Companies must be equipped with the tools necessary to operate. But if their operating costs are not managed, their financial health and business will be compromised. For example, if a company overstretches its office space, it may not have enough capital to pay employees. Companies that want to protect their bottom line should take steps to reduce operating costs. This will ensure their longevity and growth in today's competitive marketplace.
What are operating costs?
The operating costs are expenses related to the daily maintenance and management of a company. Organizations often refer to these costs as operating expenses, operating expenses or operating costs.
A significant element of operating expenses is the cost of goods sold (COGS), which is a direct expenditure for the production of products. The price of raw materials, supplies, manufacturing parts and shipping are some examples of the cost of goods sold. Listed below are other forms of operating expenses.
- Labor and wage costs
- Maintenance and incidental expenses
- Employee pensions, health insurance, disability insurance and other benefits
- Sales commission
- Depreciated assets
Operating costs can also be used to understand a company's bottom line. This is the total profit associated with running a brand. To determine this, total sales during a given period must be subtracted from operating costs. According to the previous example, the small company would have an operating profit of 400.000 US dollars.
8 tips to reduce operating costs
Companies that want to reduce operating costs without sacrificing the quality of their products or workplace environment should follow these best practices. This not only protects the brand's bottom line, but can also improve efficiency and increase competitive advantage.
1. Leverage technology
In today's digital age, there are a variety of business systems and software platforms available. These tools can automate and simplify certain tasks such as payroll, inventory tracking and supply chain management. These solutions increase productivity and business functions can be completed faster with fewer human errors. This means that companies can reduce labor costs and avoid delays caused by inaccuracies.
When selecting a business system or program, it may be helpful to consider the following questions.
- What task needs to be improved?
- Which business function works just as well?
- Which process is the most time consuming in the company?
2. Providers of research results
Companies that rely on suppliers should research thoroughly to find one within budget. It is important to consider their wholesale prices as well as order minimums, delivery schedules and shipping prices. For example, a small business should look for vendors with low order minimums because they have fewer customers and requirements.
3. Outsourcing job offers
Another cost-effective way to improve operations is outsourcing. For example, if a sole trader doesn't have a strong background in accounting, they can outsource that task to a tax professional or accountant. This ensures accuracy and allows the company to focus on other key tasks.
4. Promoting telecommuting
Working remotely 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. In addition, Upwork reported that 22% of its workforce will work remotely by 2025. By telecommuting, the company doesn't have to lease office space or pay utility costs. It also eliminates the need to invest in office supplies such as printers and desktop computers.
5. Pay suppliers immediately
Reducing operating costs also includes paying all bills immediately. Companies should pay their suppliers' invoices either early or on time. This avoids late fees, interest and costly penalties. In addition, some suppliers give their customers discounts if they pay their bills early.
6. Note about inefficiencies
Unproductive processes and procedures can lead to wasteful spending and resources. For example, if a retailer's demand forecasting system is inefficient, it will subsequently spend unneeded capital on goods that its customers do not want.
To reduce costs, business owners should regularly evaluate their operations to quickly identify inefficiencies. It would also be helpful to collect employee feedback and suggestions. Because they work directly with customers and processes, they have better insight into what works and what doesn't.
7. Cancel subscriptions
Business owners and managers should regularly review the various services they subscribe to. If a platform has not been used for months, it may be cost effective to cancel it or find a cheaper plan.
8. Be more sustainable
Buying green consumables like recycled paper, smart thermostats and energy-efficient light bulbs can help reduce costs. There are also sustainable options for air conditioning and heating. This allows the company to reduce costs, but also maintain a comfortable and welcoming work environment.
By following these cost-cutting tips, many companies can get one step closer to lowering their business costs, increasing profits and improving cash flow.