiated deals with content creators. We trained talented people on our team to do several jobs. For example, our customer support manager has a passion for social media, so if he can take care of it part-time, it would have zero impact on our payroll.

JP Brousseau, CEO of Phone Loops 

Marketing expenses are a great place to start when you’re assessing your budget. With digital marketing on the rise, some of the more expense, less-effective methods can be replaced with better, more innovative strategies. Look at HARO (Help a Reporter Out) to place quotes that will supply a backlink and promote you as an expert in your field. Or, you can turn to inexpensive, target-heavy email marketing and newsletter campaigns. Chances are that you’ll never have a more captive audience!

Blake Sutton, Operations Manager at Electrical Knowledge

Be smart about processing the payrolls

One of the critical measures a small business can take to cut operating expenses is to stop weekly payroll. Consider administrative and payroll processing costs. Especially if, like many small businesses, you don’t have an advanced payroll processing system.

We switched to a bi-weekly payroll reduced admin and processing costs by 40% and improved cash flow. Additionally, we outsourced our payroll services so that employees responsible for it could focus on more profitable tasks. We trained them to take care of customer queries, nurture leads, and participate in other revenue-generating activities for our business.

Thierry Tremblay, CEO & Founder of Kohezion 

I reduced my payroll task expenses. Instead of hiring a payroll manager to handle it, I found Hubstaff as a useful tool to help me with it. It’s a handy tool that can monitor and track my employee’s work hours too. It’s helpful for payroll as it automatically calculates the salary and wage of my employee. I just had to input the salary rate and dates covered for the computation to be accurate. I can do the payroll tasks manually or automate it. However, automation is much more reliable as I don’t have to check the time sheets one by one. The system will do it for me and automatically sends payment on the scheduled time and day. It’s very convenient for me, and I have saved a lot of money from using it.

Dennis Bell, Founder and CEO of Byblos Coffee

SEO is better than PPC

Google traffic or lead generation is a massive part of our business model and success. To quickly reduce expenses we have stopped paying for Google Ads or PPC (Pay per click) and taken all of our SEO in house. Doing our own SEO has allowed us to drastically reduce overhead while building our organic google traffic to our website, free of charge. Organic traffic is not only free, it is also a much more sustainable long term model for attracting high quality leads.

James Watson, Marketing/Acquisitions at Omaha Homes For Cash

Choose the right email software

Take your email software from $400 per month to $4 like we did.

Most email platforms use a “pay for list size” model, where you pay a monthly service fee regardless of whether you contact your email list or not. As your email list grows to thousands of subscribers, your fees quickly become hundreds of dollars per month. Instead, you can use a self-hosted email sending platform that connects to AWS on a “pay for use” basis. We implemented this change earlier this year and decreased our email fees from $400+ per month to about $4 per month. Plus, our team likes the new software better because it is simple and streamlined.

Michael Alexis, CEO of TeamBuilding

Be careful with your toll-free number hosting company

One way I reduced my operating expenses this year is by changing my toll-free number hosting company. With Kall8 I was spending about $70 per month for three numbers. I market on local business, not nationally, which is why that dollar amount might seem low to you.

I know it doesn’t sound like a lot, but I have been getting nickel and dimed with a lot of small monthly expenses. This year I’m on a cost-cutting marathon.

Although I used it just to reduce my monthly expense, PhoneWagon isn’t designed to just be your toll-free number. It’s designed to help you track where your call-in leads come from. Their pricing currently starts at 500 minutes a month, with five tracking phone numbers for $45. That’s a 36% savings, and only took me a few minutes!

Not only do we entrepreneurs need to watch the large expenses, but we also must take a look at the small expenses that are eating us alive.

Kathe Kline, Founder of MedicareQuick

Get yourself a Virtual Assistant

Dedicated assistants are essential when running a monetized website. You pay them by the hour usually using paystubs as opposed to monthly salaries. Also, the assistant is a freelancer so you don’t have to bear additional benefits. Apart from the much needed help, you can get much more from the hire by contracting someone from the other end of the globe. That way, both of you can run a

24/7 operation to earn more money.

