Are your ballooning operating costs threatening to kill your business?

You need to act fast! Many small businesses fail because they run into cash flow challenges. High operating costs increase the likelihood of a cash crunch, especially if there’s a decline in your revenues.

As a business owner, it’s your responsibility to ensure your enterprise is living within its means. When business overhead costs are high, your profit margin reduces and can even result in big financial losses.

Fortunately, there are several strategies you can implement to reduce costs without harming the operational efficiency of your business.

Let’s dig in.

1. Identify Your Biggest Expenses

Every business has big expenses. More often than not, an increase in the cost of big-ticket items can put a lot of pressure on your business finances, assuming revenue doesn’t increase at the same rate.

As such, start by establishing where most of the money is going. The cost of labor (employee compensation) is usually the biggest expense, followed by rent, and debt repayments. If you’re a manufacturing plant, the cost of electricity will be one of your biggest expenses as well.

Once you have a clear picture of your biggest expenses, it’s easier to make a decision that can significantly lower your overall operating costs. For example, it’s not uncommon for businesses to lay off employees when they’re looking to reduce operating costs.

If office rent is gobbling up most of your income, perhaps moving to cheaper premises can solve the problem of rising overhead costs.

However, such moves can negatively affect your operations. Ideally, you want to focus on implementing cost-reduction measures that don’t result in a business reduction.

2. Hire a Small Business Bookkeeper/Accountant

If you’re anything like 64 percent of small business owners, you’re handling business finances on your own. So you’re probably wondering why we’re advising you to hire a bookkeeper, a move which will add to your current operating costs.

Well, hear us out! In the short term, hiring a professional to manage your finances will increase your expenses, but in the long term, your costs could come down significantly.

You see, most business owners who wear the financial hat lack the skills to manage their business’ finances properly. As a result, they’re prone to making decisions that turn out to be costly.

For example, an owner whose business is experiencing a revenue boom after a successful marketing campaign can decide to move into a bigger commercial space, not factoring in the possibility that revenues could return to normal after a few weeks.

With an accountant on your team, you’ll someone to keep track of the business’s finances. They’ll also advise you on the financial implications of every big decision you want to make. This will go a long way in helping the business keep overhead costs within a healthy range.

3. Explore Your Remote Work Options

Although the COVID-19 pandemic accelerated the adoption of remote work, this model offers big business benefits. In fact, it can be an effective way to reduce your operating expenses.

If you run a business that operates exclusively online (such as a SaaS business), it’s possible to go fully remote. This means you can eliminate the cost of maintaining an office space from your budget. If you’re worried about your company losing its professional image because it will no longer have a physical address, a virtual address will solve that problem.

Even if your business is brick-and-mortar, you can enjoy the cost-cutting power of remote work by allowing some of your employees to work from home permanently. With a reduced on-site staff, you can move to a small office and reduce your renting/leasing cost.

4. Outsource Some Services

Outsourcing is the process of hiring a third party to perform a function that could otherwise be done in-house. It means you won’t need to maintain an in-house staff to perform that function. For example, if you fully outsource your marketing to an agency, you won’t need to have any marketing employees on your payroll.

Outsourcing is typically cheaper than having an employee. Besides saving on the direct expenses that come with having an employee (such as salary and workers’ comp insurance), you’ll also save on indirect costs, such as office supplies.

Try to outsource as many administrative functions as possible, and make the most of technology where applicable. If you have a small team, for example, payroll software can take care of all your payroll needs.

5. Use Spend Management Software

Most people struggle to control their personal expenditures. It’s no different for business owners. There’s always a new time that needs to be purchased, a bill that needs to be settled, and before you know it, the money is gone.

You can use spend management software to control your business expenses. You can, for instance, set a daily or monthly spending limit. This will help reduce wastage and keep the business on a budget.

Along with using spend management software, limit the number of people who’re allowed to make purchases on behalf of the business. If everyone is free to use the company credit card, it’s only a matter of time before things get out of hand.

Keep Operating Costs Low

As long as a business exists, it will always have operating costs. And as a business grows, so do its costs.

Business owners must ensure these costs don’t spiral out of control. These strategies will help you rein in your business spending.

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