Last editedJan 20233 min read
If you’re looking for ways to improve cash flow, one of the first places to look is your operating costs. How much is your business spending on day-to-day expenses like rent, payment collection, and utilities? These operating costs for a small business can quickly add up, but there are ways to reduce them. Here’s what you need to know about reducing operating costs without sacrificing the quality of your business output.
What are average operating costs for a small business?
The average operating costs for a small business will vary widely depending on your industry, size, and region. For example, an individual freelance designer will have very few operating costs in comparison to a manufacturing-based company.
Operating costs include any expenses incurred during the everyday running of a business. This includes things like:
Cost of goods sold (COGS)
Rent for office space
Sales and travel expenses
Cost of marketing
Payment processing fees
Five examples of operating costs for a small business
Here are a few of the most common examples of operating costs for a small business, as well as how to reduce each one.
1. Equipment and supplies
From electronic devices to office supplies and manufacturing equipment, most businesses must purchase goods and services from vendors. To reduce this type of expense, start by looking at what you’re currently paying. Shop around to find out if you can obtain the same goods and services for less, using this as a starting point for negotiation. Many vendors are willing to work with their customers to provide volume discounts for bulk orders, for example. You could also negotiate a discount for trading services or providing positive reviews online.
2. Office space
Many businesses pay monthly rent for office space, which is one of their biggest outgoings. However, leasing office space isn’t always necessary. The switch to remote working means you could potentially downsize or eliminate your office rentals altogether. Use cloud-based storage services, apps, and software to give your team access to important files from anywhere in the world. This not only reduces your rental payments, but also your utility bills.
3. Marketing costs
It’s important to get the word out about your business services, making marketing costs well worth the money. Yet some marketing strategies cost more than others. For example, social media marketing is relatively low in cost compared to traditional forms of advertising. It’s also more cost-effective because it lets you reach your target market based on buyer behavior and data. Rather than paying for a full-time in-house marketing team, consider enlisting freelancers for targeted campaigns at lower cost.
4. Payments and payment administration
Payment collection can be surprisingly expensive, making it a major operating cost for small businesses to budget for. Automating your accounting and payments process saves significantly on time and money. You’ll reduce human error, send automatic payment reminders to customers, and make the process far more efficient. Opting for payment methods like direct debit is also cheaper than credit card processing with all its associated fees.
5. Energy use
We’ve already mentioned that a remote workplace saves on the cost of office space, but there are additional ways to cut down on energy-related fees. You can replace older light bulbs with efficient LED lighting and improve your office insulation for reduced heating costs. Unplug workstations when they’re not in use and turn off lights when leaving the room. All these small changes add up to bigger savings in time.
How to estimate monthly operating costs for a small business
If you’re not sure how much you’re spending, it’s important to figure this out first. Here’s how to estimate monthly operating costs for a small business:
Add together all costs of labor, employee benefits, sales commissions, supplies, maintenance, and other standard everyday costs. Look at these from month to month to identify seasonal trends and help forecast future costs.
You can also calculate operating income by deducting your operating costs from total revenue. This shows the income associated with these daily operations, which is useful for making small changes. Take your industry into consideration for best results.
Reduce operating costs for a small business with automation
Outsourcing and automation go a long way when it comes to cutting down on operating costs for a small business. GoCardless helps automate the payment collections process using both Instant Bank Pay for one-off payments and direct debit for recurring payments. In fact, you can reduce payment-related operational costs by up to 56% simply by using GoCardless. It also integrates with over 300 partners, including top accounting software like QuickBooks and Xero. Streamlining your accounting and payments processes saves time and money, freeing your business to focus on producing revenue instead.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.