Swati Chalumuri, Founder of HearMeFolks

Buy assets and supplies, don’t lease

Buy instead of leasing. Keep the profit you’re paying to your lease financing company. Interest rates are at record lows. Buying an asset may also provide a large immediate tax deduction. Some businesses lease to show less debt on their books. A new lease accounting rule starting soon will force them to record the cost of all future lease payments. Buying commercial real estate is especially attractive right now because prices are low. Buying is an investment you make today that can reap both cash flow and profits.

Rob Stephens, Founder of CFO Perspective 

Office supplies can incur large costs, and so we decided to go to third-party retailers for everything, including our desks, scanners, and other organizational supplies. The real trick though, is to make an offer lower than the asking price in a cash payment. Paying in cash is preferred by the vendor and will generally get you a cheaper rate than if you are

paying by credit.

Jordan W Peagler, Esq., Owner of MKP Law Group

Rent out free desks

Office space can be reduced quite easily. If you have 1-2 desks free in your office you can rent them out for an affordable price to hot deskers – freelancers or remote workers looking for an office environment.

A small charge of $100-$150 a month per seat will take a healthy percentage from your office costs.

My office used to be $1200 a month. I rented out 3 hot desks for $450 total, giving me a saving of 37.5%

Brett Downes, Founder of Haro Helpers

Increase employee satisfaction

One of the most powerful, and most overlooked, ways in which companies can reduce operating cost is by increasing employee satisfaction. Studies have shown that when employees feel appreciated, valued and understood, their level of productivity increases which then increases the level of benefit and profit employers can obtain from their employees. When employees feel burned out, underappreciated and undervalued, they tend to put forth less effort and hard work which increases attrition in the workplace. Employees that are a drag on the company increase operating expenses because they fail to carry their weight.

Jeff Dundas, Owner and CEO of  Talk Central

Know your taxes

Taxes are a big burden to small businesses so here are a few accounting tips on how to reduce them.

Justifiable business expenses

Taxes are one of the single largest expenses any business incurs. Most small business owners fail to realize that individuals earn money, pay taxes on those earnings, and spend what is left. Businesses, on the other hand, earn money, spend that money, and pay taxes on what is left. One of the first things I tell clients is to move as many expenses to the business as legally possible.

This could include cell phone service, company car, and much more. Increasing justifiable business expenses is one of the easiest methods for legally reducing one’s tax obligation. It is also worth using a leasing lawyer to assist with getting a rental deduction and saving money. 

Accounting method

The accounting method used by small businesses is of the utmost importance. Most businesses default to the accrual method, which means revenues and expenses are recognized at the time of the transaction (whether paid for or not). However, the Tax Cuts and Jobs Act of 2017 permits small businesses (defined as businesses with average annual receipts of $25 million USD or less during the previous 3-year period) to use the cash method. The cash method of accounting recognizes transactions when they are actually paid, which results in significant tax savings for most small businesses.

Unpaid debts

When a small business offers credit, even if only on net 15 payment terms, unpaid debts are a deductible business expense. These expenses for unpaid goods or services can be legally deducted against the income of the organization. With business bankruptcies at an all-time high, this deduction looks to become more significant in the coming years. If these outstanding debts are later paid, whether in full or not, the income then becomes taxable during the period in which the debt was settled (whether in full or settled for a lesser amount).

Education expenses

Education expenses are often overlooked by small businesses, especially by owners. Valid deductions for education include attendance (and related travel costs) at seminars, conferences, and even trade shows. Keep in mind that attending trade shows as a vendor would be an advertising expense, not an education expense. However, even a $20 book on how to use Quickbooks is a valid education expense for any business. Because most small business owners wear many hats, this deduction can become significant over time.

Anthony Babbitt, President of Babbitt Consulting

Go paperless

Not having to spend money on paper products, including marketing collateral, can save thousands of dollars over the course of a year for a small business. And it is better for the environment as well. With so many digital options for marketing and tools for paperless communication, it really is easier than ever to cut this cost.

Jesse Silkoff, Founder of MyRoofingPal

Embrace automation

Fully embracing automation is a major lever in reducing marketing expenses. Whether it’s scheduling and posting on social media, sending monthly newsletters, or optimizing digital marketing campaigns – automation should have a big role to lower costs. Automation can both reduce manual time spent, and increase efficiency. At Wilbur Labs, we encourage founders to

constantly think about how they can add more automation into their marketing strategies and any other areas that would benefit the business.

Phil Santoro, Co-Founder of Wilbur Labs

Bater your services

One uncommon way to reduce operating cost and save money in a small business is to barter your services. For example, if you have experience in PR, you might offer that to someone who can update your website. The examples are endless. And even though it might seem a bit stale, in today’s competitive business environment, it’s a shrewd and effective tool. And the most specialized your talents and skills are, the more you can command for them in return. Bonus points if you can identify businesses or companies who need your particular skill or talent (and that you need theirs) which increases your chances of success. 

David Walter, CEO of Electrician Mentor

Reduce business travel expenses

Business travel eats up quite but of your operating costs. They are unavoidable but you can cut down the unnecessary expenses associated with business travels. One way to save costs is to consider booking flights that will take you to a small, regional airport instead of a major airport hub. They cost less and can help you save money on your business trips. By developing a travel itinerary ahead of time, you can book in advance and avail of cheaper tickets. Booking at the last minute will cost you more. You have to consider also if traveling is really necessary. If not that necessary, you may consider a virtual meeting through the various digital resources. This will help you cave both time and money and is an effective way to reduce costs.

Michael Hammelburger, CEO of Expense Reduction Group

Switch to remote work

Managing a physical office is costly. Allowing my team to work remotely reduces the total costs for office space. Our team doesn’t require face-to-face interaction with customers, so remote work is the best option to cut costs. In our technology-driven world, communication in many ways is possible. We use Slack to communicate and collaborate instantly. Doing this increases my team’s productivity and efficiency as they can work comfortably in their own homes. I’m able to save money as I don’t need an office space anymore, which increases my revenue.

It is a simple way of reducing operating costs. In these times of pandemic, remote working is highly effective and beneficial both for the employer and employees. Of course, it depends on the nature of your business. Assess yours, and you’ll see and find where you’ll be able to save money.

Mason Culligan, Founder and CEO of Mattress Battle Inc. 

For businesses that have less than 5 employees, you can save a lot of money by not renting a corporate office. If there is a professional meeting, using a desk at a coworking place would solve the problem. For example, we are a home remodeling firm with three employees. My business address is my personal apartment. It lowers down our overhead and allows usto bid projects at a more competitive price. Also, I can deduct partial apartment rent as an office expense since I’m using it for business, which reduces my taxes as well.

Adrian K., Owner of Golden Talon Construction

Outsource the back-office work

Regardless of the kind of small business you are running, you always need a back-office team to handle your accounting, data management, managed IT services, and other backend processes. In my opinion, companies can reduce back-office costs dramatically with the help of outsourcing. Now the question comes up – how outsourcing back-office processes save costs?

When a business outsources back-office operations, they don’t need to rent out space, spend on equipment, software, recruitment, employee training programs, and employee benefit programs, like insurance, 401(k) plans, etc. When there are no such expenses, businesses can save a considerable amount of their overhead.

In an Australian survey of 7500 public organizations, outsourcing saved around 46% of costs over in-house.

Jessica Smith, Senior Accountant at Cogneesol

Conclusion

Reducing the operating costs of your business won’t be a one-time job. This is an ongoing process that never ends. Your best chance at running a lucrative business is to become smarter in balancing your operating budget. As you see, small changes can make huge difference in business.