There are some documents and financial statements in your business that are mainly handled by people other than yourself, usually by an accountant with significant expertise in financial matters.
While it is you to have the right people to do this work for you; you must understand the financial matters within your business operations – This includes how to control the operating expenses/costs and to ensure there is always adequate working capital.
But before we go through the five strategies to reduce your operating expenses, there are a few things you need to understand about operational costs. Otherwise, you won’t optimise as best as you could for these strategies since you lack full transparency.
Operational Costs: What You Need to Know
What are operating costs? What’s the meaning behind it?
It’s the amount of money you spend to run different areas of your business operations. This includes materials, resources, and administrative work.
In other words, they’re the expenses necessary for the smooth functioning of your business. See below for examples of business expenses to run their operations:
- Legal teams
- Office supplies
- Raw materials
- Rent & rates and other overheads
Now, there are some definitions you need to understand which I’ll explain below:
Operating expenses: The expenses incurred to run your business operations
Operating income: the amount of profit gained from a business’ operations (after deducting cost of goods sold and operating expenses)
How do you calculate the operating income? Here’s the formula:
Total Revenue – Operating Expenses – Cost of Goods Sold = Operating Income
For example, if your business revenues £100,000 last year, but your Cost of Goods sold is £,5000 and operating expenses are £15,000, then your operating income for that year is £80,000.
You must be aware of the operating costs you are incurring over time as a percentage of your income (expenses ratio), as this indicates whether you are heading towards achieving your financial targets or not.
Tracking costs also helps you streamline and make better business decisions.
Now that you know this, let’s get to the five cost reduction strategies you can use to decrease your operating expenses.
1. Use Digital Software Services (Automate)
There are many productivity software, online processors, and digital resources out there that help you replace manual work. Not only does it save you a lot more time, but you are going to lower your total operating expenses.
Rather than spending hours doing lesser important tasks, why not automate them?
For instance, when writing emails for a group of people/potential customers, you can improve business performance and efficiency by using email automation software.
Example of email automation software includes Mail Chimp, Active Campaign and Infusionsoft; some of these also has CRM features to track your correspondence with leads and customers.
2. Stop Using Low Performing or Unused Services
Look at where your money is going. Trace them through your variable costs and check the metrics to see if your money is being put to good use or not.
You might find services you are paying for services that you are barely using or not using at all. Or those poorly performing services you might be paying for that are only acting as another expense to prevent your business from having working capital available that you can put into other areas of the company.
These are money-eating services that you need to get rid of
If you find that you can’t get rid of it, then at least negotiate the costs…
If you’re not too sure or struggle with tasks like this either you need better accounting systems, or you need to have the right money management mindset and skillet. But essentially, it’s why accountants and personal advisors are so useful.
3. Take Advantage of the latest Telecommunication
Did you know that zoom drastically reached a peak of 300 million daily participants?
Working remotely is one cost-effective strategy. It’s easier to host or access conferences and webinars since you can do so in the comfort of your own home.
Telecommunication also eliminates the need to spend time or money traveling or to pay for office equipment or rent. Unlike traditional business, many businesses nowadays don’t even have an office and optimize their digital marketing strategies.
4. Outsource to Specialists
Outsourcing is when you hire a third party’s expertise for a set to provide a service that you or your team might otherwise do in-house. Not only does it increase the value of your business operations, but you get to reduce costs and focus on the core tasks of your business.
Here are a few examples of the primary benefits you can get from outsourcing:
- Lower labour costs
- Decrease risk factors
- Effectively manage working capital
- Focus on the priority tasks of your business
- Improve efficiency and performance
There are many cases where companies that began to outsource their work obtained a large volume of profit after just a few months.
If you want to focus on the more important parts of your business and reduce costs, then be sure to outsource your work to specialists in your industry.
5. Handle Your Financial Expenses Responsibly
Handling your financial expenses is a common struggle. And it’s why experienced accountants are crucial aspects of your business when it comes to money management and financial decisions.
You might have things to pay for such as:
- Human resources
- Monthly subscription services
With debt and invoices, you want to pay these on time or better, earlier. This way, you save the extra unnecessary costs for a little mistake like being late. It also gives you a good score, and HMRC will recognise that.
Also, by paying for services on time, suppliers are more likely going to reward you with helpful discounts that are very useful when it comes to saving money.
As discussed, avoid unnecessary subscriptions that are continuously eating up your cash. Next, do some frugal shopping – look around to find other alternatives that have the same functionality with services you already have but at a lower cost. If the purpose and function are the same, then there should not really be a problem.
How often do you monitor your business finances and streams of income? Do you have monthly in-depth analysis and breakdowns of what is going on in your business to see how you can gain higher profit margins?
There’s a strong correlation with your business’ profitability and operating expenses.
Contact us to quickly recognise and unlock hidden profitability in your business. This way, you can start scaling your business profits at a quicker pace.
After that’s been achieved, you can maximize profitability and cash flow using these strategies and setting up your business to become a Money-Making Machine.
Check out our Free Online Web-class for more strategies to Increase your Profits ad cash flow – use the link below: