How to reduce operational costs for your small business

When you run a small business, every penny matters, especially in the early stages when budgets are tight. When you reduce operating costs, not only do you streamline efficiencies for your business, you also increase your profit margins. This sets you up for long-term growth.

In this post, we'll cover what operating costs are and how you can you reduce them to save money for your business.

What are operating costs?

Generally speaking, operating costs are the expenses that keep the business running on a daily basis. This consists of a mixture of both fixed expenses and variable costs. The fixed costs remain steady, whereas variable costs can shift on a monthly basis.

In simple terms, operating costs are the capital funds you need in order to “keep the lights on”—everything you spend via business credit cards, invoices, and ACH.

That said, it’s more than just your electricity bill and office supplies. Operating costs can include the rent for your office space, accounting fees, travel expenses, sales, and marketing. It’s important to note that operating costs are not the same thing as operating expenses.

Operating costs = operating expenses + costs of goods sold (COGS)

This represents both the costs of providing your product or services as well as the expenses that would crop up regardless of whether or not a sale was made. For example, a small software-as-a-service (SaaS) company’s operating costs can typically be broken down into four primary components:

Cost of Goods Sold

• Personnel costs for implementation (consulting, data migration, training)
• Direct materials
• Software delivery hosting expenses
• Costs for third-party software tied to the delivered product
• Customer support team personnel costs

Office expenses

• Rent
• Telephone
• Internet
• Utilities
• Office equipment
• Accounting, Legal, and other professional services
• Insurance

Sales and marketing expenses

• Advertising
• Sales materials
• Travel & entertainment
• Software
• Direct mailing

Compensation-related expenses

• Base compensation
• Payroll taxes
• Sales commissions
• Employee benefits

By monitoring both fixed and variable expenses, you can make informed decisions that improve profitability.

How to reduce operating expenses in your business

The first step to reducing operating costs is reducing operating expenses. Trimming your small business expenses doesn't have to mean sacrificing quality or growth. By taking a strategic approach to expense management, you can boost your bottom line while maintaining excellent service.

• Identify and eliminate waste: Audit your processes to find unnecessary expenses and cut them without sacrificing quality or customer satisfaction
• Optimize operations: Streamline workflows and cross-train employees to maximize efficiency and reduce redundancies in daily processes
• Leverage technology: Implement automation and digital tools to handle repetitive tasks, freeing up your team for higher-value activities
• Be more energy-efficient: Switch to LED lighting, program thermostats, and consider remote work options to significantly lower utility costs
• Reduce other expenses: Renegotiate with suppliers, consider shared office spaces, and review subscriptions to eliminate unnecessary recurring costs

Understanding and managing your operating costs is an ongoing journey, not a one-time task. With regular reviews and these targeted strategies, you'll create a leaner, more profitable business without compromising your values or customer experience.

How to reduce operating costs

FAQWhat does "reduce operating costs" mean?Reducing operating costs means lowering the day-to-day expenses of running a business to improve profitability.

Smart cost-cutting isn't about penny-pinching, it's strategic decision-making. From leveraging technology through automation to optimizing your supply chain, these tactics to reduce operational costs work together to create a leaner, more profitable operation.

Automate

Identify repetitive tasks in your business that eat up valuable time. Modern software solutions can automate everything from invoice processing to customer follow-ups.

While there's an up-front investment, the long-term savings in labor costs and reduced errors can be substantial. Start small with one process, measure the results, and expand from there.

Change employee spending behavior

Cultivate a cost-conscious culture by involving your team in expense management. Draft a clear expense policy, recognize frugal innovations, and share regular cost reports to build awareness.

Consider implementing a simple approval process for purchases above certain thresholds. When employees understand how spending impacts the bottom line, they become valuable partners in cost reduction.

Outsource

You don't need to handle everything in-house. Consider outsourcing specialized tasks like web development, IT support, or digital marketing to professionals who can often do them more efficiently.

This approach eliminates the need for full-time salaries and benefits while giving you access to expert-level service when you need it.

Manage inventory

Excess inventory ties up cash and takes up valuable space. Implement a just-in-time (JIT) inventory system to reduce storage costs and minimize waste.

Use inventory management software to track product movement, identify slow-moving items, and make data-driven purchasing decisions that align with actual customer demand.

Optimize processes

Take a critical look at your business operations to eliminate redundancies and streamline workflows. Sometimes, a simple reorganization of your workspace or adjusting the sequence of tasks can yield surprising efficiency gains.

Encourage your team to contribute ideas. They often have valuable insights about bottlenecks in their daily work.

Negotiate with suppliers

Don't be afraid to have honest conversations with your suppliers about pricing. Building strong vendor relationships and consolidating purchases with fewer vendors can help you qualify for volume discounts.

Always compare options, but recognize that the lowest price isn't always the best value. Reliability and quality matter too.

Remember, to reduce operating costs in a sustainable manner requires consistent attention rather than one-time actions. Implement these strategies gradually, measure their impact, and adjust as needed to create lasting financial benefits for your business.

Earn on your operating cash with Ramp Treasury¹

Don't settle for choosing between returns and access to your funds. Ramp Treasury offers a competitive 2.5%² return on your business's working capital while reducing time spent on cash oversight. Set up automatic transfers to maintain ideal balance levels, and plan deposits to ensure sufficient cash is always available.

Free, same-day ACH transfers allow you to maximize payment windows by as much as three days, creating additional working capital flexibility. Schedule payments to process precisely on deadline without additional costs or holdups, maintaining positive vendor relationships while optimizing your cash position.

Rest easy knowing your Ramp Business Account provides FDIC insurance³ covering millions in deposits. Open a free Ramp Treasury account in under a minute.

1) Ramp Business Corporation is a financial technology company and is not a bank. All bank services provided by First Internet Bank of Indiana, Member FDIC.

2) Get up to 2.5% in the form of annual cash rewards on eligible funds in your Ramp Business Account. Cash rewards are paid by Ramp Business Corporation and not by First Internet Bank of Indiana, Member FDIC. Cash rewards are subject to change. See the Business Account Addendum for more information.

‍3) Customers with a Ramp Business Account can use the ICS service provided by IntraFi Network LLC. Ramp is a financial technology company, not an FDIC-insured depository institution. Banking services are provided by First Internet Bank (FIB), member FDIC. Subject to the terms of the applicable ICS Deposit Placement Agreement, FIB will place deposits at FDIC-insured institutions through IntraFi’s ICS service. A list identifying IntraFi network banks appears at https://www.intrafi.com/network-banks. Certain conditions must be satisfied for “pass-through” FDIC deposit insurance coverage to apply. To meet the conditions for pass-through FDIC deposit insurance, deposit accounts at FDIC-insured banks in IntraFi’s network that hold deposits placed using an IntraFi service are titled, and deposit account records are maintained, in accordance with FDIC regulations for pass-through coverage. Deposits are insured by the FDIC up to the maximum allowed by law; deposit insurance only covers deposits in the Ramp Business Deposit Account in the event of the failure of the FDIC-insured bank.