Manage your business finances with Wave—it's free.
Send invoices, get paid, track expenses, pay your team, and balance your books with our free financial management software.Get started
How to cut operating expenses to free up cash flow
Your financial health and current market conditions can make or break your small business. According to the Small Business Association (SBA), 20% of all new ventures will fail within the first year. What’s more, business mentorship platform SCORE reports that 82% fail because of cash flow problems.
But your company doesn’t have to be another statistic. Instead, you can curb many cash flow issues with one tactic: cutting your business’ operating expenses.
Here, we’ll help you educate yourself on this challenging topic, including, defining what are operating expenses, what they mean for your cash flow, and why this matters for your growing business.
What are operating expenses?
Your operating expenses) are simply the cost of running your business minus any capital expenses, like a large, one-time purchase. But what are operating expenses you’d typically incur as a small business? Here are some common examples of operating expenses:
- Office supplies
- Advertising and marketing costs
- Rent and utilities for your office
- Insurance costs
- Payroll for your employees
- Legal fees
- Costs for business travel
On the other hand, a capital expense could be buying equipment like a new computer or furniture for a new office. These expenses aren’t recurring, so they don’t count toward your operating expenses.
To be successful, experts say your operating expenses should be between 60-80% of your gross income.
To get a sense of how much it costs to run your business, start by tracking your operating expenses using the following simple steps:
- Look several months back and identify any recurring costs.
- Group your expenses into categories based on their business function. For costs that might change every month, like payroll for part-time employees, come up with an average based on your spending over several months.
- Add all this up to determine your monthly operating expenses.
To use this data to determine the financial health of your business, use a cash flow projection. A cash flow projection will help you determine if your operating expenses are higher than your expected revenue. If they are, you need to cut costs.
4 tips to help you cut operating expenses
Here are four ways to free up more cash for your business, reducing operating expenses without sacrificing quality.
Rethink your workspace
Your largest operating expense will likely be your rent for your office. A good rule of thumb for retailers is to aim to pay anywhere between 5-10% of their gross income on rent. If your monthly rent is more then it might be worth investigating a less costly location.
Whether you have a retail location or an office, sometimes a small space can save on costs while still allowing you to get the job done. If your business allows for it, encourage employees to work remotely or investigate co-working spaces as a cost-saving option. If you don’t have employees, you can try setting up a home office rather than shelling out your hard-earned dollars for an office.
Weigh the costs and benefits of an office or physical space for your specific business. Cutting rent and associated costs from your budget can free up your cash flow to reinvest in growing your business.
Reduce marketing costs with free forms of advertising
Another common operating expense you can potentially cut is marketing costs. The SBA recommends you spend 2-3% of your expenses on run-rate marketing (for already-established companies) and 3-5% on marketing for a brand-new startup.
After tracking your operating expenses, calculate how much you’re currently spending on marketing efforts and see how that aligns with the above guidelines. If your marketing spend is high or there are ways to streamline your budget, you can reduce that spend if you focus on fewer mediums, and instead make the most of high-return and free marketing opportunities.
Rather than paying for billboards or print ads, for example, target your audience on social media. You can operate your accounts with no additional costs beyond man-hours while building a brand and organic traffic back to your site.
In addition, look into email marketing as a way to promote your brand and engage with customers. Current customers are your most valuable, so stay in touch with them. There will be an operating expense to create and send the emails, but this form of marketing also averages a return of $44 for every dollar you spend.
For more ideas on low-cost marketing tactics, check out our marketing starter kit for new businesses.
Outsource tasks to experts
Rather than spending significant time and money doing tasks yourself, delegate to an outside expert or managed service provider. You can outsource many types of tasks, from marketing/advertising to creative services to administrative activities. Freelancers or contractors can pick up the slack in a variety of areas to free up your time to grow your business (and your bottom line).
Ready to outsource some tasks to a contractor? Learn when and how to hire the right contractor for your business.
Another option to cut costs is to hire a managed service provider. Managed services providers (MSP) are third-party companies that help your business with anything from IT to staffing and printing. Typically, this MSP remotely manages tasks for a set price per month.
Outsourcing some of your key functions can help you set a consistent budget for operations, allowing you to reduce overall costs. For instance, a recent study found that 96% of businesses who used IT managed services ended up saving money.
Find tech-based solutions
Technology can also help you free up cash flow while also offering a wide range of other benefits, from automating processes to keeping paperwork organized. To free up some cash flow, consider where you can use technology to reduce your or your employees’ workloads or automate some tasks altogether.
For example, using a invoicing tool like Wave helps you DIY your own bookkeeping. Not only can you keep all your customer files, including address, emails, and overhead costs, all in one place, but you can easily send invoices, track expenses, and invite your employees to collaborate.
Make a list of potential tech-based solutions in multiple areas of your business, from shipping products to managing your marketing campaigns. Some tools may not only make your life easier but allow you to free up the cash you’d normally use to pay the person who’s currently doing that work.
To help you get started, here are a few tools we recommend for various areas of your business:
Shipping and Fulfillment
Cutting operating expenses doesn’t mean cutting people
The most important takeaway from each of these four strategies is that none of them force you to reduce your workforce to cut your costs. Use these methods to reduce your operating costs and get cash flow under control so you push past these growing pains.