Understanding your financial statements is crucial in order to improve your firm’s fiscal health. Business owners should be very familiar with the term, “operating costs.” Keep reading to learn what they are and how they affect your business.
What are operating costs?
Operating costs are the costs that are required for daily maintenance and administration of your business. Operating expenses include these items listed below:
- Office Supplies
- Professional Fees
- Maintenance costs
What does this tell you?
Understanding your operating costs allows you to find many other important figures and ratios.
The operating income is the total profit after deducting your Cost of Goods Sold and Operating Costs. The formula to find the operating income is as follows: Operating Income = Total Revenues – Cost of Goods Sold and Operating Expenses.
The Operating Expense Ratio compares your expenses to your income and is a great indicator of efficiency. The formula for the Operating Expense Ratio or OER is as follows: Operating Expense Ratio = (Operating Costs + COGS) / Revenue
4 Ways to Reduce Operating Costs
Business owners should always be on the lookout for ways to reduce their operating costs. It’s not always easy to do this without sacrificing the quality of your product or service. Below are four ideas that you can use to reduce your operating costs to generate more income.
1. Improve Technology
There are plenty of services online that can automate your business functions. These services cover many areas of operation, including marketing, website hosting, accounting, and more. Technology like AI works faster than humans and has fewer errors. Using technology in supply chain processes could also reduce costs, like shipping. Improving your technology usage promotes efficiency, which results in a reduction in operating expenses.
Another option to improve efficiency and reduce operating expenses is to outsource some of your business practices to a third-party. If you don’t have a background in real estate or tax law, it may be challenging for you to find ways to reduce your lease payments or property taxes. Outsourcing this task to an expert could help.
Many entrepreneurs find that they spend a large amount of time on marketing and advertising, but they do not see a high return. They don’t have enough time or expertise to create a successful marketing campaign. It may seem like hiring a third-party will result in spending more money, but in the long run, delegating certain tasks to experts will save you money and generate even better results. Outsourcing operations is an investment that pays over time.
3. Transition to Full-time Remote Work
Consider allowing your team to work from home as a way to reduce costs. Leasing office space, paying utilities, and managing a physical office can drain your financial resources.
Due to Covid-19, many offices were forced to close, and millions of employees now work from home. While this transition was not part of the plan for most businesses, they have adapted well. The amount of connectivity and technology available today creates a minor difference between an employee working in an office and working at home. Employees will typically also find this beneficial, as they can decrease their own expenses.
4. Cancel Unused Services
It’s easy to lose track of all your services, especially if they’re set up on autopay. Keep an organized list of all the paid services or subscriptions your business uses. Regularly identify services that you haven’t used in a couple of months. If you have a service that you want to keep, try looking around for a cheaper alternative. If this is not the case, consider canceling them completely. They’re not improving your operating income if you aren’t using them.
Take Control of your Finances
Understanding things like operating costs is going to become more and more important as you grow your business. When you understand where your costs are coming from, you can use the 4 suggestions above to start lowering your operating costs and increasing profits.