Companies need to be equipped with the necessary tools to operate. However, if their operating costs are unmanaged, their financial health and business will be impacted. For example, if a company overspends on its office space, it may not have enough capital to pay the employees. Organizations looking to safeguard their bottom line should take steps to reduce operating costs. Doing so will ensure their longevity and growth in today's competitive market.
What Are Operating Costs?
Operating costs are expenses related to the daily maintenance and management of a business. Organizations oftentimes refer to these costs as operational expenses, operation expenditures, or OPEX.
A key element of operational costs is the cost of goods sold (COGS), which are direct expenses of producing products. Prices for raw materials, supplies, manufacturing parts, and shipping are some examples of the costs of goods sold. The following are other forms of operating costs.
Labor and payroll costs
Maintenance and utility costs
Employee pensions, health insurance, disability insurance, and other benefits
Organizations can gain visibility into their operational spending by calculating their operating expense ratio (OER). This data point helps brands compare their expenses to income, to which they can monitor their efficiency. The operating expense ratio can be found by dividing operating costs by revenues. For example, if a small business earned $500,000 in revenue and accrued $100,000 in OPEX, their OER would be 0.2 or 20%.
Operating costs can also be used to understand a company's operating income. This is the total profit related to a brand's operations. To find this, the total revenue during a given period must be subtracted by operating costs. Following the previous example, the small business would have $400,000 in operating income.
8 Tips to Reduce Operating Costs
Businesses that want to reduce their operational expenses without having to sacrifice the quality of their products or workplace environment should follow these best practices. Doing so will not only protect the brand's bottom line but can also boost efficiency and enhance its competitive edge.
1. Leverage Technology
In today's digital age, there is an abundant source of business systems and software platforms. These tools can automate and simplify specific tasks, such as payroll, inventory tracking, and supply chain management. These solutions will increase productivity and business functions can be completed faster with fewer human errors. This means companies can lower their labor costs and eliminate delays caused by inaccuracies.
When selecting a business system or program, it may be helpful to consider the following questions.
Which task needs to be improved?
What business function is working well as is?
Which process is the most time-intensive in the business?
2. Research Vendors
Businesses that depend on suppliers for materials and finished goods should conduct thorough research to find one within budget. It is important to consider their wholesale pricing, as well as order minimums, delivery schedules, and shipping prices. For example, a small business should look for vendors with low order minimums since they have fewer clients and demands.
3. Outsource Jobs
Another cost effective way to improve operations is outsourcing. For example, if a retailer does not have a strong background in accounting, they can outsource this task to a tax specialist or accountant. This ensures accuracy and allows the company to focus on other key responsibilities.
4. Promote Telecommuting
Remote working has become increasingly popular and convenient. In fact, statistics show that 4.3 million people in the U.S. work remotely at least half the time. Additionally, Upwork reported that 22% of the workforce will do remote work by 2025. By telecommuting, the business will not need to lease office space or pay utility expenses. It also eliminates the need to invest in office supplies, such as printers and desktop computers.
5. Pay Vendors Promptly
Reducing operating costs also entails paying all bills promptly. Organizations should either pay their vendors' invoices early or on time. This will prevent any late fees, interest, and costly penalties from accruing. Additionally, some suppliers will award their clients discounts if they pay their bills early.
6. Take Notice of Inefficiencies
Unproductive processes and procedures can result in wasteful spending and resources. For example, if a retailer's demand forecasting system is inefficient, they will subsequently spend unnecessary capital on goods that their customers do not want.
To cut costs, business owners should regularly assess their operations to quickly identify inefficiencies. It would also be helpful to collect employee feedback and suggestions. Since they work directly with customers and processes, they will have better insight into what works and what does not.
7. Cancel Subscriptions
Business owners and managers should periodically review the various services they are subscribed to. If a platform has not been used in months, it may be cost-efficient to cancel it or find a less expensive plan.
8. Be Sustainable
Purchasing eco-friendly supplies, such as recycled paper, smart thermostats, and energy-efficient light bulbs can help lower costs. There are also sustainable options for air conditioning and heating, as well. This enables the business to cut expenses but also maintain a comfortable and welcoming work environment.
By following these cost cutting tips, many companies can be a step closer to reducing their business expenses, increasing profits, and improving their cash flow.