Cut your operating costs

As businesses are facing significant cost increases across energy, staffing, materials and distribution, many are looking at ways to cut operating costs to protect margins and stay solvent.


6 min read

1. What are operating costs?

Operating costs are all the costs involved in running your business. They include:

  • Operating expenses - all the day-to-day costs such as insurance, premises, maintenance, professional fees, admin, travel, etc.
  • Cost of goods sold - all the costs involved in producing and selling your product or service, such as raw materials/ingredients, packaging, storage, equipment, staff, distribution, etc.

Wider implications of cost cutting

Before cutting costs, make sure you understand any implications of these cuts on sales, staff, service standards and cashflow. This will help you to avoid false economies which appear to save money but eventually lead to higher costs, wastage or reduced income. For example:

  • cutting marketing costs could impact future sales
  • reducing the cost of your raw materials may lower the quality of your product or service and impact your reputation
  • limiting your storage or opening hours may have a negative effect on customer service and your brand
  • overburdening staff can lead to a recruitment crisis
  • paying up front to secure a lower price may affect your cashflow, or increase storage costs if buying in bulk

In good times, businesses aim to balance short-term goals with the longer-term strategy. However, in a cost crisis, the focus will shift to survival which may require more significant action on costs.

2. Common areas for cost savings

All businesses need to avoid inefficiencies which can creep in over time from change or growth. There are often areas where businesses don’t realise money is being wasted and there may be opportunities for easy savings.

Taking a fresh look across the business could identify unnecessary costs as well as opportunities for more environmentally friendly approaches.

Energy use

There is increased focus on energy bills and more businesses are now far more conscious of energy efficiency practices such as:

  • using motion sensor lights or turning off lights and computers when leaving the premises
  • switching to energy-efficient lighting and equipment
  • using premises efficiently and not heating unoccupied space
  • using smart meters to show where you're using most energy
  • investing in fuel-efficient vehicles.

Rising energy costs affect industries in different ways and it’s not always possible to cut use as much as businesses would like. For example, hotels still have to keep unused rooms warm enough to prevent damp, and some manufacturers cannot simply switch off complex machinery for a few hours here and there. The growth in hybrid working has the potential to reduce heating costs for offices, but a new set-up may be required to avoid heating a whole building for a handful of staff working on a specific day.

Industry bodies may be able to provide advice for businesses in specific sectors. For general guidance about energy efficiency measures, available grants, and advice on keeping costs down visit Find Business Support.

Outsourcing v in-house resource

Whether it is more efficient to outsource or bring tasks in-house will change over time in different areas of the business.

For example, with advances in technology, you may be able to update and manage your website in-house.

Alternatively, some tasks that you currently do could be handled more efficiently by others, such as outsourcing order processing, warehousing and fulfilment to firms like DHL or Amazon, or using online contracting services such as Upwork for project work.

A good time to review this is often when staff move on or contracts come up for renewal.


It’s always worth checking any loans and overdrafts to ensure they are on the best terms for your current situation. When interest rates are rising, you may assume you cannot achieve a better deal. However, one benefit of inflation is that any assets which are financed may be increasing in value so better terms may be available for lower loan to value ratios.

Subscriptions, memberships and licences

It is easy to grow a legacy of underused (or even unused) subscriptions, memberships and licences, which collectively can amount to significant waste. Consider:

  • do all staff need to be able to access a specific system or can you limit it to just a few to reduce the number of licences you need?
  • are all your memberships still relevant if your business has changed?
  • is there open-source software you can now find free of charge instead?
  • do you have publications delivered that no one reads?

Leverage technology

You could save money by replacing in-house systems and office applications with online services and cloud computing, which also allows data to be automatically backed-up off site. As a result, you could eliminate expensive servers, software and back-up systems.

These options can create additional savings by making it easier for people to share information and work efficiently away from the office, and can even reduce the need for paper and associated printing costs

If you’ve not done so already, you could consider using:

  • an online accounting system to replace your PC-based system
  • an online customer relationship management system
  • web-based services such as Google Docs to manage emails and documents
  • cloud storage services such as Dropbox to store files
  • a cheaper, lower-end alternative to a complex IT system
  • electronic files and emails in place of paper and letters

Review suppliers and minimise waste

Keep your procurement costs in check by regularly reviewing your arrangements with suppliers to check you're getting the best pricing, especially if you are a long-term customer.

Avoid the trap of over-ordering office consumables such as stationery, and go paperless where you can to avoid unnecessary printing costs too.

Shop around for the best deals on everything from insurance to consumables. If you're a manufacturer, assess whether you can cut waste at any stages of your process and lower the costs of your materials by changing suppliers or negotiating deals.

Identify inefficiency

As your business evolves, for every process ask:

  • do we still need to do this?
  • if we do, can we do it in a better way?

This prevents precious staff time being spent in pointless meetings, grappling with outdated paperwork or technology, or doing repetitive work that could be automated.

3. Understand your expenditure

Busy business owners can become so caught up with the practical demands of delivering the product or service that cost reviews become less frequent.

Therefore, it’s important to block out time to regularly review costs and run periodic checks to ensure that you have accurate data about expenditure. Ensure you have systems in place to make that as easy as possible.

How to monitor and measure costs

To control your costs, once you understand where they arise in your business, you need to assess them against your budget. There are different ways to measure and monitor your costs:

  • Benchmarking - a benchmarking system helps track costs over time and against similar businesses.
  • Key performance indicators (KPIs) - KPIs enable you to objectively measure expenditure against budgets.
  • Activity-based costing - can help you determine the real cost of specific business activities by attributing proportions of all your costs (e.g. payroll, premises or raw materials) to specific business activities.

Cost control needs to be everyone's responsibility, so create a culture of cost awareness among your staff and management team.

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