How To Reduce Operating Expenses in Business: 15 Tips

Running a successful business requires careful management of operating expenses. Razor-thin profit margins make every dollar count. Uncontrolled spending can quickly eat into profits and put companies in the red. Indeed, small businesses face constant pressure from all sides: rising wages and healthcare costs, regulatory burdens, and fierce competition, among others. Controlling operating expenses has never been more crucial.

This blog post aims to provide small businesses with a list of tips on how they can reduce operating experiences and remain competitive. Implementing even a few of these tips can lead to significant savings, allowing you to reinvest resources into growth.

Importance of Controlling Operating Costs

Operating expenses are ongoing regular costs for running day-to-day business operations. This includes things like:

• Rent

• Utilities

• Office supplies

• Insurance

• Accounting fees

• Legal fees

• Marketing expenses

• Employee wages and benefits

• Equipment costs

• Software subscriptions

Unlike one-time startup costs or capital expenditures, operating expenses recur each month.

Controlling operating costs is crucial for small business survival and profitability. Unchecked spending can quickly spiral out of control. Even a 5% or 10% reduction in operating costs can dramatically impact net profits. Yet, at the same time, businesses need to ensure a reduction in expenses does not negatively impact the quality of service and customer engagement. Further, overwhelmed employees can quickly become a risk in terms of retention and recruitment. The key is finding the right balance through smart spending optimization.

15 Tips for Small Businesses to Reduce Operating Expenses

With this at the forefront, following are 15 impactful tips for small businesses to lower their monthly operating expenses:

1. Switch to a Coworking Space

Renting conventional office space is a major cost for many companies. The average cost per square foot for Class A office space ranges from $25 to $100 per month—or more—in major US cities. Small businesses are increasingly turning to coworking space as a much more cost-effective alternative. Two years ago, for example, 10% of small businesses used coworking space, a number that has grown since then. 

For small businesses, coworking spaces can provide enterprise-level amenities and networking at a fraction of the price. Desk fees average around $300 per month, often with flexible terms.

Coworking spaces through providers like Davinci Meeting Rooms eliminate big upfront deposits, long leases, and headaches of managing office infrastructure. They provide flexibility to ramp teams up or down as needed.

2. Reduce Energy Usage

Utility costs like electricity, gas and water can amount to 10% or more of a company's operating expenses. Simple steps like converting lighting to LEDs, installing programmable thermostats and using power-saving settings on computers and other devices can reduce energy usage up to 20% or more.

Businesses should conduct energy audits, upgrading insulation and sealing air leaks provides additional gains. Smart power strips eliminate "vampire" loads from idle devices. Negotiating better rates from utility providers and switching to renewable energy sources also helps optimize utility outlays. (Of course, for small businesses that leverage coworking space or day offices, energy audits and surprise utility bills are non-existent.)

3. Cut Telephone and Internet Expenses

With the rise of mobile devices and VoIP services, traditional landline phones are increasingly obsolete. Eliminating landlines and switching providers can dramatically reduce these costs.

For internet access, compare rates and bandwidth allowances across business cable and DSL providers, and small businesses can leverage promotions for new subscribers. Consider shifting long-distance calling to more cost-effective voice-over-IP solutions. (Hint: Small businesses that use with coworking space and day offices automatically slash their telephone and internet costs.)

4. Go Paperless

Printing and paper supplies are a substantial yet easy-to-reduce business expense. Just cutting paper usage by 25% yields significant savings. Businesses should convert manual processes to paperless wherever possible, including billing, file storage, invoices, payroll, etc., and eliminate printing emails and attachments. Storing documents digitally via scanning or cloud-based tools can reduce expenses as well. For necessary printing, enable double-sided, use lighter paper weight, print in grayscale instead of color, and lower printer ink density. Recycle used paper.

5. Renegotiate Merchant Processing Fees

Credit card processing fees can amount suck up valuable revenue for retailers and ecommerce businesses. Yet merchant account providers often apply complex fees that maximize their profits. Renegotiating contracts can yield significant savings. Reducing percentage-based fees in exchange for fixed monthly fees can cut cost. Businesses can even consider paying annually in advance to lower cost.

6. Trim Software Costs

The cloud is the nirvana for many businesses, providing them with the scale only available to large enterprises before. But these subscriptions can be expensive, with cloud software subscriptions accounting for 10% to 20% of an organization’s IT budget. As a result, small businesses need to perform regular audits of their business software needs and users of those platforms and to prune waste. This includes consolidating tools that provide overlapping functionality and searching for software tools that offer comprehensive capabilities like HubSpot. Many software companies are amenable to negotiating lower fees as well. 

7. Cut Inventory Waste

Carrying excess inventory leads to losses from spoilage, obsolescence, storage fees, and tied-up working capital. Controlling inventory waste unlocks major working capital, reduce lead times, and improve cash flow. To gain optimal efficiency, small businesses need to analyze purchase trends and sales velocity by SKU, set minimum order quantities, and reorder points to balance stockouts with overordering. Adoption of just-in-time principles can create significant cost efficiencies by receiving inventory only as needed. 

