Reduce operating costs with 17 effective but simple tips

When looking at documents like the balance sheet and income statement, you may come across accounting terms that you’re unfamiliar with. Because these terms relate to your company’s financial health, understanding them is vital.

One term that’s incredibly relevant to business owners is “operating costs.” In fact, a recent Intuit QuickBooks survey found that 48% of small businesses reported cost increases in 2024, highlighting the ongoing challenge of managing expenses. 

In this article, we’ll provide a concise overview of operating expenses, plus outline 17 things you can do to lower costs and increase your bottom line.

Jump to:

• What are operating costs?
• How to calculate your operating cost
• 17 ways to cut operating costs
• Take control of your business finances

What are operating costs?

Operating costs are any expenses that your business requires for the day-to-day maintenance and administration. 

• Also known as: Commonly referred to as “overhead,” these essential business costs include electricity, employee payroll, and office leases. 
• Importance: Continually analyzing operating expenses allows businesses to trim unnecessary spending and lower costs. By reducing this overhead you can improve your profitability.

One of the primary components of operating costs is the cost of goods sold (COGS). COGS are the direct costs related to producing your business’s goods or services. 

Operating expenses also include things like:

• Labor costs, such as payroll
• Employee health insurance, pensions, and other benefits
• Sales commissions
• Asset depreciation
• Amortization
• Maintenance costs

What does reduce operating costs mean?

Reducing operating costs means actively lowering your business's ongoing expenses for its day-to-day operations. This can include reducing the cost of things like rent, utilities, and administrative software to increase your profit margins without increasing sales.

How to calculate your operating cost

Below are the two most important data points you can obtain through operating costs: operating income and operating expense ratio.

Operating income

Operating income is the total profit associated with your company’s operations. The formula to calculate operating income is:

Operating Income = Total Revenues - Operating Costs

Example: A company earned $552,000 in revenue last year and has $100,000 in operational expenses. The operating income for the year would be $452,000.

Those results may not be ideal for a Fortune 500 company, but if you’re an entrepreneur who just opened your company last year, you’re probably jumping for joy. 

A good operating income is relative and doesn’t necessarily give a strong indication of financial health due to the scale of different businesses.

Operating expense ratio

The operating expense ratio, on the other hand, does indicate financial health. By measuring efficiency as a percentage, it’s easier to compare yourself to others in your industry, no matter how big or small your business is.

Operating expense ratios (OER) directly compare your expenses to your income, allowing you to track your efficiency. The equation for OER is:

Operating Expense Ratio = Operating Costs ÷ Total Revenues

Based on our example above, we would come up with:

OER = $100,000 ÷ $552,000 = .1812 × 100 = 18.12%

Operating expense ratios can vary by industry. 

For instance, banks have low operating expense ratios, sometimes as little as 0%. Others, like the building materials industry, have OERs as high as 73%. 

You should pay closer attention to how you rank within your industry. If you find ways to meet or beat the industry average, that can be a great indicator of success.

17 ways to cut operating costs

Improving your operating costs means putting yourself ahead of your competition. Small business owners should always be looking for ways to reduce their expenses without sacrificing the quality of their product or service.

What are the best ways to reduce your company’s operating costs? See 17 ideas that can help you reduce the operating costs of your business and potentially generate more revenue:

1. Automate time-consuming tasks
2. Outsource for extra efficiency
3. Find a freelancer
4. Integrate an internship
5. Entertain different vendor bids
6. Ditch your office building
7. Pay your bills in advance
8. Put wasteful habits to rest
9. Pull the plug on unused services
10. Use free apps whenever possible
11. Go paperless
12. Think eco-friendly and save 
13. Use bartering instead of cash
14. Slash your travel budget
15. Implement a negotiation system
16. Use AI wherever possible 
17. Establish a cost-conscious culture

We’ll cover each of these tips in-depth below.

1. Automate time-consuming tasks

There are dozens of online systems and software programs that can automate and streamline the day-to-day functions of a small business. These systems can cover a variety of tasks, including accounting, website hosting, marketing communications, payroll, invoicing, and more.

Technology is useful because it can help reduce operating costs in areas such as direct labor. Robots and computer programs can perform repetitive work faster than humans and with fewer errors. With innovations like Intuit Assist, AI-powered tools are now directly helping businesses minimize administrative overhead and improve financial management. 

To choose the right program or service, ask yourself the following questions:

• What aspects of my business am I highly skilled at and don’t require any automation? (E.g., if you have a background in design, you wouldn’t need software to help you with graphic design.)
• What tasks do I find myself spending an excessive amount of time on every week?
• If I could remove one of my most repetitive, time-consuming tasks, what would it be?

Answers to these questions will highlight which aspects of your business you should automate with software. 

5. Entertain different vendor bids

If you work with vendors regularly, you might want to set up a bidding system for projects and work. If you ask three different vendors to provide quotes, you can have them compete to see who is willing to work for you at the cheapest price.

Be sure to compile an accurate scope of work or request for proposal (RFP) for vendors to bid on, as missing information or added complexity can significantly affect the quoted rate. Having an accurate quote can allow you to better plan for anticipated operating expenses. 

6. Ditch your office building

Leasing office space, paying your utility bills, and managing a physical workspace can drain your financial resources. Thousands of companies have gotten rid of their office space and are fully remote. Allowing staff to work from home allows businesses to reduce their physical footprint and lower operating costs.

