Understanding and Reducing Operating Costs for Your Business

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Understanding and Reducing Operating Costs for Your Business

Keeping your small business up and running can be costly. There are tons of costs associated with business operations, from payroll expenses and utilities to keeping inventory and equipment in stock. And if you’re starting to grow your business, taking on substantial costs may not match up with your tight budget or narrow profit margins.

In this post, we’re explaining how to understand better—and plan for—your operational costs. Plus, we’re sharing some strategies you can use to start reducing the expenses on your list.

Calculating your startup and operational expenses

Calculating your operational costs

Before you can begin reducing your business expenses, you’ll want to know what costs you’re currently working with. Calculating these costs in advance can help you:

  • Budget better
  • Project profits
  • Conduct a break-even analysis
  • Apply for loans with a stronger financial profile
  • Bring in investors
  • Save money with tax deductions

So, how do you go about estimating your startup and continual operational costs? The Small Business Administration recommends identifying your expenses based on the type of business you operate (online, brick and mortar, service). Each of these business models is associated with different expenses, which may include:

  • Utilities
  • Commercial rent
  • Equipment, inventory, supplies
  • Loans
  • Licenses and permits
  • Insurance
  • Legal fees
  • Accounting costs
  • Payroll, employee salaries
  • Advertising and marketing
  • Website fees

Once you have an outline of what costs you can expect, it’s time to estimate how much they’ll cost you on a monthly and yearly basis. Some of these costs, like your monthly rent, will be much easier to calculate since they’re the same each month, while others, like employee salaries, are not as consistent. Do your best to get as close an estimate as possible by researching averages online or talking to other business owners in your local area.

Four ways to reduce operational costs 

Now that you have a better idea of where your operational costs stand, you’re probably looking for ways you can reduce them, and in turn, boost your business’s bottom line. While things like small business taxes will never completely go away, there are several things you can do to minimize your overhead costs.

Let’s take a look at some strategies to help you save.

1. Rethink your office needs

As a result of the COVID-19 pandemic, more employees are working from home than ever before; in fact, an estimated 22% of the American workforce will be remote by the year 2025. This begs the question: Do you really need an office space after all? The answer could very likely be “no.”

Because so much of our day-to-day work is done with the help of technology, much of today’s workforce can get their job done just as efficiently from home as they would in an office. The move to remote work offers several benefits for both employees and employers:

  • Employees can save time and money on daily commuting.
  • Employers can save money on rent, utility, and other office expenses.
  • Employees can create their own work environment that’s most conducive to their productivity.
  • Employers can focus recovered costs on building their business.

Of course, this option has its own obstacles as well, and it’s not for everyone. For example, if your business requires in-person sales or services, you may not be able to adopt a fully remote environment. Still, you may be able to downsize to recoup some operational costs.

2. Improve efficiency by using technology

Today’s technology helps us in seemingly endless ways, including how we run our businesses. By embracing technology, you can make processes more efficient, avoid errors, and ultimately save time and money. 

Here are two examples of the most popular and helpful technologies for business owners:

  • Accounting software: Bookkeeping and accounting are two foundations of good business management; however, there’s a lot to keep up with and learn if you’re not a trained professional. If you want to refocus your attention on growing your business without incurring the costs of hiring a full-time accountant, using accounting software can be a great option.
  • Project management tools: Project management software is a must if you’re looking to boost your team’s efficiency and track project progress. With a project management platform, you can monitor progress, provide updates, track time, view deadlines, and collaborate with team members.

3. Outsource work when necessary

Costs to hire an employee

According to SHRM.org, the average cost of hiring an employee is $4,129; add that to their annual salary or hourly wage, and it’s clear employees are among your most expensive expenses. One way you can combat high costs is by opting to outsource some work as needed.

If you choose to outsource, remember that you often get what you pay for, so make sure to vet your freelancers before signing any contracts properly. In addition, make sure that you have your best employees work on projects that are foundational for your business’s success.

4. Establish good vendor relationships

As a small business owner, you likely work with other small businesses (vendors) to fulfill products and services to your customers. And just like you appreciate timely payments and positivity from your customers, so do your own vendors. What’s more, making on-time payments and fostering good relationships with your vendors can pay off. In fact, many vendors offer discounts for invoices that are paid early, while others may be willing to negotiate costs for long-time customers.

Being a good customer may save you a little extra cash here and there, but over time, the savings can really add up.

Wrapping up

Running your own small business is certainly a labor of love, but it doesn’t come without costs. By taking the steps first to calculate your operational expenses, you can identify your cost inefficiencies and find unique opportunities for savings. Every business is different, so you may find that you have plenty of chances to slim down your spending, or you might find it more challenging. If you’re not sure where you can save, you can use these four strategies as a starting point:

  1. Reevaluate your office needs
  2. Improve efficiency by embracing technology
  3. Outsource work when necessary
  4. Establish good vendor relationships

Which of these savings tips will you try out first? Then, open up the conversation in the comment section below.

Understanding and Reducing Operating Costs for Your Business

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