8. Optimize Marketing Spend

Ineffective marketing tactics bleed cash without generating sufficient sales to justify the expense. Small businesses need to measure and optimize programs regularly to improve ROI and focus spending on initiatives with proven returns. As part of this process, businesses need to test new messaging and landing pages before investing in full-blown marketing campaigns. And when a program is not performing, small businesses should cut it and move on. In addition, with the advent of generative AI large language model (LLM) tools like ChatGPT, Bard, Claude AI, and others, small businesses need to turn to them to generate content, write code, and analyze data. 

9. Rethink Your Physical Footprint

As customers migrate online, maintaining physical outposts can be challenging. In these instances, small businesses need to consider downsizing store square footage or renegotiating leases to cut monthly payments. For service businesses, assess client demand patterns for your physical office. Options like virtual office addresses from providers like Davinci Virtual Offices, shared spaces, and remote work policies help reduce real estate costs. In particular, virtual addresses through Davinci Virtual Offices provide small businesses with professional address locations without the expense of permanent office space. 

10. Automate Where Possible

Labor represents one of the largest expenses for many small businesses. Businesses need to identify opportunities to automate manual processes to boost productivity while reducing wage costs. For example, scheduling software like Calendly saves hours of administrative time. The advent of generative AI LLMs makes it easy for businesses to leverage chatbots for handling common customer inquiries. Payment processing, invoicing, accounting, and other financial tasks can be streamlined through automation. New no-code tools allow creating workflow bots without programming expertise.

11. Buy Used Equipment

New equipment comes at a premium price. Gently used equipment offers comparable utility at a fraction of the sticker price, often at 40% to 60% discounts. Purchasing refurbished models is another cost-effective option. Many equipment vendors offer refurbished devices with warranties at reduced prices. Here, businesses need to evaluate whether used or refurbished equipment can adequately meet business needs without sacrificing quality or performance.

13. Cut Business Travel

Business travel is estimated to run over $1,300 per trip for each employee. With remote work and videoconferencing, these costs have never been easier to trim. Analyze past travel spend to identify opportunities for savings, such as reducing the frequency of onsite internal team meetings. For necessary client visits or conferences, optimize logistics to minimize costs such as rented meeting rooms from providers like Davinci Meeting Rooms.

14. Leverage the Gig Economy

Growing gig platforms like Fiverr and Upwork provide access to on-demand talent and creative services. Rather than hiring expensive employees or onshore contractors, small businesses can leverage these gig economy platforms to find cost-effective talent. This provides them with significant scale without the typical cost.

15. Evaluate Staffing Needs

Adding employees without sufficient sales and revenue growth places unnecessary strain on finances. Small businesses should take their time to objectively evaluate staffing levels and productivity before hiring. Labor represents one of the largest expenses for many small businesses and evaluating your staffing needs and costs is critically important. In addition, businesses need to identify opportunities to automate manual processes boosts productivity while reducing wage costs.

16. Renegotiate Supplier and Vendor Contracts

Maintaining favorable terms with suppliers and vendors directly improves the bottom line. Businesses need to renegotiate all vendor contracts upon renewal. Volume discounts, extended payment periods, waived fees and other concessions reduce input costs. You should be willing to switch providers if existing partners will not match better offers. For commodity products and services, businesses need to run competitive bidding processes and avoid auto-renewals that lock in unfavorable legacy pricing.

17. Outsource Receptionist and Administrative Tasks

Hiring full-time or even part-time staff for receptionist and administrative tasks does not make sense for many small businesses. Leveraging on-demand live receptionists through providers like Davinci Virtual give small businesses scale and enable them to deliver services that level the playing field between them and much larger competitors. 

Optimize First and Then Cut 

Businesses need to remember that while the desire to reduce expenses is understandable, extreme cost-cutting can backfire by negatively impacting quality, capabilities, and growth.

The most successful companies optimize smartly. They focus reductions on clear inefficiencies, waste and low-ROI expenditures. Customer experience is enhanced through innovation, not diminished through penny-pinching.

Continuously Improve Efficiencies and Operating Expense Reduction

With creativity and diligence, small businesses can realize major cost optimization. Regularly examine operating expenses from all angles to identify savings opportunities. The strategies presented provide a blueprint to substantially reduce outlays. While magnitude of savings depends on current efficiency, 10% to 25% reductions are feasible for most companies.

Achieving lower operating costs takes persistence and is not a one-time effort. Businesses need to continuously analyze expenditures, negotiate new contracts, and keep trimming waste.

Efficiency must become ingrained in processes and culture. With lean operations, businesses not only survive but thrive. 

About Patrick Spencer

Patrick Spencer (Ph.D.) is the President and Founder of TIRO Communications that helps companies develop, build, and manage content, customer, advocacy, and demand-gen programs. Included in its offerings is TIRO Cognition Insights, a data analytics tool that enables B2C and B2B businesses to pinpoint what their customers and competitors’ customers are saying and to identify corresponding actionable product, services, competitive, sales, and marketing intelligence.

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Website: www.tirocommunications.com