Reduce Operating Expenses: Strategies And Best Practices

"I don't have dreams, I have goals."

As Harvey Spector said in Suits, you must also – more or less – have the same attitude. It all comes down to the ambitions and goals!

Whether you are a budding entrepreneur or a well-established businessman, you have multiple goals for your business. These goals might include many things – from creating a vast empire to being the best among other industry competitors.

However, one goal every entrepreneur cannot afford to lose out on is – earning more and saving even more!

Of course, you wouldn't want to build an empire but have no funds, right?

So, how can you save more money?

One strategy that many entrepreneurs use is to cut down on their operating costs. While you might not have much control over your sales, you can control your expenses. This operation cut and run will enable you to increase your profitability and keep your business thriving, even during tough times.

In this blog, we will talk about how you can reduce operating costs. So, let's begin with what are operating expenses.

What are operating costs?

Operating costs include all expenses incurred simply to keep things running smoothly. Owning and operating a business is costly, and the operating costs must be a small percentage of the incoming revenue for the company to succeed.

What do you require to keep your business running?

These are a few examples:

Cost of Goods Sold

• Personnel expenses for implementation (consulting, data migration, training)
• Direct materials
• Hosting costs for software delivery
• Payments for third-party software related to the delivered goods
• Staffing fees for the customer service department
  

Office-related costs

• Rent
• Internet
• Office Supplies
• Telephone
• Accounting, legal counsel, and other expert services
• Insurance
  

Marketing and sales-related costs

• Advertising
• Marketing materials
• Travel and entertainment
• Software
• Direct mail
  

Compensation-related costs

• Compensation
• Payroll tax costs
• Sales incentives
• Employee perks
  

It is important to remember that operating costs are generally lower than the cost of goods sold (COGS), which includes the cost of everything needed to manufacture a product or service.

Let us look at two key figures that operating costs can reveal: operating income and operating expense ratio.

Operating income: This is your company's total profit from day-to-day operations. It is the beating heart of your financial performance. To calculate it, subtract your operating costs from your total revenues.

Consider this: Last year, your company made $435,000 in revenue but had to spend $200,000 on operational expenses. If you crunch the numbers, your annual operating income will be $235,000.

Operating expense ratio (OER): This is a valuable measure of your financial health. Consider it as a percentage that represents how effectively you are performing. Whether you are a big fish in the ocean or a small one, it is a way to gauge how you compare to others in your industry.

Operating expense ratios are a direct comparison of your costs and revenues. This enables you to monitor how well-organized your business is. The formula is simple: divide your operating costs by your total revenues.

Here's how it works in the earlier example:

OER = $200,000 ÷ $435,000 = .4597 × 100 = 45.97%

Remember that these ratios can vary greatly depending on your industry. For instance, operating expense ratios for banks are typically low, occasionally even zero. Meanwhile, industries such as construction materials may see a whopping 73% increase in OERs. What counts is how you rank among others in your field. If you can match or exceed the industry standard, that indicates that you are headed in the right direction.

So, whether you are in charge of a massive corporation or a recently established startup, these ratios can provide important information about your financial situation.

Strategies for reducing operating expenses

Stop overspending on waste

Remember what Tyrion said in the Game of Thrones?

"A Lannister always pays his debts!"

Debt in business is measured not just in dollars but also inefficient spending.

When examined closely, almost every business can identify previously ignored issues. Whether minor time wasters or severe fraud cases, inefficiencies cost money.

Do some parts of your processes or specific departments produce noticeably more waste than others?

When did you last list your recurring (but unused) subscriptions?

Do you waste time on redundant or repetitive tasks?

Or perhaps a part of your supply chain is not giving you the return on investment you were hoping for.

These inefficiencies can be fixed once you have identified them.

• One way to reduce the likelihood of inefficiencies is to streamline your processes.
• Another is to set up a system of checks and balances so that mistakes can be caught and fixed before they do too much harm.
  

Whatever approach you go with, it is crucial to address inefficiencies proactively. Then, by repairing them, you can contribute to preventing operating cost waste for your company.

Your bottom line will benefit significantly from eliminating or making changes to wasteful parts of your company because doing so will allow you to concentrate your efforts on the more valuable aspects of the business. You can improve operations, maximize resources, and gain a competitive advantage by identifying and reducing unnecessary costs.

