How to reduce operating cost in business?

Apr 05, 2024

What are operating costs and why do they matter?

Any expenses incurred in conducting activities and processes to ensure daily maintenance and management of a business are known as operating costs.

Commonly known as “overhead” costs, operating expenses are a crucial and indispensable component of business management.

Keeping our operational costs in check allows businesses to conduct a thorough spend analysis and eliminate those unnecessary activities and processes that cost wasteful expenditure, thereby increasing the overall profitability of the country.

Operating costs help us assess a company’s cost and stock management efficiency and highlight the sales target that a company needs to surpass the break-even point and generate revenue.

Types of operating costs

Operating costs are made up of Cost of Goods Sold (COGS) and Operating Expenses (OPEX). However, taxes, interest expenses, and capital expenses (such as buying a work building) do not fall under operating costs. There are 3 types of business operating expenses:

1. Fixed costs

These costs refer to expenses that remain unaffected by the volume of sales and must be paid irrespective of the company’s performance in any particular period. Examples of fixed costs are rent, insurance, security, and equipment.

2. Variable costs

Unlike fixed costs, variable costs are subject to change as per the company’s sales or production volume. Variable costs include expenses such as raw materials, shipping costs, electricity, production labor wages, etc.

If the sales or production grows, your business’s operating costs increase as you’ll have to buy more resources, hire more manpower, ship more deliverables.

3. Semi-variable costs

Known as semi-fixed or mixed costs, semi-variable costs are expenses that mirror the characteristics of fixed costs below a certain production level but may transform into variable costs when sales or production levels go beyond the ordinary.

One example of semi-variable costs can be overtime wages.

Until a certain limit, overtime is a non-existent or fixed expense. However, once the demand for production goes beyond the normal level, the pay can rise and fall as per production or sales, making it a variable cost.

Now that you know about the types of operating costs that exist in the business, let’s figure out how business operational expenses are calculated.

How to calculate operating costs?

Your total operating costs are a sum of Cost of Goods Sold (COGS) and Operating Expenses (OPEX).

Cost of Goods Sold (COGS)

Also known as cost of sales, COGS are direct expenses tied to the production of goods and services sold by your business.

Removing COGS from your revenue leaves you with the gross profit or loss value. Some business expenses examples that can be considered as COGS are:

- Cost of material

- Cost of labor

- Production facility rent

- Equipment repair costs

Operating Expenses (OPEX)

Expenses under OPEX are incurred while engaging in normal business activities otherwise unaccounted for in COGS.

The operating Expense ratio differs from the Cost of Goods Sold in that while COGS are directly related to the production of goods and services, OPEX is not.

Some operating costs examples are:

- Rent

- Equipment

- Inventory

- Marketing

- Insurance

- Payroll

If you reduce operating cost in business, it can further improve the overall profitability of your company. It’s all about smart choices and eliminating unnecessary operating burdens.

Let’s look at 8 ways you can reduce operational costs and boost profit easily.

8 easy ways to reduce operating cost in business

Our point is that every business expense has an important purpose to achieve. And therefore, you must have pristine clarity on what operating costs your business incurs to keep it running at peak efficiency daily.

To maintain the long-term sustainability of your business goals, you must know exactly what goes into determining the operating costs for a business and how to prioritize the expenditures.

1. Choose workspace wisely (Remote work or office space)

Leasing or renting office spaces form a big part of your business operating expenses. It’s a big physical space that could be leaching you off a lot of profit if used sparingly.

Companies nowadays are moving towards fully remote work environments or setting up flexible shared workspaces for hybrid working.

With fully remote employees, you are saving up on not just rent, but also the maintenance fees, office equipment maintenance charges, fully stocked pantry.

It is also financially prudent for employees, who do not have to spend time and money on traveling and can log in from anywhere in the world.

If you have to bring people to the office, it’s recommended to bring only those personnel whose work commitments are suitable for office spaces. This will avoid paying for unused office space as well.

2. Pay on time (advance is even better)

Paying your invoices on time, or in advance, can put you in your vendors’ good books. This makes you even more likely to receive attractive discounts on raw materials, office supplies.

