How to reduce operational costs

Running a profitable business means keeping operational costs under control. Yet many companies struggle to identify where they're overspending and how to cut costs without hurting quality or growth.

Operational costs, the day-to-day expenses of running your business, can quietly eat away at your margins if left unchecked. The good news is that targeted improvements to your financial processes and technology can help keep these costs in check.

What are operational costs?

Operational costs are the ongoing expenses required to keep your business running. Notably, operating costs aren't directly related to the production of the products or services you sell. That means these recurring expenses have an outsized impact on your profitability and cash flow.

Common examples of operational costs include:

• Payroll and benefits: Indirect labor costs such as salaries and wages for administrative staff, as well as employee benefits like health insurance and retirement contributions
• Rent and utilities: Office space, electricity, water, and phone and internet services
• Software subscriptions: Accounting tools, CRM systems, and productivity software
• Office supplies: Paper, equipment, and other consumables
• Insurance: General liability, property, and professional coverage
• Maintenance: Equipment repairs, cleaning services, and facilities upkeep

These differ from capital expenditures, which are one-time investments in assets like buildings or machinery. While capital expenses appear on your balance sheet as assets, operational costs flow through your income statement and directly reduce your profit margins.

How to calculate the cost of your operations

Calculating your operating expense ratio (OER) is simple: Divide your total operating expenses by your net sales revenue. This metric shows what percentage of your revenue goes toward running your business.

The formula is:

Operating expense ratio = (Operating expenses / Net sales) * 100

A lower ratio means you're keeping more revenue as profit, while a higher ratio signals that operating costs are eating into your margins. But what constitutes a good operating expense ratio depends on your company's industry and growth strategy. For example, a higher OER might be justified if your company is investing heavily in growth or operational improvements.

Common expense categories to track include:

• Salaries and benefits
• Rent and utilities
• Software subscriptions and technology costs
• Marketing and advertising expenses
• Insurance premiums
• Office supplies and equipment
• Professional services (legal, accounting)
• Travel and entertainment
• Maintenance and repairs

Tracking this metric regularly helps you identify opportunities to reduce costs by revealing which expense categories consume the most revenue. You can benchmark your ratio against industry standards and monitor trends over time to spot inefficiencies before they impact profitability.

Use the OER, a ratio, when you want to measure efficiency and compare it over time or against your industry. Use total operating cost, a dollar figure, when you need the full cost of operations for budgeting, pricing, or operating expense reduction targets.

13 strategies to reduce operating costs

Reducing operational costs requires improvements to processes, technology, and operations without sacrificing quality. These strategies can help you cut expenses while maintaining or even improving your business operations. They fall into four groups: technology and finance workflows, vendors and procurement, facilities and overhead, and process and culture.

1. Automate finance workflows

Manual financial processes drain both time and money from your business. Automating repetitive tasks like invoice processing, expense reporting, and payment approvals eliminates hours of manual data entry and reduces costly errors.

Consider how much time your finance team spends on routine tasks like 2-way matching, chasing down receipts, or manually entering expense data. Automation can handle these tasks instantly, freeing your team to focus on strategic work. Plus, automated systems catch duplicate payments and coding errors that humans might miss, saving money in easily preventable mistakes.

For example, Ramp's Policy Agent, an always-on AI reviewer, takes this further by catching 7x more out-of-policy spend than traditional rule-based systems and reviewing 100% of transactions before spend happens.

2. Centralize spend with corporate cards

Corporate cards help centralize business expenses and increase transparency into how you're spending money. Instead of employees using personal cards and submitting expense reports weeks later, corporate cards provide real-time visibility into every purchase.

Today's best corporate cards have integrated expense management software that automatically categorizes expenses, enforces spend controls, and flags out-of-policy purchases before they happen. You'll eliminate reimbursement processing costs while gaining insight into where your money goes. This visibility alone often reveals surprising opportunities to cut unnecessary spending.

3. Digitize accounts payable

Paper-based invoice processing drains resources from your business in ways you might not realize. According to Ardent Partners, companies without automation average $9.84 per invoice to process, while automated invoice processing can reduce costs to under $3 per invoice.

Transitioning from paper invoices to digital processing eliminates manual data entry, reduces processing time from weeks to days, and prevents errors. You'll also capture early payment discounts more consistently and avoid late payment penalties that accumulate when invoices get forgotten or misplaced.

