Operating costs refer to all the necessary business expenses that keep your company afloat, including employee salaries, outsourced manufacturing, materials sourcing, and shipping. Your business’ operating costs will overlap with those of others, but you will likely have some unique to your company and current situation.
While all operating costs are important to keep a close eye on, there are key areas that can influence how your business runs. Keep your business firing on all cylinders by fine-tuning the expenses mentioned in this article.
The Importance of Operating Costs Management
First, you must understand why it’s crucial to manage operating costs. Staying financially resilient means managing costs in a way that allows for discrepancies and optimizes for maximum profit. Uncertain markets, unexpected costs, hidden fees, and improperly managed finances can derail a business quickly.
If your operating costs are too high and outweigh your sales, this can result in a lower net profit — or even a net loss. Luckily, proper management can prevent this. Awareness of your business expenses can give you a leg up on competitors by allowing you to make informed financial decisions, like adjusting pricing or investing in new technology. If done correctly, effective management allows your business to streamline operations and budget forecast efficiently, considering all expenses.
Actual vs. Standard Costing
Choosing a costing method directly shapes how you manage your business finances. While standard costing involves guesstimation based on historical data and predicted costs, actual costing uses tracked data.
Operating costs are fixed, variable, and semi-variable, meaning they never change, change often, or change unpredictably. For example, fixed operating costs include items like:
- Accounting and legal fees;
- Banking;
- Costs of goods sold (COGS);
- Licensing and insurance;
- Property lease or rent;
- Taxes.
These fixed costs are easier to predict and maintain. However, variable and semi-variable operating costs can change with the amount of goods sold. Further, costs can change based on company behavior. This is where operations management comes in. Learn how to effectively manage operating costs and safeguard the future of your business by honing in on the following areas.
1. Labor
Costs of labor include many different factors from recruitment to benefits. For internal employees, you have to factor in wages, training, payroll taxes, benefits, hiring, onboarding, equipment, and human resources. This can be affected by several factors, such as absenteeism, attrition, and hourly pay that goes up during peak seasons.
To manage these costs effectively, consider:
- Strategic scheduling;
- Cross-training staff;
- Forecasting labor demand;
- Hiring quality professionals;
- Investing in employee development;
- Boosting morale;
- Automating menial tasks;
- Outsourcing certain tasks.
The main goals are to hire the right number of employees, schedule them accurately with demand, and treat them fairly to reduce turnover rates. If you can automate certain manual tasks and processes, this can also save on labor costs. Non-core functions that can be outsourced include IT support, payroll processing, manufacturing, and customer service. It’s often more cost-effective to outsource these roles, as long as you work with reliable partners, or invest in automation software that can make your business life easier.
2. Maintenance
Buildings, vehicles, and equipment all incur maintenance and repair costs. If you find that you are spending too much in this category, consider:
- Investing in upgrades;
- Training employees on proper use;
- Performing preventative maintenance;
- Conducting regular safety inspections;
- Storing vehicles and equipment properly.
These practices can increase the longevity of equipment, prevent injury, and optimize production, delivery, and building efficiency.
3. Marketing
There are increasingly accessible options for business marketing. You can cut down on marketing costs by streamlining some aspects. For instance, look to your analytics and eliminate ineffective marketing channels or tactics. Several aspects of marketing can also be automated, such as social posting with software that can even tell you the best times for optimal performance on each platform. These two easy changes can save you time and money that can be used elsewhere like working on SEO or pushing social media ads. Marketing operations can thrive on low-cost yet effective techniques. Analyze how well campaigns perform and adjust as needed.
4. Materials and Inventory
If you source materials to manufacture goods, this can be a significant expenditure. Even if you just manage inventory, there are ways to reduce wastage and maintain accurate stock levels for reduced spending. Consider:
- Purchasing repurposed materials;
- Upcycling;
- Forecasting demand;
- Using inventory management systems (IMS);
- Leveraging tech for real-time stock updates;
- Adopting just-in-time principles;
- Monitoring market trends and demand patterns.
Knowing exactly when to replenish inventory can prevent overstock and reduce carrying costs. Internet of Things (IoT) tech like inventory sensors can provide insight into current stock levels and prevent missteps. All of this plus sourcing lower-cost, quality materials and goods can enhance the cost-effectiveness of your product operations.
5. Shipping and Logistics
Your business’ supply chain processes can also be optimized for cost savings. Shipping and logistics include everything from receiving supplier products to delivering products to consumers. If you have your own fleet, you can optimize your routes and choose energy-efficient, newer vehicles that require less fuel and maintenance. If you outsource, you can work with shipment companies that are committed to reducing transportation expenses and freight rates. Further, opt for local sourcing to cut down on shipping distances.
You can also consider leveraging third-party logistics providers for specialized services. Continuous evaluation and adjustment of logistics strategies based on evolving market conditions and supply chain automation are essential for sustained cost optimization in the dynamic realm of shipping and logistics.
6. Technology
The tech you integrate into your business and in your workplace can be both a significant cost and cost-saving investment. When auditing your tech suite, consider eliminating any unused or ineffective tech. Also, check for upgrades and, if necessary, make changes to other tech that is better at streamlining your unique processes.
Business process management systems are a good example of tech that incurs an upfront investment but saves money in the long run by optimizing business operations. Generally speaking, any tech tool that offers you insight into how to streamline operations is a win-win investment. Just make sure to keep tech updated to prevent costly issues like cyberattacks.
7. Travel and Transportation
Business travel is a costly venture. Flying employees to tradeshows and training workshops can increase your bottom line eventually, but you have to keep tabs on the return on your investment. With the advent of remote workshops and online networking, it may be more cost-effective to have staff attend virtually.
Further, the rise of remote and hybrid work can help you cut down on transportation costs. If you are reimbursing employees for commutes and travel, you can get rid of this expense by offering flexible schedules and work-from-home policies.
8. Utilities
Adopting remote work can also help you save on utilities. Utilities like electricity and water can rack up and add to your operating costs. Using tech to track utility usage can give you insight into where to cut back. Some tools can even automatically adjust things like temperature and lighting to save money and reduce waste.
Saving Money Moving Forward
Continuous monitoring and analysis of business operational performance is a key. When you integrate new tech or strategies, you should follow up and track the cost difference. Also, check in with employees to ensure satisfaction. With automation tools like the Comidor platform and insight into your spending, you can drastically change your day-to-day operations and reduce operations costs for a more fruitful, resilient business year after year.
