10 Ways to Reduce Operational Costs for Your Small Business

How to reduce operational costs for your small business

Many small business functions and categories lend themselves to cost-cutting measures, including the following:

• Technology investments
• Outsourcing secondary business functions
• Hiring
• Negotiating with vendors
• Remote work
• Employee benefits
• Accounts payable
• Identifying waste
• Sustainability
• Monitoring and adjusting business functions

We’ll examine each element and suggest ways to cut costs and boost profitability.

1. Embrace technology to reduce operational costs.

Examine current administrative processes and identify areas where automation and technology could relieve employees of manual tasks. Business technology is changing rapidly and implementing the latest software and solutions can reduce operational costs significantly.

Many online solutions can automate various small business functions at a fraction of the cost of employing human resources (HR). By automating repetitive tasks, you can save hours of manual effort daily, freeing employees to focus on more productive tasks. Additionally, since machines are not prone to mistakes, technology reduces human errors.

Here are a few ways to reduce your operational costs with technology:

• Reduce your payroll burden: Instead of hiring a bookkeeper and staffing a billing department, incorporate invoicing and accounting software to improve efficiency. Accounting solutions can reduce the time needed to accomplish daily tasks, freeing team members to pursue other crucial business pursuits.
• Lower your marketing costs: Experiment with low-cost marketing methods and platforms. For example, explore Facebook marketing strategies, use Instagram for business and try Pinterest ads to reach your target market directly. Google Ads is another way to put your business in front of people actively searching for your products or services.
• Save on travel expenses: Commuting costs and travel allowances comprise a significant percentage of a business’s total operational expenses. Instead, save money and time by organizing meetings and presentations online. Webex by Cisco can be an excellent tool for conducting meetings, webinars and presentations online.

2. Outsource business functions to reduce operational costs.

Finding an outsourcing partner for secondary business functions is another smart way to reduce operational costs. Outsourcing helps keep your organization slim while lowering payroll costs. Instead of diverting your focus and effort to manage nonessential tasks, you’ll be able to devote your time to revenue-generating activities.

Here are some services that may lend themselves to successful outsourcing:

• IT support activities: If you only have a handful of computer systems to manage, you don’t necessarily need an in-house team of hardware specialists. Computers don’t crash every other day, but when they do, a service center in your area can help. Besides fixing your computers, an outsourced IT provider can offer several valuable services, including software installation, troubleshooting for performance issues and routine system maintenance.
• Tax preparation: Preparing your annual tax return is one area where you don’t need dedicated employees throughout the year. Modern accounting programs can do much of the legwork to prepare for tax filing and then you can send records and reports to an outside tax professional.
• Customer support: Every business deals with customers and customer support is an area no one can afford to ignore. However, maintaining a customer support team can be costly, especially when you consider recruitment and training expenses. Many small businesses prefer to outsource customer service activities to an external vendor instead of handling them in-house.
• Marketing: You may want to hire an outside marketing firm to handle your advertising, social media marketing and other marketing avenues. Hiring an experienced in-house marketing executive can be expensive and, with so many marketing channels, choosing what to focus on can be confusing. Consider interviewing traditional and digital marketing agencies so you can tap into their experience and expertise to help grow your company. Usually, agencies will provide a proposal with recommendations and budgets, helping you select the right outsourced marketing partner for your needs.

3. Make smarter hiring decisions to reduce operational costs.

Smart hiring decisions, such as finding applicants with multiple skills, can reduce yearly HR expenditures. For example, if your new administrative assistant understands content marketing, that’s a huge plus. 

Investing in your team and the employee experience is also a good plan. “It might sound counterintuitive, but sometimes spending a little more on your employees can actually reduce costs in the long run,” said Rushi Patel, co-founder of Homebase. “Higher pay, flexible schedules and good training help attract great people — and keep them around longer. Lower turnover means you spend less on hiring and training new folks, and a happier team usually means better performance and higher productivity.”

Another idea is to hire contractors instead of full-time employees. Many small businesses are turning to exceptional professional freelancers for ad hoc jobs, which has revolutionized the way startups compete with established organizations in today’s marketplace.

Hiring freelancers and interns can be a money-saving masterstroke for small businesses. Hire contract professionals for as long as it takes to get the job done. You don’t need to pay them when there’s no work. The work gets done and the overhead costs aren’t added to your payroll commitments. It’s a win-win situation.

Here are a few areas where businesses often benefit from hiring freelancers:

• Copywriting: Do you need a copywriter to create engaging content for your new website or draft your weekly email newsletters or blog posts? If so, browse freelance marketplaces like Upwork or Guru to find tons of talented copywriters at a fraction of the cost of full-time employees. Freelance copywriters usually charge an hourly or per-word rate. According to Upwork, copywriters charge $19 to $45 per hour, but rates can be higher depending on various factors, including the amount of research needed, content specialization, project type and complexity, expertise level and tight deadlines.
• Web development: Consider employing a freelance web developer to build your business website. Using a freelancer is less expensive than appointing a full-time web developer or using one of the best website builders and design services. Because the work is mostly coding, some small businesses use web developers based overseas because they tend to charge lower rates. Alternatively, if your website is relatively simple, you could use a web template service like Wix to create your own site.
• Search engine optimization (SEO): Organic visitors are the driving force behind any online business’s success. While large-scale businesses have the budget to build an in-house team of SEO experts, startups may have a difficult time employing a full-time SEO professional. Freelance services can help. A freelance SEO contractor can help you build an SEO strategy, optimize your website code and incorporate keywords, among other tasks. You can pay them a monthly charge to fix issues and submit listings to keep your site visible.
• Graphic design: Do you need a quick flyer designed? Are you looking for a graphic artist to create the landing page template for a new email marketing campaign? For ad hoc design tasks, a freelance graphic designer fits the bill. Sites like Fiverr and 99designs are your best bet to find an awesome graphic designer for as low as $5 per task.

4. Negotiate with vendors to reduce operational costs.

Are you paying the best possible prices for goods and services? Examine your operating expenses and see where you may be able to negotiate better rates. 

Kimberly DeCarrera, managing attorney and chief financial officer at Springboard Legal, suggested reviewing contract terms, especially regarding notice, termination and renewal. “Recognizing that it takes time and money to change vendors, my first priority is to negotiate with the current vendor for lower prices,” she said.

Consider the following factors:

• Volume discounts: If you buy products or raw materials in bulk, you may be able to get a volume discount.
• Good customer flexibility: Leverage the fact that your business has been the vendor’s customer for a long time, has an excellent payment history or makes frequent high-cost orders. The vendor won’t want to lose you as a customer and may be flexible on price.
• Major-customer status: Does your company account for at least 10 percent of the vendor’s annual revenue? If so, you are in a good negotiating position and should be able to bring down the price.
• Competitors’ prices: Look at what competing vendors charge for the same service or materials and use this information to negotiate. If the vendor doesn’t budge on price, you can always switch vendors.
• Reviews or testimonials: Offer to give the vendor a positive review or testimonial for marketing purposes. The vendor might show appreciation by offering lower prices.
• Nonprice concessions: Even if you can’t lower the overall price, you may be able to win other contract term changes, such as better payment terms or faster delivery.

5. Implement remote and hybrid work plans to reduce operational costs. 

Expansive — and expensive — office space isn’t always necessary. The COVID-19 pandemic taught us that not all employees must come to the office every workday. Some jobs can be done at least as efficiently from home while others can be done well partially from home with some in-person meetings at the office.

If you haven’t already, create a remote work plan and allow employees to telecommute for part of the week. You may be able to downsize your office space and use remote work tools, including video conferencing systems, to facilitate client, vendor and co-worker meetings. For example, Slack, Trello and Zoom enable virtual meetings and collaboration. Additionally, technologies like Google Drive and Basecamp centralize documents and file storage to ensure a smooth workflow. 

Beyond saving money on office space, remote work can benefit your business in multiple ways. For example, many employees prefer working from home and avoiding the commute, leading to higher job satisfaction and loyalty. 

6. Review your employee benefits to reduce operational costs.

You may be able to adjust your employee benefits package to save money without shortchanging your employees. Here are some tips: 

• Eliminate little-used benefits: Contact your employee benefits provider to evaluate which benefits your employees used the most and least in the previous year. If your staff isn’t using a benefit, there’s no sense in paying for it. 
• Consider lower service levels: You can also examine specific benefit usage, such as health insurance, to see if you can reduce service levels without compromising your team’s needs and expectations. 
• Look into bundling benefits: You might save money by bundling different types of insurance or benefits with the same provider. 
• Consider another benefits provider: You may be able to get comparable benefits at a lower cost with another provider. Because insurance and employee benefits are such significant expenses, it’s a good idea to review your benefits provider’s offerings annually.

7. Take advantage of early payment discounts to reduce operational costs.

Many vendors offer early-payment discounts to reduce nonpayment and collection expenses. If you have the available cash, pay your invoices early to take advantage of these discounts, which can add up quickly. 

If your vendors don’t currently offer this kind of discount, ask them about it or include it in contract renegotiations, especially if you are a long-term customer or spend significant money with them.

Conversely, most vendors charge interest or late fees on unpaid invoices. If you have been paying these penalties, shifting to paying your bills on time can also save you money.

8. Identify and eliminate waste to reduce operational costs.

Enlist and incentivize employees to identify redundancies and waste in the organization. “One of the most effective ways to reduce expenses is by first understanding where your money is going,” according to Gary Jain, chief executive officer of The Ledger Labs. “Use detailed financial reports to spot inefficiencies, such as underutilized software, redundant tools or excessive manual processes.”

Here are some examples: 

• Consolidate software: If you have several software platforms with overlapping functions or ones you rarely use, consolidate and stop paying for the extras. Licenses are another place to save. DeCarrera recommended businesses consider downgrading service level or reducing the seat licenses, particularly on software.
• Minimize travel: Only approve travel for employees if they must accomplish the objective in person. 
• Use inventory management software: Use inventory management software to ensure you always have the right products in the correct amounts on hand. This software will optimize storage and shipping costs while minimizing stock-outs and excess inventory. 

9. Go green to reduce operational costs.

Shifting to a sustainable business model is good for the planet and your bottom line. Although you’ll have some upfront expenses, sustainability measures like installing solar panels on your facility’s roof can save you thousands in utility costs each year. The federal government and some state and local governments offer tax credits for specific green initiatives, so be sure to seek out applicable ones. 

10. Continually analyze and adjust to reduce operational costs.

Running a successful business is an ongoing process that necessitates continuous monitoring, analysis and adjustment. Examine several cost factors to ensure you aren’t paying more than is necessary. “I look for some quick wins — even some small expenses that I can eliminate or reduce; then I look for the larger, more difficult expenses that may take more negotiation and effort to reduce the costs of,” DeCarrera said.

Patel also suggested keeping a close eye on labor costs. “Labor is one of the biggest expenses for most small businesses, so it’s important to have a clear and accurate picture of exactly where your money is going,” he said. “Break things down by the hour or half hour to spot patterns, like where you might be overstaffed during slow periods.”  

Here are some examples of areas to continually monitor for potential cost-cutting opportunities:

• Employee time: Are certain times of the day, week, month or year busier than others? If you have hourly employees, schedule more of them during busier periods and fewer during slow times. To maximize employee time, if you have a point-of-sale (POS) system, view POS sales reports by time of day, week and month. The best credit card processors also have dashboards that allow you to view various sales reports. When you stay on top of your staffing needs, you ensure coverage while saving money.
• Inventory levels: Storing inventory can be expensive, especially when renting warehouse space. In your inventory management software or POS system’s inventory features, examine sales reports by time period and product to determine optimal inventory levels. Drill down to product specifics as one size, version or color may sell better than others. Alternatively, implement a just-in-time strategy for inventory to minimize costs; for e-commerce orders, consider dropshipping directly from the supplier.
• Finance costs: While financial costs aren’t as variable as personnel or inventory costs, conduct a review of your financial expenses every quarter. Are you getting the most interest on the money you have in the bank? Should you refinance an outstanding business loan at a lower rate? Should you renegotiate your credit card processing fees? A periodic review will ensure your financial vendors aren’t taking advantage of you.

What are operational costs?

Operational costs are the day-to-day expenses you pay to run your business, such as the following:

• Cost of goods sold (COGS) is the amount it takes to buy or make, package and sell your product (service businesses typically have no or very low COGS)
• Rent, equipment lease payments and utilities
• Phone and internet service
• Business insurance
• Marketing expenses, such as advertising, trade show fees and graphic design
• Sales expenses, including travel
• Payroll and other HR expenses
• Office expenses
• Credit card processing and other bank fees

On financial statements, the COGS is subtracted from total revenue to get gross profit. Then, other operational costs are subtracted from the gross profit to get the net profit. This is the amount left over to be distributed to the business owners or reinvested.

Reducing overhead

“Profit. That’s why reducing costs is important — every dollar that you reduce your expenses means that you are adding to the bottom line,” DeCarrera said. “With costs going up everywhere, it’s important to maintain strong discipline when it comes to how we spend. This provides a more disciplined team that can better pivot when circumstances change.”

Reducing operational costs is a proven practice to gain better margins. However, to do that effectively, you must identify the areas where it is feasible to reduce overhead. Consider involving customers and suppliers to evaluate possible areas of improvement. Proper assessment of your profit and loss statement is equally important as you don’t want to take any undue risks that can harm your business’s performance.

“However, it’s important not to cut corners in areas that drive growth, like customer service, product quality or skilled labor,” Jain advised. “Avoid short-term fixes that compromise long-term value.”

Remember that there is no one-size-fits-all approach to cutting costs and improving profitability. Something that works for another business might not work for you. However, a business with streamlined operating expenses is in better shape to push for improved margins, so make sure you’re running a tight ship.

Danielle Bauter contributed to the reporting and writing in this article.