4. Streamline procurement and approvals

Uncontrolled purchasing creates budget overruns and maverick spending that undermines your cost reduction efforts. Implementing clear approval workflows and spending limits ensures every purchase aligns with your budget and business needs.

Set up tiered approval levels based on purchase amounts and categories. For example, purchases under $500 might only need a manager's approval, while anything over $5,000 would require finance review. This prevents both unnecessary bottlenecks and unauthorized big-ticket purchases.

Ramp Procurement connects intake, approvals, POs, and AP in one system, delivering 16% average annual savings on vendor spend while eliminating 46 hours a month of manual purchasing work. A connected approval flow controls:

• Intake, so every request enters through one front door
• Duplicate and out-of-policy requests, flagged before they reach an approver
• PO matching that reconciles purchase orders against AP

5. Consolidate and negotiate with vendors

Working with dozens of vendors fragments your purchasing power and creates administrative overhead. Consolidating vendors allows you to take advantage of potential volume discounts while simplifying your procurement process.

Start by auditing your vendor list to identify redundancies. You might discover you're buying office supplies from five different vendors when one could handle everything at a volume discount.

Once you've consolidated, renegotiate contracts armed with your increased purchasing power. Many vendors will offer better terms to keep your business rather than lose it to competitors.

6. Audit and cancel unused software subscriptions

Unused SaaS subscriptions silently drain budgets. Regular audits can uncover these hidden costs and eliminate redundant subscriptions no one remembers signing up for.

Start by conducting a quarterly software audit. List every subscription your company pays for, then check actual usage against licenses purchased. Companies waste an average of $21 million a year on unused SaaS licenses, often because different departments purchase similar tools without coordination.

Here's how to conduct an effective SaaS audit:

1. Pull all recurring charges from your card and bank statements
2. Survey department heads about tools their teams actually use
3. Check login data to identify inactive users
4. Look for overlapping functionality between different tools
5. Cancel or downgrade subscriptions with low utilization

Don't forget to check for auto-renewals scheduled months in advance. Many vendors automatically renew contracts at higher rates unless you actively negotiate or cancel before the deadline.

7. Move infrastructure to the cloud

Cloud migration eliminates the heavy expenditures associated with purchasing, running, and maintaining on-premises servers. Instead of buying servers that depreciate and require constant updates, you pay only for the computing power you actually use.

The pay-as-you-use model means you can scale resources up during busy periods and down during slow times. This flexibility prevents overprovisioning—no more buying servers sized for peak demand that sit idle 90% of the time. Cloud providers handle all hardware maintenance, security updates, and infrastructure management, reducing your need for specialized IT staff.

Energy savings alone can justify the move. On-premises data centers require significant cooling and power costs, which you completely eliminate when you migrate to the cloud.

8. Embrace remote and hybrid work

Flexible work arrangements can dramatically reduce your office footprint and associated costs. Even a hybrid model where employees come in 2–3 days per week can reduce your office space needs.

Beyond rent savings, you'll reduce utility costs, office supplies, and commuting subsidies. Remote work also expands your talent pool beyond expensive metro areas, potentially lowering salary costs while accessing better talent.

Address productivity concerns by setting clear expectations, using collaboration tools effectively, and measuring results rather than hours logged.

9. Go paperless to lower operating costs

Digital document management eliminates more than just paper costs. You'll save on printing, toner, printer maintenance, physical storage space, and mailing expenses. Electronic signatures alone can save thousands in overnight shipping costs for contracts.

The real savings come from improved efficiency. Digital documents are instantly searchable, shareable, and never get lost. Approval workflows that took days with paper happen in hours digitally. You'll also reduce errors from illegible handwriting and lost documents.

Most importantly, digital systems create an audit trail automatically, reducing compliance costs and simplifying potential audits.

10. Reevaluate your travel expenses

If your team frequently travels for meetings with customers, prospects, vendors, or colleagues in other offices, business travel can account for a significant portion of your budget. T&E expenses like airfare, lodging, and meals can quickly add up.

With this in mind, rethink what travel is necessary for your business. For example, you can consolidate monthly in-person meetings into quarterly meetings, reduce the number of networking events your business attends, or send fewer team members on business trips.