So, whether you are a Stark, a Targaryen, or a Lannister, remember that "wise leaders always reduce their debts" in business.

Pass on the baton

Outsourcing secondary business functions is a wise move. However, many entrepreneurs believe that outsourcing their tasks is a crazy idea. If you are one of them, remember the words of the man himself, “Pablo Escobar.”

Geniuses are always branded as crazy!

Reduce payroll costs, downsize your team, and concentrate on tasks that will generate revenue. In any case, labor continues to be the most expensive cost for businesses, accounting for 70% of total spending. Nonetheless, outsourcing will give you plenty of time to invest in activities that earn money rather than rushing through unimportant chores.

In fact, according to research, your business can save 78% of operating expenses if they get a virtual assistant onboard.

Wearing too many hats is going to make you look like the “Weird Barbie!”

Be a Barbie instead! Delegate tasks to an assistant. You can benefit greatly from virtual assistants without providing them with additional benefits or physical space, which lowers your overhead costs.

They can handle administrative work but also possess various skills and the ability to take on specialized tasks, allowing you to concentrate on main activities. The best part is how simple it is to access talent worldwide while scaling up or down.

First, you must determine the tasks you need assistance with, select suitable virtual assistants, establish effective communication, and set clear expectations. There are many areas where you can outsource your non-core tasks:

Streamlined finances: Ditch the year-round tax professionals. The grind is made more accessible by hiring small business cpa. When financial management takes a toll, an external tax wizard can handle the heavy lifting.

Effective customer service: Outsourcing customer service can ease the hassles of hiring and training. Let the assistants handle customer inquiries while you concentrate on the bigger picture.

Marketing strategy: Cut the expensive in-house marketing staff. Virtual assistants bring sharp insights. They will research the latest trends and make recommendations based on your objectives.

Leave your office

The recent rise in remote work is one factor reshaping the business landscape. And guess what? It goes beyond simply switching office chairs for plush couches. Working remotely is a great way to reduce operational expenses.

You may run out of money managing a physical workspace, leasing office space, and paying utility bills. Many businesses now operate entirely online. Thousands of them have done so. Companies can reduce operating costs and physical footprint by allowing employees to work from home.

Additionally, you are saving your staff money and time on their commutes, which can add up quickly.

But wait, there's more to it. Remote work allows you to tap into a larger talent pool. Geographic boundaries are no longer a barrier; finding top-tier professionals without being tied to a single location is now easier than ever.

Tech tools and virtual meetings become cost-cutting aids. Instead of flying to meetings, you can save money by clicking buttons. So, remote work is more than just a fad; it is a strategic move to cut costs, increase flexibility, and bring your company into the modern era.

It may be worth your investment if you have not taken the time to provide employees with remote workspaces that maximize efficiency. To cut costs, consider selling or leasing unused office space.

Negotiate your best level

Have you ever considered whether your vendor relationships are draining your bank account? You are not alone if managing vendor contracts seems like a struggle. Many business owners discover years or months later that they have been paying a lot for goods or services. Reduce your prices for goods and services as an innovative and quick way to lower your operating expenses.

Start by doing a thorough cost analysis first. Determine which expenses are the main offenders, those hefty monthly payments that give you a headache over money. Even a slight reduction in these costs can result in sizable savings. Also, determine the ROI champions and those simply consuming your budget.

The exciting part is that you might want to try putting a bidding system in place to change things up. Put vendors up against each other in a financial battle. Their competitors will drive down bids, putting more money in your pocket.

Let us now discuss those long-standing relationships. It is time to put them to work. Use your experience to negotiate benefits, discounts, or more flexible terms.

Finally, technology takes center stage. Consider a Control Center as your vendor management hub. It is a command center that gathers all vendors. You will have real-time access to costs, who is spending what, and payment deadlines. Furthermore, you can predict and control recurring expenses before they occur.

You can analyze your spending like a pro using these strategies.

Get more tech-savvy

"The future is already here. It's just not evenly distributed."

The tech world has advanced a lot, but we are not embracing it to its fullest potential.

Running a business means juggling different things at once. Undoubtedly, it is a daily hustle. However, the truth is that not everything requires a human touch. Consider the repetitive, manual tasks. They're a game for the upcoming software.

Connectivity is only one aspect of automation; it also provides a foolproof defense against mistakes introduced into manual work.

Why not put your employees to work on more important projects? Getting the most out of your team is your aim. Talent is wasted when they are forced to do data entry.

Although adopting technology can initially be uncomfortable and expensive, it can ultimately save costs. Online tools and programs can enhance productivity and free time for workers at all levels of your company. Artificial intelligence (AI) can quickly process data and reduce human error. Additionally, technology can enhance internal and external communication throughout your company's supply chain.

Automating tasks such as bookkeeping duties, customer service, scheduling services, and email marketing increases efficiency and reduces costs significantly. Most software created for business purposes has options for customization and integration, if necessary.

Pay early, score better

Late payments can be a real pickle – costly and full of issues. It is not just about making a few extra dollars; the repercussions could bankrupt your company.

When invoices or loan payments are past due, it hampers more than just your bank account. Your company's credit rating may also take a hit. The bottom line is that your company's financial reputation is on the line.

Plus, the fees can be a money drain. Late payment penalties are like leeches, sucking your money away. They may appear small on their own, but they add up quickly. You are wasting money that could be used for expansion, growth, or simply keeping the lights on.

But here's the catch! You can leverage automatic payments. They're like a reliable friend against these issues. Set up the system so you do not have to think about it.

Loans and invoices? Paid on time!

There's another way to get away with the "late" tag. Early payments!

Early payments are like the golden ticket. Many vendors provide attractive discounts if you pay before the clock strikes "due." It is like a reward for being on time. Even 2%-3% savings per billing cycle can quickly add up. Assume your annual operating costs are $100,000. If you pay your invoices on time and save 2%, you will save $2,000 annually.

Furthermore, early payments on loans and debts are not just a way to be prompt but a strategic move. By settling ahead of schedule, you're cutting the amount you'll lose in paying the interest over time. It is like a never-ending financial magic trick.

How can Wishup help reduce operating costs?

Wishup is this incredible virtual assistant company that can help you save tons on your operating expenses! With over 800+ happy clients, the company links US-based entrepreneurs and small businesses with highly qualified professionals to take over their admin chores.

You get some sweet perks working with Wishup:

Super-selective hiring: When choosing the cream, Wishup does not mess around. Only the top 0.1% of applicants are accepted. These guys are masters of over 70 no-code tools and excel in over 200 skill sets.

Skill-boosting training: Wishup does more than hire people and leave them alone. They invest big in training their virtual assistants. These in-house training sessions help everyone stay up-to-date on industry trends while enhancing skills and opening up new opportunities.

Backup plan: Business and life – both are unpredictable! That's why Wishup has an instant replacement policy. Don't fret if your assistant can make it. They will send a replacement in no time.

Test Drive: We understand that you want to be sure before committing. This is why we provide a seven-day free trial. You get to put pre-vetted virtual assistants to the test. Additionally, we have your back with a 100% money-back guarantee.

Various Options Available: Wishup has got you covered – whether you are looking for offshore or US based virtual assistants. We have many experts to accommodate multiple time zones and corporate requirements. And don't sweat the hiring and contracts – let us handle it all for you.

Confidentiality at best: Do you worry about your data? Fear not. To ensure your private information is kept secure and confidential, Wishup's virtual assistants sign NDAs.

Key Takeaways

Winter is coming, but these incredible hacks for reducing operating expenses will help you stand firm! Understanding the nuances of your operating costs will become more crucial as your company expands.

Hire a virtual assistant if you hardly have time to keep track of your operating costs. Wishup can assist you in finding the candidate who is most suitable for your company. Learn more by booking a free consultation or mailing us at [email protected]

FAQs related to reducing operating expenses

What does it mean to reduce operating expenses?

Reducing operating expenses entails lowering the costs associated with carrying out day-to-day operations for a business. This strategy aims to increase profitability by maximizing spending and removing wasteful or unnecessary expenditures without sacrificing the quality of goods or services.

What causes a decrease in operating expenses?

Operating costs may decline due to a variety of factors. Common strategies for reducing operating costs include implementing adequate procedures, utilizing technology to simplify tasks, negotiating better terms with suppliers, and reducing non-essential services or activities. Cost reduction can also be aided by better resource allocation and increased worker productivity.

What are examples of operating expenses?

Operating costs include wages, rent, utilities, supplies, insurance, marketing, upkeep, maintenance, travel, software, and interest. These are the expenses involved in keeping the company operating smoothly.