Operating expenses are important to generate profit. But it’s also important to control and reduce the expenses so that the cost of generating profit remains less. In a small business especially when we start a business just with passion and will power and without business management degree, knowledge and business backgrounds then we don’t know about such financial terms.
For many, it’s all about incoming, outgoing and the difference in between is the profit and loss. But while doing business for 3 to 4 years, we start understanding the financial side of the business.
In a small business, the money you save from the operating expenses will contribute to your profit and after a certain amount, you can invest that on machinery, technologies, marketing, and team.
To reduce operating expenses is not easy. There is a risk involved in which you can get a loss in the short term or your operating revenue can decrease. So, it’s important when executing the ideas, you analyze the situation on paper and spreadsheet
And today, I will share with you some of my business experiences and ideas in which you can learn how you can decrease the operating expenses in your business without losing the profit, production numbers and cash flow.
So, let’s start:
1. Find out where you spending more:
To reduce operating expenses business first you have to find out what are things where you are spending more money. And find out what are the things that actually contribute to the profit directly and indirectly.
Let’s take a few examples:
- You have 2 two-room sets for office or you have 500 sq. ft space for the work. You’re paying $300 per month. But you’re using only 200 sq. ft space and that is generating you $10000. You’re paying extra for 300 sq. ft space. Now you can save that money by changing the office.
Now you have 2 options:
- You can find out the 200 sq. ft space in that same location or find a better place without compromising the customer’s area. And only pay for 200 sq. ft. Now in this way, you will be able to decrease the office expenses minimum $150 rupees. In a year you can add $1800 in a profit. After decreasing the cost of the office. But make sure you will keep generating $10000 rupees.
- The second thing you can do is utilize the remaining 300 sq. ft space to contribute to the profit. You can expand your business or hire 2-3 people or use that for product display, like a store or anything. But at least take the advantages of other spaces. Else you’re paying extra $1800 rupees in a year.
But if you think if only that place/location can help you to generate $10,000 then don’t change that. Just keep going and look for other things to reduce the expenses.
So, the point is to find out where you’re spending more and what are the things that contribute or not contributing to the profit. And how you can decrease those expenses.
Might be you’re spending more on electricity, while you can use Solar panel Light.
Might be you’re using traditional marketing but you can use online advertising.
Might be you’re spending on traveling, while you can use video conferencing, video calls and collaboration.
2. Utilize the resources and machinery:
In business, you have to focus more on growth. I mean expenses are growing then you have to think about growing your profit. And to grow profit you have to utilize each source, time, effort, team member, place, machinery, technology and all the elements of production to its fullest.
For example, your team member is finishing the work 2 hours before they leave the office. And they are free for 2 hours. Now you’re paying for those 2 hours. It means you have to increase or have to give them more work or new goals.
It means when they finish the 1st work early then they can utilize that on the next thing. So that next thing, goal, work, task have to be there. That directly or indirectly contribute to growing the revenue.
Another example: You have 5 employees. And all 5 doing 80% efforts and contribution in the revenue. But you have to go deep to find each individual performance.
B = 28%
C = 35%
D = 30%
E = 15%
F = 10%
Now you can see that B, C, D are contributing more in production and revenue. But E, F are contributing only 25% in combined. Where the other 3 contributing 93%. But the cost of each employee is the same. But E, F is increasing your operating expenses.
So now find out why E, F is not contributing.
Might be they have personal problems then talk with them.
Might be the tools are not good.
Might be there is a conflict between another member.
You can increase the performance of E and F through training, skill development, motivation, communication, and training programs.
Or you can replace them and hire a new team member.
3. Use Information Technology and the power of the Internet:
Information Technology has changed the way we do business. Now the Internet, the computer is part of almost all types of business operations. The sooner you start using the computer, the internet and various other business technologies and business software the better it will be for the growth of your business. It’s because one day you have to use it. Technology is changing and the situation for businesses is uncertain. But if you learn to change along with the technology transition then you will get competitive advantages in the market.
The majority of the consumer today using the computer, internet to find out the businesses, services, products, prices, features.
They are watching and reading product reviews, features online. They are comparing products and services features. They are comparing the prices before they buy from you. the customer is more powerful today than 20 years ago. And in the future, it will change to a new level. So it’s better that you utilized the technologies, get adaptive to the new ways of doing business.
For example, you can do the following things by using a computer/internet in your business to decrease operating expenses.
- You can try online advertising. Compare the difference and output with your traditional marketing. You don’t have to stop offline marketing immediately, instead use google ads, Facebook ads, youtube video ads, affiliate marketing, coupons, and content marketing for a minimum of 6 months. And I am sure that you will be able to reduce your operating expenses. 39 Smart Ways to Promote Your Business Online Effectively
- If you buy raw material for the production, then you can use the internet and search engine to find out new suppliers, you can compare prices, you can compare shipping cost and many other things. Might be you can find a new supplier that can give you the raw material at low prices from your current supplier. I just mean try to explore the options so that you can reduce the production cost.
- You can use Microsoft Excel for the customer’s data management, inventory and financial management and data analysis. If you do it you can compare the cost, prices, demand, profit, supply, expenses, income, and cash flow by using charts, formulas. Importance of Microsoft Excel in Business
Calculator and credit books are important but they don’t help you to understand the growth, management and operating expenses of your business. That’s why when you use proper business financial management software, online tools for accounting then it will help you to understand what things need improvement and where you’re getting the loss.
- If you’re doing IT-related business and you found the cost of employee management is higher than productivity then you can try to remote staff, freelancers and you can outsource the work. It will be hard in the beginning to find the right talent and experts but within 2-3 months you will get the results about how remote staff can be so beneficial for you to decrease the operating expenses.
Other online tools/technologies and platforms that you can use to reduce operating expenses:
- Video conferencing for the meeting and updates.
- Chat support and Chatbots in the website
- Blogging on the website How to use a blog to promote your business online
- Website for selling products and getting demands. Importance of a website for small business
4. Invest in innovation and creativity:
Innovation and creativity are important to grow the business. It brings new ideas, new business processes, customer support, business models and more customers and leadership in business.
It’s important to update and innovate when you fund to decrease the operating expenses.
For example, if you’re paying subscription fees $1000 + subscription fees per month to use the accounting, designing, marketing, cloud storage or any kind of software then you can think or invest in creating your own custom software or buying a server.
In the long term, it will reduce costs.
There are many businesses that buy the building or shop space before they start the business so that they don’t need to pay the rent. And instead of paying a rent they pay loan installment. In that way, they start creating assets from the beginning. That way the control the cost. And use that money to buy more stock at a low price and they will become able to sell it at a lower price for the customers than their competitors.
Many are master in this kind of techniques. They take the calculated risks, creativity, and utilize the available sources and personal network.
Learn more: Importance of Innovation in Business
5. Cheap machinery versus costly:
The people who have more funds and investment they able to control the expenses more than those who have fewer funds. It happens in two ways.
Business owners who have fewer funds will buy cheap technologies, tools, and services. They just want to start production as soon as possible and they want to generate profit faster. But this doesn’t happen very often. The risk is that if they don’t become profitable within 3 months or 6 months then their machinery or technologies or tool can start creating problems. In that way, they have to reinvest again on the same tools and sources. In the beginning they able to control the expenses. The risk is if they haven’t executed their plan well, then they will not be able to save money or not able to control cost.
The second business owners invest in high-quality technologies, tools, sources, teams, trainers, and consultants from the beginning. They try to negotiate the prices.
It means they buy premium services and products, but they buy them fewer prices. And due to good quality tools, they will generate more profit, they will higher speed in the production and they will be always in the position to control the operating expenses.
Similarly, the team, office space, marketing and location also play a crucial role. You can compare the output based on the initial cost. And if you’re in a good financial position then you can invest in premium things to reduce the operating expenses long term and gain more profit.