Telecommuting is on the rise across the United States. In 2005, only 1.8 million US employees said that they telecommuted for half the week. In 2015, that number had grown to 3.9 million—and by 2023, that number reached 22.5 million. That's 13.8% of the entire U.S. workforce.

With the amount of connectivity available today, the difference between an employee working two cubicles away or working two states away is almost indiscernible. Employees will typically also find working from home advantageous, as they don’t have to spend time and money commuting to the office each day.

7. Pay your bills in advance

Many vendors will offer a discount if you pay your invoice early. Even a savings of 2%-3% per billing cycle can really add up. Let’s say your annual operating costs are $100,000. If you take advantage of paying invoices early and save 2%, you would end up cutting your costs by $2,000 a year.

At the very least, make sure to pay invoices quickly to avoid any late fees or other penalties. The same goes for loans or any other debt you’ve taken out. Your interest expenses can increase if you’re late or begin to miss payments.

8. Put wasteful habits to rest

You should always be looking for ways to make your business more efficient. By tightening up your processes and procedures, you can reduce waste in both materials and time. For example, if you run a bakery and throw out dozens of bagels and donuts every night, adjust your baking process to reduce waste. 

Here are some ways to decrease waste:

• Encourage your employees to point out inefficiencies and suggest solutions to the problem. 
• Consider providing an incentive for employees who alert you to money-wasting practices within your business. 

Again, you can consider this an investment in your company. A small reward to an employee could save you thousands of dollars down the line.

9. Pull the plug on unused services

Sometimes a subscription service just isn’t as useful as we thought it would be. SaaS companies make millions of dollars a year from apps that companies sign up for but never use. 

Here are some ways to tighten your belt:

• Check with your team to see if they actually use the services you’re paying for every month. 
• Consider downgrading to the free version or canceling them altogether if they’re idle and/or no one finds them essential in their work.

It’s easy to lose track of unused services, especially if you’ve set them up for recurring payments via auto-pay on your credit card. If you find a service ou like but don’t use all of the features, try shopping around to see if cheaper alternatives are available.

Auditing small recurring costs isn’t a one-time task. It should be done regularly to cut costs and keep your organization lean. Set up a quarterly or biannual reminder to check for unneeded services that you can get rid of. 

10. Use free apps whenever possible

Many apps follow the “freemium” model—you can use the base model of the program for free, but you have to pay to get access to additional features. But sometimes, those more sophisticated features never get used, and the company has wasted operational expenses for nothing. 

Example: Gmail is free, but you can pay to increase your storage. There’s no need to buy every employee the paid version of Gmail if you don’t really need it. 

Have your team try out the free version of an app and see how well it suits their needs. If it becomes indispensable, there may be plans available that make it more cost-effective.

11. Go paperless

Another way to save money is to go paperless. Have you ever walked by the office printer to find 25 copies of a document that someone accidentally printed out and then left behind? Do you really need to print a dozen color copies of the annual report for a meeting where everyone can see the report on a giant screen anyway?

Like typewriters, landlines, and fax machines, the office printer is quickly becoming a relic from a bygone era of business. However, business owners still often ignore printing costs because they consider them unavoidable. 

Printing everything from internal documents to catalogs and flyers increases your company’s operating expenses. Encourage employees to print out documents only when absolutely necessary, and if you have to print an expensive glossy catalog, order a batch small enough that there won’t be any sitting in the recycling bin.

12. Think eco-friendly and save

In addition to a paper-free business, there are many other ways to make a positive impact on your budget and the environment. If you have an office space, consider making it as green as possible. 

To reduce energy usage, replace regular light bulbs with compact fluorescent lighting, look to lower heating and cooling costs by improving your insulation and windows, and cut back on the amount of physical waste. 

If you have several workstations that are unused, unplug the devices in it to reduce electricity consumption. Not only will you save on utility costs, you’ll save on your monthly office supply costs as well.

13. Use bartering instead of cash

An often overlooked way to reduce business overhead is to barter. After all, why pay cash for something when you can trade for it? Take a look at the businesses you already work with and see if there’s a product or service you offer that you could trade for. 

If you’re already contracted with a carpet cleaning company, ask them if they’d like you to manage their marketing in exchange for monthly cleanings. If there’s a great food truck in your neighborhood and your company prints uniforms, ask the owner if you can print up a set of new uniforms for their staff in exchange for catered lunches. 

There are a lot of creative ways you can trade your services to get the things your business needs without having to spend any extra money. 

14. Slash your travel budget

Many businesses have already drastically reduced their business travel, and that trend may become more popular in the near future. The widespread adoption of video conferencing has shown that business can be conducted around the globe without ever having to set foot on an airplane. 

Hotel costs, delayed flights, missed connections, along with rescheduling fees, can add up quickly, making that in-person sales pitch all the more costly. While you can often write off travel expenses, there are many that you can’t write off.

Take a hard look at your business travel budget and decide which trips need to be done face-to-face and which can be done virtually. Reducing travel lowers your operational expenses and is better for the environment, too.

15. Implement a negotiation system

Create a system for negotiating every single expense your business incurs. It shouldn't just be an option—bake negotiation into your process. After all, if you can get a better price, shouldn't you go for it? 

Here are some ways you can add negotiation to your existing processes: