Previously published July 10, 2023

You might think your bookkeeping is under control, but what if the hidden gaps in your process are quietly draining your profits?

While operating costs are 100% necessary, they can quickly spiral out of control if left unchecked. The good news? Smart bookkeeping practices can help you identify and manage these costs more effectively, ensuring you keep more of what you earn. Before we dive into the 10 practices you might be overlooking, let’s take a closer look at what operating costs really entail and why they’re such a crucial part of your bottom line.

Evaluating Your Operating Costs

Before looking at the specifics of your business's operating costs, it's essential to understand what they are and how they affect your business. Operating costs include costs of goods sold (COGS) and operating expenses such as selling, general, and administrative. Operating expenses include things such as overhead costs and payroll. Operating costs are deducted from revenue to determine a company's operating income.

Ways to Reduce Operating Costs

Now, let's explore the ten ways to reduce operating costs in your business:

1. Review Efficiency of Current Business Processes

Take a moment to review the processes in your business to evaluate their efficiency. Technology and automation can often streamline processes, promote efficiency, and reduce direct labour.

Looking at direct labour costs and evaluating whether they are something of necessity is also wise. For example, on-demand needs or infrequent tasks could potentially be completed by a freelancer on an as-needed basis instead of having someone on payroll. This will negate your having to pay payroll taxes, insurance, paid leave, etc. Examples of freelancers of this nature include web designers, copywriters, and marketing/advertisement agencies.

2. Review and Evaluate Your Current Expenses

By reviewing your expenses, you'll be able to identify the items that you don't need. Consider whether there are subscriptions or services that you can operate without. If you're currently paying for online software you're not utilizing, it's time to ditch it.

3. Evaluating Spending Patterns

Review how your money flows out of your business, and consider how you can optimize to get the most for your dollar. Talk to suppliers to negotiate on price, consider buying in bulk, and look for free or cheaper options that will still get the job done.

4. Stay on Top of your Wasteful Habits

Every dollar counts, so looking at any inefficiencies in your products is important. For example, a restaurant owner might find that they often throw out a large amount of food at the end of the week. Developing a process to reduce such waste will help lower operating costs, which could mean reducing items for sale, re-thinking menu items, etc. Additionally, providing incentives to employees who spot and report inefficiencies is a good way to stay "in the know" of your wasteful habits.

5. Use Data Analytics for Decision Making

Understanding your business and making data-based decisions is the most efficient way to success. It's important to invest in tools that help you understand your business better, i.e., where are the majority of your clients geographically located (consider using an 80-20 analysis), where are the majority of your leads coming from, etc. They can show you ways to save money and make decisions based on facts instead of guessing.

6. Evaluate Energy Efficiency in your Office

You'd be surprised how much an energy-efficient office can reduce operating costs. Improving lighting, using energy-saving appliances and looking at more clean energy alternatives can help you save money while also helping the environment.

7. Minimize Employee Turnover

Continuously replacing employees due to high turnover can cost you a lot of money. It is, therefore, important to make sure your employees are happy and feel heard. You can do this by creating a positive work environment which supports employee growth. This way, you will invest in your current employees and spend less on finding and training new ones.

8. Optimize Customer Service

If your customers often ask questions and request support, it may be best to consider using a chatbot or other method to answer common questions. This will help reduce the operating costs of hiring more customer support staff.

9. Reconsider your Office Space

Depending on the type of business you’re currently running, it may be feasible to reduce operating costs by reconsidering your current office space. Do you think you’d be able to operate with less space? Could your employees work from home and rotate their time in the office? Although the decision may seem inconvenient and less than conventional, it can significantly impact operating costs and employee satisfaction.

10. Optimize Inventory Management Practices

Ensure to put systems in place so that you order inventory only when needed so that you don't waste money. Build good relationships with suppliers and speak to them about getting discounts on inventory purchases.

Reduce your Operating Costs Today

In the current climate, it's important to reduce your operating costs as much as possible. You can reduce costs and keep more money in your pocket using the ten strategies above. From cutting out inessential services, creating a positive work environment and considering green energy alternatives, each strategy can move the needle slightly to assist you in reducing your operating costs.

This fluid process can only work if you look at these items today. The difference may seem small initially, but minimal progress is still progress and will add up in the long term.

So, start considering these strategies today so that you can see continued success and growth in your business this year. The first step is having accurate bookkeeping to reference for your business. If you're looking for help cleaning up or maintaining your books, contact us today.