Reducing Your Business Operating Costs
Entrepreneurs can reduce costs by spending a few minutes analyzing their expenses, this blog post will walk you through determining your business operating costs and then reducing some of them.
There are two types of expenses you have as a business owner, fixed, and variable expenses. A great way to stabilize the finances of your business is to increase your revenue and reduce your expenses. Reducing or eliminating variable expenses is the most recommended way to do this. Fixed expenses can be reduced as well, but may require a bit more sacrifice or changes to how your business operates.
Step 1: Gather Your Expenses
Let’s begin by gathering the expense amounts for rent, utilities, business subscriptions, and anything else you typically spend business money on (variable expenses).
Rent: Studio or space rental is a fixed monthly expense. As creatives, this expense tends to go up annually with the increase in rent.
In my own business, I set a rental limit for my business, a top rental price I could afford. Once the rent hit that amount, I knew I needed to adjust my plan. Some options for creatives are to move studios (which is a big project), find a renter or artist to share your space, find grant funding that can cover your costs.
Utilities: Determine how much you spend monthly on internet access, water, electricity, phone, or other utilities you pay with your business.
Subscriptions & Memberships: List out your business memberships, annual payments, and subscriptions along with the date these charges renew. Include the following items
- Domain and hosting or other website and app service costs
- Memberships to business services or art organizations
- Subscriptions to training, masterminds, and courses
- Marketing or digital subscriptions and applications
- Accounting software and fees
Variable Expenses: Variable expenses are the expenses that are not expected each month. Examples of these can include food and drink, shipping, supplies, inventory, and other costs. All businesses will have variable expenses.
Since variable expenses shift and change, you can list out variable expenses and determine an average you spend each month.
Step 2: Determine Monthly Costs
Add your operating costs (fixed expenses) to your variable to get a total business expense amount for each month.
Since some of my subscriptions are paid annually, I took the total amount due and divided it by 12 to determine how much I essential pay monthly. For example, I may pay $85 a year to be a member of an arts organization, I essentially pay approximately $7 a month to be a member.
Step 3: Reflect & Reduce
Now that you have your monthly operating costs, ask yourself (honestly and more importantly without judgment) if you are bringing in enough revenue each month to cover these costs. Money can be tough. It can also make you have feelings of guilt if you haven’t managed your finances well in the past, so suspending judgment is critical.
After a bit of (non-judgemental) reflection, begin to take action by prioritizing your operating cost list from the most priority to the least priority. Bringing in just enough money to cover your costs won’t build you a viable business. Ideally, you want to bring in more revenue than your current expenses.
When I went through this, I had 4 different marketing-based subscriptions on my list which included a membership to Mail Chimp, an additional service for newsletter conversions, access to licensed digital imagery for social content posting, and a digital app to help boost my SEO. After prioritizing my list of expenses, I determined I could (and needed) to remove three of these expenses that I thought I needed.
You can also use this technique to prioritize expenses that you value and want to make space for. I knew I had wanted to budget for a monthly artist group and by including this in my monthly operating expenses, I was able to plan ahead an include that cost.
Step 4: Future Preparation
Emergencies and unplanned expenses happen all of the time. By reducing your monthly operating cost, you can make sure that you build up some financial reserves for your business. Financial planning, monthly projections, and building small savings will be important so when something unexpected happens, you have the money in your bank account to ease through this business disruption.