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T

he adage “It takes money to make money” may ring in your head every time you have to make a painfully expensive purchase for your business. While it’s true that there are inevitable operating costs and expenses involved in running a business, some careful strategizing and a detailed budget can help you avoid spending more than necessary.

But first, let’s break down the jargon. Operating costs and business expenses are the costs related to running your business, such as rent, utilities, raw materials, marketing, and salaries.

In this article, you'll learn how you can reduce operating costs and business expenses so you can increase profits.

## How to start cost-cutting

Before you can cut costs for your business, you have to know what they are — which is why you need a budget to track them. When you have a budget in place, you can review your expenses, determine which ones are necessary and which ones aren't, and prioritize your spending.

As you’re reviewing your budget, take the time to analyze each expense. What was your return on investment? Did it contribute to a better outcome? What would happen if you cut or eliminated it? Is there a cheaper or free alternative?

## Tips for reducing operating costs

No matter what your current level of spending is, you can almost always cut back. Here are some strategies you can use to reduce operating costs without sacrificing quality.

### Cut unnecessary and unused overhead expenses

Eliminating unnecessary and unused overhead expenses can make a dramatic impact on your bottom line without negatively affecting your business operations. You often won’t notice or miss what you’ve cut. Even better, many of these cuts (like cuts to energy usage) will help you be more eco-friendly, so you can feel good about how you’re doing business.

Examine costs like rent and utilities. With so many workers going remote, do you need a physical office space? Maybe you could get by with renting a meeting space on an as-needed basis and get rid of expenses like monthly rent, utilities, and office equipment.

Also, think about expenses related to software and IT. Many software companies offer free versions of their products for smaller businesses. With the rise in software as a service (SaaS), a subscription model might save you money on expensive software and IT services. Cloud-based services can also eliminate the need to have expensive servers on-site as well.

### Reduce employee expenses

Cutting employee expenses won’t feel as good as cutting unnecessary office space, but there are ways you can reduce costs without being a Scrooge.

First, think about whether you need an employee before you make any new hires. With the competitive labor market and rising salaries, you may be better off using a freelancer instead. You may pay more per hour for a freelancer, but you only pay for what you need. Since freelancers handle their own taxes and benefits, it will also make your accounting easier.

You can also think about whether you need a permanent employee for a specific role or if an intern or part-time hire will be able to perform it just as well.

For your current employees, you may want to see if you can cut back on expenses such as travel. In today’s digital business landscape, people are used to virtual communication. Cutting travel is also a way to reduce your company’s carbon footprint — an important consideration for many consumers.

### Boost efficiency

Software-as-a-service (SaaS) options are available for almost every area of business operations. These solutions can boost productivity by automating tedious and time-consuming processes. For example, email marketing software can help you automate emails at significant points in the customer journey, such as when they abandon their cart or make a purchase. You can also reduce waste and your company's carbon footprint by eliminating paper in favor of digital solutions.

Many software solutions allow you to streamline operations by performing tasks in-house that you might otherwise have to pay to outsource. Design, marketing, accounting, and communications are just a few of the areas where software can reduce the time and labor you need to function effectively.

For example, graphic design software helps you create promotional materials by providing pre-designed drag-and-drop templates. Accounting software can automate logging and categorizing your expenses to make tax time easier.

When you can't automate tasks, you can go with old-school methods of improving employee productivity. Offering incentives and rewards to your top performers will not only increase efficiency but will also improve employee engagement. For instance, you could implement a leaderboard with gift cards as prizes for employees who meet or exceed performance goals.

### Negotiate with vendors

Most vendors want your business and are willing to negotiate. For example, if you’re using a software subscription and paying for features you don’t need, ask about a price reduction.

You can also set up a more formal bidding process if you regularly work with multiple vendors. Send out a request for proposals (RFP) with an accurate scope of work and compare the bids you receive.

Prices for comparable services can vary widely, so it’s always worth comparison shopping to save money. However, look closely at the terms of the contracts to be sure you’re not overlooking important details that could increase costs later.

### Use free tools where possible

For almost every paid software tool you can purchase, there’s a free option available. If you don’t want to pay for Photoshop, you can use GIMP. Some free tools offer limited features or users, but many are just as useful as the paid versions.

Monday is great project management software that includes a robust free-forever version. MailChimp offers a free email marketing platform. For business banking, you can’t beat Novo, a no-fee business checking solution.

### Pay your bills on time (or early)

Late fees, overdraft penalties, and interest on overdue accounts are completely avoidable expenses that add nothing of value to your business. Avoid them by always paying your bills on time or early and including a buffer in your business account.

Some vendors offer a small discount for paying invoices early or in a lump sum. While it probably won’t be a significant amount, everything adds up, and it’ll help you build a good reputation.

## Takeaways

Keeping operational costs low is vital to the health of your business. In an uncertain economy, bloated expenses can be the difference between success and failure. Cutting unnecessary overhead, critically examining your expenses, and finding solutions to boost your efficiency can help you keep your costs low and profits high.

Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.

Novo is a fintech, not a bank. Banking services provided by Middlesex Federal Savings, F.A.: Member FDIC.

Updated
April 21, 2023
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