7 ways to cut business expenses
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While driving revenue is an important objective for businesses and startups, focusing on profitability is equally, if not more, important. Whether you are an established brick-and-mortar selling physical goods or a tech startup building the future of online computing, profitability is a key performance indicator (KPI) that measures the health of your operations.
Improving profitability can make the difference between maintaining your current team or having to make layoffs. It can make the difference between maintaining your operations or launching a new product or service and growing your business. Let’s take a look at what business expenses are and different strategies to reduce these costs.
What are business expenses?
Per IRS Publication 535, business expenses are necessary and ordinary costs incurred by an organization to generate a profit. Whether you can deduct these costs will depend on your industry and stage. Here's a list of some common business expense categories:
- Personnel costs
- Rent or mortgage payments
- Technology and equipment
- Marketing and advertising
- Supplies and inventory
- Professional services
- Research and development
Within these categories, we can explore hundreds or even thousands of different business expenses that are necessary and ordinary. Here are some common expenses:
- Office supplies and equipment
- Travel to clients and vendors
- Training and education programs
- Internet, conferencing, and phone solutions
- Postage and shipping
- Bank and credit card processing fees
- Meals and entertainment
By becoming aware of these categories and types of expenses, you can begin optimizing your financial strategy for your business. Let’s explore 7 ways to cut business expenses.
7 ways to cut business expenses
Enhance your daily operations through new technology and automation
Embracing technology isn't just about staying current; it's a strategic move to cut costs long-term. With the advent of new Artificial Intelligence (AI) tools and programs, managing and improving your people, processes, and products/services becomes easier every day.
For example, a restaurant that automates its reservation system, using software like Resy, can reduce the need for front-of-house staff and improve customer service. A local gardening service might use route optimization software, like OnFleet, to save on fuel and vehicle maintenance, while a small publishing house could digitize its editing and layout processes using Grammarly and Adobe InDesign, slashing printing and distribution costs.
Manage your people effectively and promote employee wellness
For many businesses, human capital, or your employees, is one of the greatest costs. Reducing turnover costs and improving employee engagement can save significant costs associated with hiring and training new talent. By focusing on workforce efficiency and supporting wellness initiatives, companies not only trim expenses but also boost overall productivity.
For instance, a tech company can offer remote work options or coworking space memberships to reduce office space while also promoting work-life balance, potentially lowering stress-related health claims. A local cafe might use part-time staff during peak hours to manage labor costs and provide wellness workshops to keep morale and health high. A delivery service could introduce a bike-to-work program that cuts parking costs and enhances employee fitness.
Optimize and regularly audit your utility costs
Utility bills can quietly chip away at your bottom line. By being conscious of energy use, businesses can not only save money but also contribute to a greener planet. It's important to track these expenses regularly (e.g., annually) to make sure you aren't overpaying for basics. When you see costs increase, it doesn’t hurt to negotiate better rates or shop around other vendors.
For example, a boutique hotel could install motion-sensor lighting to reduce electricity usage, while a busy call center can switch to VoIP to lower phone bills. A home-based freelance operation might save on heating by insulating workspace areas or choosing a different local utility provider with better rates.
Streamline financial processes and maximize tax savings
A fitting financial system paired with savvy tax planning is a vital part of any business's success strategy. A “fitting” financial system means choosing a provider that gives you the flexibility you need for your industry while remaining affordable. Moreover, having a good accountant can save you hundreds of thousands of dollars or more on your tax bill each year.
For instance, a clothing boutique can use industry-specific integrated point-of-sale and accounting software to manage sales, inventory, and expenses efficiently while capturing all deductible expenses such as Infor for fashion. An independent consultant can make an S Corp election to save on self-employment tax or establish a retirement savings plan that reduces taxable income. Meanwhile, a manufacturing company can invest in solar panels to take advantage of current tax credits.
Negotiate with and manage your suppliers and vendors
Whether you're running a coffee shop or a computer repair service, your relationship with suppliers will impact your financials. It's important to regularly make sure you're getting the best prices, terms, and service for your business. This may mean you need to shop around and find better rates or hire someone to manage your vendor relationships.
For example, a local coffee shop owner could negotiate bulk pricing for beans, while a computer repair shop might work out consignment terms with parts suppliers. For a yoga studio, swapping services with and promoting other local fitness businesses could reduce the costs of new trainers and promote cross-sell opportunities.
Reevaluate your strategy and budget for your marketing, advertising, and business development
Marketing can be a money pit if not handled carefully. It’s important to set a strategy, goals, and budget for your marketing and advertising campaigns. Vendors can charge thousands of dollars a month for campaigns that may take 6-12 months to get a return on investment and you will need to cover the spend until it pays for itself.
For instance, a self-published author can use organic social media posting through Pinterest or Instagram to promote their books instead of costly advertising campaigns. An independent consultant might host weekly webinars to attract clients, significantly reducing the cost per lead and reaching their target market for much cheaper than a paid advertising campaign. A local garden center could start a loyalty program to increase repeat business without spending extra on advertising.
Cut travel and meeting expenses
In today's digital age, face-to-face isn’t always necessary. Some companies can operate fully remotely and avoid costly real estate, travel, and meeting costs. For those who cannot, it’s important to be mindful of how much is spent on travel and meetings. It’s easy to spend $5-10 thousand dollars or more on a trip for a few employees to go meet a prospective or current client. Sit down and determine whether that relationship justifies that kind of spend or whether you can virtually meet.
For example, a software company could replace out-of-town client meetings with video conferencing like Zoom, Teams, Meets, or one of many other conferencing solutions. A sales team might use CRM software, like HubSpot, to conduct virtual sales calls instead of traveling to client sites. For a consulting business, in-house training can be conducted through e-learning platforms, cutting down on the need for off-site training expenses.
The bottom line
We focused on seven actionable strategies for cutting business expenses, an essential aspect of enhancing a company's profitability. Although these seven strategies are important, they aren't the only strategies you can take to reduce business expenses.
These strategies range from integrating new technology and automation for operational efficiency to managing employee wellness and streamlining financial processes. Regular auditing of utility costs and maximizing tax savings are also crucial. Additionally, maintaining strong supplier relationships, optimizing marketing strategies, and reducing travel and meeting expenses can significantly lower costs.
Each approach highlights the importance of being proactive and strategic in managing expenses to not only ensure the financial health of your business but also to foster growth and sustainability in an increasingly competitive global marketplace. Implementing these measures can lead to substantial savings, making a notable difference in your business's bottom line.
Frictionless software that helps you cut business expenses
Ramp effortless expense management software helps you replace manual processes and immediately identify opportunities to optimize expenses. Ramp enables your team to easily provision virtual and physical cards, roll out automatic receipt documentation, and help managers with swift approvals.
With integrations like Outlook, Uber, and Amazon Business, Ramp simplifies receipt collection. This seamless compatibility extends to major accounting and banking software, enhancing financial management and reducing errors. Try Ramp for a more efficient approach to expense management.