If your yearly operating costs are around $100,000, even if you receive a discount of 4%, that’s $4000 worth of profit saved!

If paying in advance is not feasible for you, ensure that you pay your bills before the deadline. By doing so, you will be able to avoid any late fees or penalties, which can further deplete company profits.

3. Cancel unused subscriptions

Sometimes we start using a SaaS tool that later turns out to not be suitable for your business’s requirement.

And then somehow you forget to unsubscribe before the trial period ends or before the renewal cycle begins and get stuck paying for a service you don’t even need. This is not an isolated incident.

SaaS companies make millions of dollars every year, thanks to businesses that forget to cancel their subscriptions or keep paying for duplicate applications for similar tasks.

That’s why it is important to keep track of all the apps being used by departments and teams.

Keep out a special eye for those with an auto-renew cycle and regularly check in with the list to ensure that all the subscriptions you are paying for are being fully utilized by the team.

Related read: How to efficiently track and manage SaaS subscriptions?

4. Outsourcing

As a decision-maker for your business operating costs, it is important to ensure that everyone is working to their strengths.

That’s why outsourcing certain skills are important to ensure that you focus on the prioritized tasks.

For example, business owners who take care of production and administrative duties might not have the time or the skills to look after the advertisement and marketing aspects.

Instead of incurring heavy losses by being a jack of all trades, outsource these requirements to someone else who has the necessary skills to conduct the work efficiently.

This helps the company reduce operating costs in the long run.

5. Apply strategic inventory management

While attempting to reduce operational costs, one of the most overlooked challenges is the optimization of your company’s inventory.

Keeping inventory on-hand incurs warehouse expenses, maintenance costs, insurance, and labor and staff to operate the warehouse. Inventory expenses alone can form up to 25% of your total operating costs.

To keep inventory costs to a minimum, try to keep a steady flow of low-stocked inventory ready for sales at a given time.

This can ensure that there is no overstocking of any sort and the manufacturing units aren’t backlogged either, thereby saving you a lot in operational expenses.

6. Negotiate

Negotiation is an art that every business owner must know, especially one who is aiming to bring their operational costs down.

Whether it’s with your leased or rented building’s owner, vendors, shipping service providers, negotiate deals and discounts to get the best cost possible.

When the lease or rent renewal date comes around, remember to negotiate with your real estate agent or owner by researching similar properties near them.

This will give you an edge and help you bring your rent or lease amount down. Negotiate with vendors too, ask for discounts on payment plans, such as advance payment discounts, bi-monthly payment discounts.

With your shipping service providers, you can inquire about their offers and conduct thorough research to find out their competitor’s pricing as well.

7. Use online spend management system

If time is money, then using a spend management platform that eliminates paper-based time-consuming filing will save you a fortune!

With the advent of the internet, paying your bills online is a great way to keep track of your expenses more transparently and efficiently.

Spend software also offers an automated payment facility, so you never have to pay late fees ever again. However, not all spend software are built equal.

It is important to choose an application that offers you utmost transparency along with complete control over your operating costs and budgets.

8. Bulk is better

Bulk buying is a great way to get amazing discounts on things you need to run your daily operations smoothly. While Inventory management is one of the major contributors to increasing operating costs, items like office supplies should be bought in bulk.

They take less amount of space as compared to raw materials, finished products, etc.

How can Volopay help your business to improve cash flow?

Maintaining your operating costs and by extension, the cash flow itself is ensuring the longevity of your business. But compiling all your operational expenses and staying on top of them is difficult.

That’s why a smarter spend management system like Volopay can streamline your spending and offer clear visibility into all your expenses.

Volopay gives you the full range of visibility without compromising on control. Our live dashboard gives you real-time insights into all expenses being made via the software.

From bill payments to physical/virtual card transactions and employee reimbursements, gain crystal clear transparency into your business’s operational expenses from the get-go.

Our detailed expense reports cover every single transaction and are seamlessly integrated into your accounting system so you never have to rely on manual data entry and paper-based invoicing ever again!

You can set one-time and recurring virtual card payments for your subscriptions so you never miss the deadline. Additionally, you can also freeze and block the cards to avoid unnecessary spending over unused subscriptions.

Streamline your business expenses and get real time data on your spending