Beyond simply eliminating unnecessary travel expenditures, look for ways to reduce travel spending. For example, you may be able to get a more cost-effective corporate rate with preferred airlines or hotels.

11. Consider outsourcing non-core functions

Functions like bookkeeping, IT support, and marketing often cost less when outsourced to specialists than when handled in-house. Outsourcing eliminates the overhead of full-time employees: benefits, training, management time, and equipment.

Specialized firms bring expertise and efficiency you can't match internally. For example, an outsourced accounting firm can often handle your bookkeeping faster and more accurately, while an IT support company provides 24/7 coverage that would require multiple in-house staff to match.

Focus your internal resources on core competencies that differentiate your business. Outsource commodity functions where external providers offer better service at lower cost.

12. Apply lean process improvement

Lean methodology eliminates waste from your workflows. Start by mapping your key processes, then identify steps that don't add value: redundant approvals, unnecessary handoffs, or waiting time between steps.

For example, if purchase orders require five signatures, ask whether all five add value or just delay the process. If reports take hours to compile manually, investigate whether automation could reduce that to minutes. Small improvements compound: saving 10 minutes on a daily task saves over 40 hours annually.

Involve front-line employees in identifying waste. They know where the inefficiencies hide and often have practical solutions that management overlooks.

13. Build a cost-conscious culture

Sustainable cost reduction requires employee buy-in at every level. When employees understand how their actions affect costs, they make better decisions without constant oversight.

Publicly share cost metrics so teams understand the financial impact of their choices. Celebrate cost-saving wins publicly to reinforce the behavior. Consider incentive programs that share savings with employees who identify cost reductions.

Communication is essential. Explain why cost control matters not just for profits, but for job security and growth opportunities. When employees see cost management as a means to protect the company's future rather than penny-pinching, they become active participants in the effort.

Metrics that prove operational cost reduction

Tracking the right metrics ensures your cost reduction efforts deliver results. Good progress shows up as a falling operating expense ratio: a company that tracks its OER monthly and trims it from 60% to 55% keeps an extra 5 cents of every revenue dollar as profit. The operating expense ratio provides the clearest picture of overall efficiency, but you should track other, more nuanced KPIs monthly as well:

• Operating expense ratio: Should trend downward as efficiency improves
• Cost per employee: Total operating costs divided by headcount
• Expense growth rate: Should be lower than revenue growth rate
• Category-specific ratios: Track major expense categories as a percentage of revenue
• Productivity metrics: Revenue per employee, units processed per hour

Set up monthly monitoring activities to:

• Review expense reports for anomalies or unexpected increases
• Compare actual spending to budget by category
• Calculate month-over-month and year-over-year changes
• Benchmark your ratios against industry standards
• Identify the top three cost increases for further investigation

Regular monitoring catches problems early, before small inefficiencies become major cost overruns.

Pitfalls that undermine cost savings

Done incorrectly, cost reduction can hurt your business rather than create value. Avoid these common mistakes that turn cost-cutting initiatives into expensive failures:

• Quality degradation: Cutting costs too aggressively can lead to quality issues that damage your reputation. A support team cut from 6 agents to 3, for instance, can see response times double and churn tick up, erasing the savings.
• Employee burnout: Loading more work onto fewer people seems like easy savings until productivity crashes and turnover spikes. Automate tasks before eliminating positions, and remember that replacing burned-out employees usually costs more than the savings from understaffing.
• Technology shortcuts: Choosing the cheapest software or skipping proper implementation saves money up front but costs more in the long term. Invest in reliable solutions with good support and proven track records, and budget for proper training and implementation.

Avoid these pitfalls by pairing every cost cut with a clear plan for maintaining quality, morale, and reliability. Savings should compound, not backfire.

Cut operating costs with Ramp's automated expense management

The first step to reducing operational costs is getting clear visibility into your business spending. Ramp's expense management platform does exactly that, giving you a real-time report of every transaction.

Ramp automatically categorizes your expenses according to customizable rules, giving you accurate and up-to-date expense data you can use to identify opportunities to reduce costs. Ramp helps you implement your cost-cutting strategy with customizable spend controls that block out-of-policy spending before it happens.

Try an interactive demo to see how companies that choose Ramp save an average of 5% a year across all spending.