The ultimate measure of success for any commercial enterprise is, of course, profit. But in the pursuit of profit, an excessive focus on increasing sales while neglecting cost-cutting makes it hard to tap the profit-making potential of your business.
Commercial profit is as dependent on your costs as it is on your sales, meaning you can drive profit up by cutting costs even in the absence of additional sales revenue. This valuable - and, at times, necessary - exercise boasts numerous financial benefits for your business, giving you confidence that your company is running like the well-oiled machine it can be.
In this guide, we’re giving entrepreneurs the inside track on operating costs, why minimising these expenses matters, and how to keep yours to a minimum for maximum business growth.
What are business operating costs?
Your business’s operating costs are any costs associated with the day-to-day running of your company. As well as the cost of goods sold (COGS), these costs also include rent for your office space, the costs of any business equipment and inventory, your staff payroll, business insurance, marketing expenses, and the cost of any research and development (R&D) activity your company undertakes.
You can identify your business’s operating costs by analysing your business’s income statements.
Cost-cutting is the process of establishing where cutbacks can be made to these various expenses, which becomes all the more important in times of financial struggle when profit can be harder to generate.
Taking a holistic approach to cutting your business’s operating costs helps you to maximise profit by leaving no stone unturned, and brings with it a range of other welcome commercial benefits.
The benefits of reducing your operating costs
Naturally, the advantages of reducing your business’s operating costs are primarily financial. Profit is, as always, the priority - but clawing back this all-important capital has far-reaching benefits for your business, including:
- Maximising company profit: the less money being burned on unnecessary costs, the more your business has to claim as profit. In times of dire financial straits, being able to recoup valuable profit is highly worthwhile and, in a worst-case scenario, can help to protect your company from dreaded bankruptcy
- Driving worthwhile efficiencies: working smarter, not harder is a time-honoured business adage - and for good reason. Streamlining company costs is the key to building a more efficient business where every pound of capital is maximised and your overall profit margin is higher than ever before. From energy usage across lighting and heating to redundant process that could be automated, there are various essential costs in business that can be streamlined to save you money
- Reallocating valuable capital: arms of your business that have been historically underfunded (such as sales, marketing, or research and development) can enjoy the cash injection they deserve once you’ve scaled back costs in the areas where it makes sense. A best-practice approach to running any business involves allocating funds where you’re most likely to see a worthwhile return on your investment - and keeping budgets low where this isn’t of detriment to your business’s performance
Top tips for cutting your operating costs
A cost-cutting strategy involves pinpointing wastage and finding alternative, less costly routes to the same ultimate solution. By embracing these tried and tested tactics for reducing operating costs, you can make your business more profitable and substantially leaner in the long term:
- Look after the pennies: it helps to start small when it comes to cost-cutting, bearing in mind that seemingly minor savings accumulate to create meaningful savings in the long run. Expenses as trivial as regular office amenities cost very little each time, but pennies make pounds and the slightest saving on each of your various office supplies (from food and drink to toiletries and cleaning products) will become meaningful over the months and years
- Take advantage of preowned equipment: overcome the stigma associated with secondhand equipment and make worthwhile cost savings on the equipment your business needs to run. We’re not necessarily advising that you skimp on vital technology such as staff computers and office phone systems, especially if these are integral to the day-to-day running of your company. However, when it comes to ancillary equipment such as office furniture, as well as printers, scanners and monitors, there’s room to save significant money on these unavoidable costs by exploring the preowned market
- Keep energy usage to a minimum: join the fight against climate change and reap the financial benefits in the process by doing what you can to reduce energy consumption in the office. This cost-cutting effort can be as simple as making the switch to energy-saving light bulbs, moving radiator-blocking furniture to get more out of your heating in the colder months, or minimising printer use in the office (to limit paper waste in the process). Again, some of these energy-saving hacks may seem minor, but the money you’ll save in the long term is far more meaningful
- Eliminate duplicated effort: even some of the world’s biggest businesses are guilty of convoluted operational processes that see work repeated unnecessarily. If you’ve never performed an audit of your company’s day-to-day operations, you may be unaware of duplicated efforts being made that are wasting your business time and, ultimately, money. Any man-hours saved through these reviews create time that can be better spent elsewhere in your business - generating additional resource at no extra cost to you
- Adopt remote working: the decision to adopt a fully remote model in your business isn’t one to be taken lightly, as there are pros and cons to be considered. For example, remote businesses may find something of their company’s culture is lost through the lack of face-to-face team interaction. However, taking this leap could mean you’re able to ditch your office premises and all of the associated costs. If this feels like too great a step to take, you could start by downsizing your office space and operating a hot desking system to offer staff a hybrid working model
If your business could do with some financial streamlining, it may be time to take operating cost-cutting seriously. At Harlands Accountants, it’s our mission to demystify accounting for small business and beyond - so when it comes to cutting costs, we’ve got plenty of ideas. Contact our expert team now to find out how we could help your business prioritise profit.