Operational cost refers to expenses associated with the maintenance and administration of business daily. Also known as operating cost, it includes operating and overhead expenses, as well as the cost of goods sold. The examples of common operating cost are rent, machinery, payroll services, utilities, uniforms and office supplies.

The operational cost meaning should not be confused with that of operating expense. Commonly known as OPEX, operating expense is an ongoing cost for running a product, business, or system and does not include the cost of goods sold such as materials and direct labour, or capital expenditures such as machines or buildings. Understanding your operational cost is significant because it allows you to derive many other relevant business figures and ratios. 

 

How to cut down operational cost?

Below ideas that can help you reduce the operating costs of your business and enable you to reduce overhead and generate more revenue.

Embrace technology

There are dozens of online systems and software programs that can automate and streamline small business functions. These systems can cover an array of areas of operation, including accounting, website hosting, marketing communications, payroll, and more.

Outsourcing

Another option to improve efficiency is to outsource certain business practices to a third-party specialist. For instance, if you don’t have a real estate or tax law background, you may find it challenging to pinpoint ways to reduce your lease payments or property taxes. Someone trained explicitly in this area could help.

 

Shop around for better rates

If you work with vendors regularly, you might want to set up a bidding system for projects and work. If you ask three different vendors to provide costs to you, then you pit them against one another to drive prices down.

 

Telecommute

Leasing office space, paying utility costs, and managing a physical office can be a drain on your financial resources. Consider allowing your team to telecommute as a way to reduce total costs.

Telecommuting is on the rise across the United States. In 2005, 1.8 million US employees said that they telecommuted for half the week. In 2015, that number had grown to 3.9 million, and it’s continued growing ever since.

 

Pay invoices early or on time

At the very least, make sure to pay your invoices on time to avoid any late fees or other penalties. The same goes for loans or any debt that you’ve taken out. Your interest expenses can increase if you’re late or begin to miss payments.

 

Identify inefficiencies

Encourage your employees to identify inefficiencies and suggest solutions to the problem. Consider providing an incentive to employees for doing so. Again, you can consider this an investment in your company. A small reward to an employee could end up saving you thousands of dollars.

 

Cancel unused services

Pore through your variable costs and identify services that you’re no longer using. If you haven’t used them in a couple of months, look for a cheaper plan or consider cancelling them altogether. If you’re not using them, then they’re not improving your operating income.

 

Go green

If you have an office space, consider making it as green as possible. To reduce energy usage, replace regular light bulbs with compact fluorescent lighting, look to lower heating and cooling costs by improving your insulation and windows, and cut back on the amount of physical waste. Not only will you save on utility costs, but you’ll also save on your monthly office supply costs as we

 

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