Reduce operational costs in 3 steps
Managing cash reserves and expenses is currently one of the most pressing challenges for businesses. Leaders are looking for ways to cut costs, save money, and streamline spending. If they haven’t already been affected by economic turbulence, then they’re preparing for the inevitable.
Unwieldy corporate spending is a silent and underrated menace that can quickly undermine your company’s financial goals. Of course, you need to spend money to keep the business going. But if employees are spending company money willy-nilly, you might be in trouble.
Luckily, we’re here to discuss ways your company can reduce operational costs. By making strategic changes, you’ll be able to keep your organization afloat without huge sacrifices.
What are operational costs?
Operational, or operating, costs are the expenses associated with the day-to-day running of a business.
Operational costs include both fixed and variable expenses. As implied by their names, fixed costs stay the same every month, while variable costs change from month to month.
An example of a fixed cost is rent. No matter how much of your product you produce or sell, the rent payments for your office or warehouse facilities remain steady. It’s not dependent on the level of output.
A variable cost is an expense that changes depending on the level of production or output. If you hire more employees, your payroll costs will increase. And some expenses, like materials, fluctuate in price due to external factors.
Operational costs fall under the following categories:
Cost of Goods Sold (COGS) - All the direct costs associated with making a product or service.
Selling, General, and Administrative (SG&A) - Accounting expenses, corporate office overhead, advertising, marketing and sales expenses, rent and utilities…expenses that aren’t directly related to production.
Because operational expenses span so many categories, it’s easy for unnecessary spending to slip through the cracks. When you look closely and truly examine your budget, you might find unpleasant surprises.
3 steps to reduce operational costs
Operating costs are a necessary part of running a business, but there are ways you can rein it in. Let’s take a closer look at the three steps to take to reduce operational spend.
1. Create a solid expense policy – and stick to it
In order to maintain control over employee spending, whether it be for business travel, communication and events, office management, or other essential expenses, you must have an operational expense policy.
However, a good expense policy is not just a list of rules. It should give employees the freedom to spend money when appropriate, while setting clear limits.
An expense policy is only effective if it’s actually followed. Make your policy accessible and brief so employees read it, understand it, and apply it whenever they spend company money.
Be sure that:
It includes clear categories and budgets
The rules are fair and consistent for everyone
The wording is brief and to the point (no complicated financial jargon)
You update the policy regularly to reflect any company or regulatory changes
The policy complies with local and national laws
(If you need help building an expense policy, you can download our Expense Policy Template.)
2. Make the switch from manual to digital processes
There’s no way around it: digital and collaborative tools are critical to business success.
Not surprisingly, many finance professionals want (and need) appropriate technology to face budgetary challenges and reduce operational costs.
Here’s a recent example of the dangers of relying on manual processes: during Covid lockdowns, employees weren’t able to work at all if they couldn’t access the office and no digital tools were available to them. These companies learned the value of digital tools the hard way.
With digital tools, colleagues stay connected. They can collaborate any time - from anywhere.
Today, employees also need tools that eliminate monotonous, repetitive tasks in order to save time for more important things. Minimizing these types of activities can be extremely helpful from an efficiency standpoint.
Companies that are most concerned about their profitability will see a real opportunity in digital tools to better respond to negative external factors in the future.
So here’s how to make the switch:
Identify what’s not working: any broken processes have got to go. They’re efficiency killers, time killers, and money wasters. Find and fix anything that’s not working before considering implementing automated processes.
Assess your current tools: in times of increasingly irregular cash flow, having a clear idea of the tools that your company pays for becomes a good way to manage operational costs. There’s an almost infinite number of tools that can respond to a wide variety of problems.
Eliminate all paper: at this point, any paper-based system you’re using almost certainly has a digital counterpart. This will save time and money down the road, plus digital tools are much easier to scale if your company plans on growing in the future.
Consolidate tools: if you have any systems that are semi-automated, shop around and see what solutions exist that combine multiple tasks or programs. Paying for several tools when you could pay for just one is a waste of money. For example, if your company relies on paper expense reports but you’re using an online budget tracker, why not find one digital tool that does both – and more?
Weigh the effort: does this change involve multiple departments and teams? Or is it localized to one group? How long will it take to implement the new process? Any change takes time and effort; weigh whether the work of making a potential switch is worth it.
3. Track your costs in real time
Company finance leaders should be closely monitoring and optimizing company spend. A real-time budgeting tool takes the guesswork out of budget tracking.
With an overhead view of cash flow, the finance team and budget managers (such as directors or team managers) will have a complete understanding of the company’s finances. This is especially useful in a turbulent economy, such as the one we’re currently in. But why is the real time aspect necessary?
First, let’s examine what it means to track costs in real time.
Things move quickly nowadays, thanks to digitalization. Tracking cash flow should be no different. Waiting on someone to update the budget, fix mistakes, or input data into an Excel spreadsheet just won’t cut it.
And forget about quarterly budget updates– the business world moves way too fast. Quarterly updates mean that your information is already out of date by the time you need it. Same goes for email chains and relying on paper– these antiquated methods are a detriment to managing company costs.
You need to be able to see budget updates – all incomings and outgoings – as they happen. That way, you’ll always know where your finances stand.
The finance team and budget managers can make better decisions and optimize spend in a more targeted way. It’s much easier to stick to the budget when you can see what’s already been spent.
Here are our tips:
Avoid expense claims, and choose smart integrated cards instead
Ensure all your payment methods (including accounts payable) share data automatically, so you don’t need to go looking for updates
Have a budget dashboard that pulls all these payment methods together
Once you have an overview of your up-to-date finances, you’ll see where you can cut costs for maximum operational efficiency.
Here’s the best news: you can combine all three steps to reduce operational costs with one smart spend management tool.
Invest in a smart spend management tool
A digital all-in-one platform like Spendesk will help your company cut operational costs and manage spend more efficiently. With Spendesk, you can:
Enforce expense policy compliance with features like Play by the Rules which limits employee spending if they fail to produce a receipt within a predetermined amount of time.
Switch to a cloud-based spend management platform and take advantage of time-saving automation and even consolidate tools to save money.
Track your budget in real time to see where you’re wasting money and where you have more leeway.
A spend management tool brings together smart company cards, expenses, incoming invoices and budgets under one umbrella - all corporate expenses that the finance team needs to keep under control.
Want even more step-by-step instructions on how to reduce operational costs? Read our free ebook here: