[14 Tips] How To Reduce Operating Costs Tips

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Looking for examples of reducing operational costs? Let us explore the ways on how to reduce operating costs tips that help you grow your business. Today, in this article we are going to understand the ways to reduce operating costs to increase profits in your business.

When you’re going through documents such as the balance sheet and income statement, you might encounter accounting terms that you’re not quite familiar with. Since these terms directly affect your company’s financial well-being, it’s crucial to grasp their meanings.

One term that holds significant importance for business owners is “operating costs.” We’ll give you a brief explanation of what operating expenses entail. Following that, we’ll present 14 actionable steps you can take to reduce costs, and improve your overall profitability.


What are Operating Costs and How to Calculate Them?

Operating costs cover all the expenses needed to keep your business running smoothly on a daily basis.

  1. Also known as: Often referred to as “overhead,” these are the essential costs of doing business, including electricity, employee salaries, and office rent.
  2. Importance: Regularly examining operating expenses helps businesses cut unnecessary spending and reduce costs. Trimming overhead can significantly enhance your profitability.

One of the main elements of operating costs is the cost of goods sold (COGS), which are the direct expenses linked to producing your business’s goods or services. Operating expenses also encompass items such as:

  • Labor costs, such as payroll
  • Employee health insurance, pensions, and other benefits
  • Sales commissions
  • Asset depreciation
  • Amortization
  • Maintenance costs

Operating cost ratios:

Here are the two key pieces of information you can gather from operating costs: your operating income and your operating expense ratio.

The below are the two types of operating cost ratios:

1. Operating income:

Operating income represents the overall profit generated from your company’s day-to-day activities. You can calculate operating income using the following formula:

Operating Income = Total Revenues – Operating Costs


Let’s say a company made $552,000 in revenue last year and had $100,000 in operational expenses. In this case, the operating income for the year would be $452,000.

  • For a Fortune 500 company, these results might not be considered ideal. But if you’re an entrepreneur who recently launched your business last year, you’re likely feeling ecstatic.
  • What constitutes a good operating income varies depending on the scale and nature of different businesses, so it doesn’t always provide a clear indication of financial health.

2. Operating expense ratio:

On the flip side, the operating expense ratio is a clear indicator of financial health. It measures efficiency as a percentage, making it simple to benchmark yourself against others in your industry, regardless of the size of your business.

Operating expense ratios (OER) provide a straightforward way to compare your expenses to your income, enabling you to monitor your efficiency. The formula for calculating OER is:

Operating Expense Ratio = Operating Costs ÷ Total Revenues

Using the example provided earlier, we would calculate:

OER = $100,000 ÷ $552,000 = 0.1812 × 100 = 18.12%

Operating expense ratios can differ depending on the industry.

  • For example, banks typically have low operating expense ratios, sometimes as low as 0%.
  • Conversely, industries like building materials may have high OERs, reaching as high as 73%.

It’s crucial to focus on where you stand within your industry. If you manage to meet or surpass the industry average, it could be a strong indicator of success.

14 Tips On How To Reduce Operating Costs Tips

Enhancing your operating costs puts you in a better position compared to your competitors. Small business owners should constantly seek ways to cut down on expenses without compromising the quality of their product or service.

Wondering how to effectively reduce your company’s operating costs? 

Check out these 14 ideas that can assist you in trimming down your business expenses and possibly boosting your revenue:

  1. Automate time-consuming tasks
  2. Outsource for extra efficiency
  3. Find a freelancer
  4. Integrate an internship
  5. Entertain different vendor bids
  6. Ditch your office building
  7. Pay your bills in advance
  8. Put wasteful habits to rest
  9. Pull the plug on unused services
  10. Use free apps whenever possible
  11. Go paperless
  12. Think eco-friendly and save
  13. Use bartering instead of cash
  14. Slash your travel budget

Best ways to reduce operating costs tips:

If you are growing through business failures, and want to overcome business drawbacks, then you must go through the best ways to reduce operating costs.

Here are 14 best tips to reduce operating costs:

1. Automate time-consuming tasks

There are numerous online systems and software programs available that can automate and simplify the day-to-day operations of a small business. These systems can handle various tasks, including accounting, website hosting, marketing communications, payroll, and more.

Technology proves valuable because it enhances efficiency. This efficiency ultimately leads to a reduction in operating costs, especially in areas like direct labor. 

Robots and computer programs can perform tasks quickly and with fewer errors than humans. Technology can optimize supply chain processes, such as finding ways to reduce shipping costs for raw materials.

To select the right program or service for your business, consider the following questions:

  • What aspects of my business do I excel at and don’t need automation for? (For instance, if you have a design background, you might not require software for graphic design.)
  • Which tasks consume a significant amount of my time every week?
  • If I could eliminate one of my most repetitive, time-consuming tasks, what would it be?

Answering these questions will help you determine which areas of your business would benefit most from automation through software.

2. Outsource for extra efficiency

If automation isn’t feasible, another option to enhance efficiency is hiring an external specialist to handle tasks for you. For instance, outsourcing advertising and marketing appears to be particularly beneficial.

For many entrepreneurs, managing an in-house marketing campaign can divert their attention from their core business. Although they might see a good return on investment from the time spent on advertising and marketing, they’d prefer to delegate these tasks to others rather than handling them alone.

While it may initially seem like hiring an external vendor would be more expensive than doing it yourself, in the long term, entrusting specific tasks to experts will save you money and yield even better outcomes. 

Outsourcing certain operations is an investment that brings significant returns over time.

3. Find a freelancer

While outsourcing your human resource needs or IT department is common, what about tasks that don’t come up very often? Freelancers can step in for roles in your business that aren’t required consistently.

For sporadic needs, hiring a full-time employee doesn’t always make sense:

  • For Example: If you only need to collaborate with a web designer a couple of times a year, or if you want to expand your customer support team significantly just for the holiday season, freelancers are an excellent solution.

They avoid increasing your operating costs through insurance, paid time off, and payroll taxes. Businesses that need to quickly adjust their workforce size can benefit from the growing pool of freelance workers available for project-based work, all while keeping costs manageable.

There are numerous online platforms where you can find and hire freelancers from around the globe. However, remember that with freelancers, the cheapest option isn’t always the best. 

Investing more in someone for higher quality work is often more cost-effective in the long run compared to repeatedly hiring cheaper freelancers who don’t meet expectations.

4. Integrate an internship

Interns offer a fantastic opportunity to cut costs. They are typically newcomers to the job market with limited work experience, seeking internships to gain practical professional skills and learn about the business world.

Your business reaps benefits too, as interns are usually paid less than regular employees and receive fewer employee benefits. It’s a win-win situation for both parties involved. Additionally, internships help decrease recruitment expenses.

Once an intern has demonstrated their value to your organization, you can hire them without the need to spend time and money searching for other qualified candidates. Since you’re already familiar with their capabilities, there’s often no need for an interview process or extensive training.

5. Entertain different vendor bids

If you frequently collaborate with vendors, you might consider implementing a bidding system for projects and tasks. By requesting quotes from three different vendors, you can encourage them to compete and offer you the most affordable price for the work.

Make sure to create a thorough scope of work or request for proposal (RFP) for vendors to bid on. 

Any missing details or added complexities can greatly impact the quoted rate. Having an accurate quote enables you to effectively plan for expected operating expenses.

6. Ditch your office building

Renting office space, paying utility bills, and maintaining a physical workspace can put a strain on your finances. 

Many companies have chosen to eliminate their office space entirely and transition to remote work. Allowing employees to work from home enables businesses to shrink their physical footprint and reduce operating expenses.

Telecommuting is becoming increasingly popular across the United States. In 2005, only 1.8 million U.S. employees reported telecommuting for half of the week. By 2015, that number had risen to 3.9 million. 

According to Upwork, it’s estimated that by 2025, more than 36 million Americans will be working from home.

Given the level of connectivity available today, the distinction between an employee working a couple of cubicles away or working in a different state is almost negligible. Employees often find working from home advantageous, as they save time and money on commuting to the office every day.

7. Pay your bills in advance

Many vendors offer discounts if you pay your invoice before the due date. Even a modest saving of 2%–3% per billing cycle can accumulate significantly. 

Let’s say your annual operating costs amount to $100,000. By taking advantage of early payment discounts and saving 2%, you’d end up reducing your costs by $2,000 per year.

At the very least, ensure you pay your invoices promptly to avoid any late fees or penalties. The same applies to loans or any other debts you’ve acquired. Late payments or missed payments can lead to increased interest expenses.

8. Put wasteful habits to rest

It’s essential to constantly seek ways to enhance your business efficiency. By refining your processes and procedures, you can minimize waste, both in materials and time. 

For instance, if you run a bakery and regularly find yourself discarding numerous bagels and donuts each night, it’s time to adjust your baking process to reduce that waste.

  • Encourage your employees to identify inefficiencies and propose solutions to address them.
  • Think about offering incentives to employees who spot and report money-wasting practices within your business.

Once again, consider this as an investment in your company’s future. A small reward to an employee might result in saving thousands of dollars down the road.

9. Pull the plug on unused services

Sometimes, a subscription service doesn’t turn out to be as useful as we initially thought. Companies rake in millions of dollars annually with software-as-a-service apps that businesses sign up for but never actually utilize.

  • Check in with your team to verify if the services you’re being billed for each month are genuinely being used.
  • Consider downgrading to the free version or canceling them altogether if they’re sitting idle and no one deems them essential for their work.

It’s easy to lose track of unused services, especially if you’ve set them up for recurring payments through auto-pay on your credit card. If you do find a service you like but don’t utilize all its features, explore other options to find cheaper alternatives.

Auditing small recurring expenses isn’t a one-time task. It should be done regularly to trim costs and maintain the efficiency of your organization. Set up a quarterly or biannual reminder to review and eliminate any unnecessary services.

10. Use free apps whenever possible

Many apps operate on the “freemium” model—you can use the basic version of the program for free, but you need to pay to unlock additional features. However, sometimes those advanced features go unused, resulting in wasted operational expenses for the company.

  • For Example: Gmail offers a free version, but you can opt to pay for additional storage. There’s no need to purchase the premium version of Gmail for every employee if it’s not necessary.

Encourage your team to test out the free version of an app and assess how well it meets their needs. If it becomes essential, there may be alternative plans available that offer better cost-effectiveness.

11. Go paperless

Another way to cut costs is by going paperless. Have you ever walked past the office printer only to find 25 copies of a document someone printed by mistake and then abandoned? 

Do you truly need a dozen color copies of the annual report for a meeting where everyone can view it on a large screen anyway?

Similar to typewriters, landlines, and fax machines, the office printer is swiftly becoming a relic of a bygone business era. Yet, many business owners still overlook printing expenses, viewing them as unavoidable.

Printing everything from internal documents to catalogs and flyers hikes up your company’s operating expenses. Encourage employees to print documents only when absolutely necessary. 

And if you must print an expensive glossy catalog, order a smaller batch to avoid excess copies ending up in the recycling bin.

12. Think eco-friendly and save

Apart from aiming for a paperless office, there are plenty of other ways to have a positive impact on both your budget and the environment. If you have an office space, consider making it more environmentally friendly.

To cut down on energy usage, switch regular light bulbs to compact fluorescent lighting, improve insulation and windows to reduce heating and cooling expenses, and minimize physical waste. 

If you have unused workstations, unplug the devices to lower electricity consumption. This not only saves on utility bills but also reduces your monthly office supply expenses.

13. Use bartering instead of cash

An often overlooked method to cut down business expenses is through bartering. Why spend cash on something when you can exchange goods or services for it? Take a look at the businesses you already collaborate with and see if there’s an opportunity to trade.

For example, if you’re already working with a carpet cleaning company, inquire if they’d be interested in you handling their marketing in exchange for monthly cleanings. 

Or if there’s a popular food truck nearby and your company specializes in printing uniforms, propose printing a new set of uniforms for their staff in exchange for catered lunches.

There are numerous creative ways to trade your services and acquire what your business needs without having to spend any extra money.

14. Slash your travel budget

Many businesses have significantly cut back on their business travel, and this trend might continue to gain momentum in the near future. The widespread use of video conferencing has proven that business can be conducted globally without the need for physical travel.

The expenses associated with hotels, flight delays, missed connections, and rescheduling fees can accumulate rapidly, making in-person sales pitches even more costly. While you can often deduct travel expenses, there are many that aren’t eligible for deductions.

Take a close look at your business travel budget and determine which trips truly require face-to-face interaction and which ones can be conducted virtually. Reducing travel not only lowers your operational expenses but also benefits the environment.

Final Thoughts

Are you the kind of owner who simply keeps an eye on business expenses and income without delving into detailed breakdowns? 

If so, it’s time for a change. As your business expands, understanding the nuances of factors like your operating costs becomes increasingly crucial.

Operating costs provide valuable insights into how your expenses affect your profits. With small business accounting software, you can easily pinpoint and address areas of inefficiency in your company, thereby enhancing your financial well-being. 

Every dollar saved on operational expenses is a dollar you can put back into your business for growth.

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