Every startup in the country has been prompted by COVID-19 to carefully review the accounting books. What is going on with profits? What is going on with expenses?

Businesses that have survived in the current conditions have been known for their adaptability, and startups are looking for various ways to cut costs and boost earnings.

Even while you might not have much influence over growing your sales, you can still boost your profitability by drastically reducing your operating expenses. Your running costs will increase as you expand, which means you'll be losing more of cash flow. By reducing your operating expenses, you can increase your profit margins and cash flows and continue to be successful in a downturn situations.

What is Operating Cost?

Operating costs are the total of all the expenses you incurred to manage your startup. A startup must have low operating costs relative to revenue in order to be profitable. Ask yourself what is required to keep your startup running?

Payroll, inventory, insurance, bills, and other expenses are all part of your running costs. You can figure this out by adding your cost of goods sold by your operational expenses (COGS).

Operating costs = Operating expenses + COGS

What are Operating Expenses?

The maintenance and administrative expenditures of running the startup on a daily basis are referred to as operating expenses or OPEX. These are the "additional" costs that are incurred for operating but are not directly related to your product or service.

Examples of operating expenses include:

• Payroll for staff
• Insurance
• License fees
• Rent
• Research
• Marketing (including for social channels like Facebook)
• Accounting fees
• Building maintenance and repairs
• Office supplies
• Utilities
• Legal fees
• Property taxes on real estate
• Vehicle expenses
• Travel expenses
• Overhead costs

What is Cost of Goods Sold

All of the costs incurred in the production of your products or service are included in the cost of goods sold (COGS). In order to manufacture and market your product, you may need to pay for supplies, production, labor, packaging, storage, equipment, and other costs.

What is Operating Income

Operating income is crucial piece of data for your startup. A measurement of operating income reveals how much money you are actually making after covering operating expenses. Operating income is only a figure that varies greatly from company to company, but it can be a reliable predictor of growth or decline over time.

Operating income = Total revenue – operating cost

What is Operating Expenses

Your operating expense ratio is a more beneficial figure that might be shared with your board or potential investors. The operational expense ratio is a useful gauge of financial health and may show you how you stack up against competitors in your sector. Your company is more efficient the smaller the ratio.

Operating expense ratio = Operating cost/revenue

8 ways to Reduce Operating Costs and Expenses for your business

Startup Founders may have more success focusing on lowering their operational costs than they do on boosting sales and maximizing income, which is what many business owners do in order to improve their profit ratios. You might see that your running expenses aren't at healthy levels after calculating your operating costs and operating expense ratio.

Cost reduction is a viable and practical option. All startup founders should evaluate their operational costs objectively and look for areas where they may make savings without compromising quality or over taxing their staff. We're providing a range of suggestions for reducing running expenses so you can achieve greater financial success in the short and long terms.

1. Normalize Remote Work

Due of COVID-19 constraints, a lot of businesses have switched to entirely remote workforces. Even though the transition to full-time WFH was not without its challenges at first, roughly 43% of full-time workers say they plan to continue working from home after the economy has recovered.

There are numerous cost-saving advantages of facilitating employee remote work, particularly for your overhead. It may be worth your future investment to set up staff with remote workspaces that maximize productivity if you haven't already done so. As a strategy to reduce costs, you may also take into account the possibility of leasing or selling extra office space.

2. Save Money on Insurance

It could be time to review your benefits package for some cost reductions if you're trying to cut back on your spending. Even while you still want to ensure that your insurance options are competitive, try to minimize prices if you can.

Look for packages that include several services (such as dentistry and vision) under a single coverage. Make sure you shop around with many insurance brokers to find the best prices for your particular business needs; keep in mind that brokers can gain commissions on insurance sales, so they may not all be motivated to give you a deal.

3. Consider a 4/5-Day Work Week

Even if the advantages of a four or five-day workweek for mental health are becoming recognized, working less hours has major financial advantages.

By switching to a four-day workweek, 20% of variable overhead costs are automatically eliminated, resulting in annual savings of thousands on things like power, office supplies, and even housekeeping. Additionally, this can lessen the need for ancillary benefits like office meals, snacks, and even commuting expenses.

Additionally, businesses like Microsoft have reported a 40% increase in productivity as a result of converting to a four-day workweek. A shortened workweek would be well worth your attention given the lower overhead and happy workers.

4. Work Smarter with Technology

Using technology can be uncomfortable at first and even expensive up front, but over time it can help you save money. Online tools and programmes can boost productivity and free up time for workers at all levels of your company. Artificial intelligence (AI) can handle data more quickly and reduce human error. Additionally, technology can enhance communication within your company and throughout the whole supply chain of your firm.

5. Outsource

As a startup owner, you could feel overworked. This can be particularly true for start-up companies, which need to optimize every employee's productivity to reduce initial costs. It can be tempting to try to juggle all of the different hats on your own or to over-work your employees, but you might find that you're wasting a tonne of time by having in experienced people handle specialized duties.

Professional work delegation or contracting out may actually result in a large decrease in operating expenses and an increase in revenue. Advertising, Marketing, Financial advice, Legal issues, and other specialized areas, outsourcing to professionals can produce far more effective outcomes and free up working hours to be dedicated to significant advancement. Additionally, you might discover that hiring a full-time accountant or lawyer is unnecessary and that you can save money by outsourcing that work for less hours. It's not always the best response, but it's something to think about.

6. Negotiate

Too many business owners discover years later that they have been paying too much for goods or services. Reduce the prices you spend for goods and services as a smart and quick way to lower your operating expenses. A workflow could be established that includes receiving estimates from various vendors for each job. You might be able to bargain for cheaper costs in exchange for exclusivity, loyalty, volume purchases, or joint purchases with other small businesses. Get inventive and don't be scared to look for fresher, less expensive options.

7. Set Up Payment System

Of course you are aware of the costs and issues associated with late payments. In addition to incurring costly fees, paying invoices or lenders late might harm your business' credit. To prevent this, set up automatic payments, and see if making early payments will help you save money. Early payment discounts of up to 5% are sometimes offered on invoices, and extra or early payments on loans and debt can reduce the total amount of interest you'll have to pay over time.

8. Identify Inefficiencies

Nobody wants to believe that their business is full of inefficiencies, but that is the unfortunate reality of how human operations work. When examined closely, almost every organization can discover flaws that were previously ignored. Whether they are merely tiny time wasters or serious fraud instances, inefficiencies cost money. When was the last time you made a list of all of your recurring (but unused) subscriptions? Do you squander man hours on jobs that are redundant or repetitive? It has an impact on your revenue.

Your current processes and procedures can be made more precise to reduce costly mistakes and give your staff more time to work productively.

Increasing cash flow

If reducing your operating costs and expenses is proving challenging or you just want to make financial progress more quickly, you can also focus on some tactics that will boost your cash flow from sources other than debt. By increasing revenue, you can naturally reduce the amount that goes to operating expenses and preserve a sound capital structure. Try a handful of these strategies to increase revenue for your company:

• Price increases, especially for popular goods and services
• Bill clients more rapidly
• Reduce payment deadlines and pursue unpaid invoices
• Use a business credit line.
• Improved marketing will attract new clients.
• Renting or selling any unneeded property or equipment

About Jordensky

At Jordensky, we are committed to providing an experience of the highest caliber while specializing in accounting, taxes, MIS, and CFO services for startups and expanding businesses.

When you work with Jordensky, you get a team of finance experts who take the finance work off your plate– ”so you can focus on your business.