15 Best Ways to Reduce Operational Costs (& Keep Them Down)

Kevin Cyriac Tom

on Mar 13, 2025

QUICK SUMMARY

Discover simple, effective ways to cut costs without sacrificing efficiency! In this guide, I breakdown smart tips on streamlining operations, reducing waste, and making the most of your resources.

TABLE OF CONTENTS What Are Operational Costs Strategies to Reduce Costs

Key Takeaways

Cut Costs, Not Quality: When looking to cut costs, ensure you're picking things that won't impact productivity or employee satisfaction. If you do, it could have negative consequences.

Embrace Technology : Look into technology when seeking to reduce costs. Automation software can help lower expenses while streamlining operations.

Look to Outside Resources: Freelancers and contractors can contribute substantially to your business, generally for a lower cost.

Identify Redundancies : Are there services you're not using anymore? Unwanted subscriptions? Make sure you utilize everything you purchase to get the most bang for your buck.

Reducing operational costs is a must for CFOs looking to boost profits and stay competitive. The key, however, is finding savings without hurting quality or efficiency—easier said than done, right?

With years in financial operations, I’ve learned what actually works to keep costs low. I get the challenges you’re facing—tight budgets, economic shifts, and constant pressure. That’s why this guide is packed with real, practical tips that fit your world.

Here, you’ll find simple, effective ways to trim expenses without disrupting your business. From vendor contracts to automation, these strategies will help you save money. So, let's get started on making every dollar count!

Understanding Operational Costs

Operational costs are expenses associated with the day-to-day maintenance and running of your business. It’s calculated using the following formula:

Operating Costs = Cost of Goods Sold + Operating Expense

Cost of Goods Sold (COGs): Account for the direct expenses tied to producing the goods and services.
Operating Expenses (OpEx): Are in-direct expenses generated by normal business operations.

Here’s a quick rundown of the different types of COGs and operating expenses you may experience:

Cost of Goods Sold	Operating Expense
Labor directly tied to production	- Sales and marketing - Payroll/payroll taxes - Insurance
Direct materials needed for the production of goods and services	- Material costs - Office supplies
Taxes on the production facilities	- Rent - Utilities - Legal costs
Transportation costs	- Freight in/Freight out costs - Other delivery fees

Businesses can’t run without covering their operational costs but they tend to eat into profits if they’re not managed properly. Most leaders need to keep tabs on both COGS and operating expenses to measure what’s impacting profitability more.

Usually, they reach the same conclusion: cost reduction = more revenue.

But even the best ideas can’t guarantee better profit margins. Cutting business expenses is an easier and more surefire way to increase profits—which is why managers prefer this approach. However, there’s a flipside.

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Let’s take this example: An ecommerce business cut down on paid marketing spend. This will definitely reduce its operational costs significantly, but by reducing ad spend, it’s also risking reduced visitors to the website, which can impact sales in the future.

Additionally, it can also decrease employee productivity if not implemented properly. Trimming the workforce means fewer employees need to take up more responsibility, impacting overall satisfaction and operation workflow in the long run. Ultimately, this solution only offers short-term gains.

This is why it’s important to implement cost cuts with a well-thought-out strategy that focuses on the right areas, rather than just to simply shave off a few dollars.

15 Strategies to Reduce Operational Costs

You didn’t think I'd present you with the problem, and not supply solutions, did you? Here are 15 strategies you can implement now to ensure you’re effectively reducing operational costs over time:

1. Embrace Technology

New technology focuses on improving efficiency and productivity, but it can also reduce operational costs if implemented properly. Of the lot, I’ve identified two systems that can directly cut down costs:

Automation:

Automation tools simplify mundane and repetitive tasks so employees can focus on revenue-generating tasks like customer experience, research, and product development.

For example, accounting automation tools can save small businesses time and labor by automatically completing financial processes. Automating accounting entries also reduces manual errors, providing more accurate data around cash flow, revenue, expenses, etc.

Take a look at some of my top accounting software options to get a feel for how they can impact your business:

Cloud Computing:

Apart from unfettered access to business data and operations from anywhere, cloud computing also significantly cuts down on IT maintenance and upgrades for the following two reasons:

Since they are usually managed by a third-party, it’s the provider’s responsibility to ensure continued service.
They use a pay-as-you-go pricing model so businesses only pay for the resources that they consume.

Though they have been around for years, businesses haven’t fully realized the benefits of using the cloud-based solutions, including cost savings. With over half of business leaders saying they’re not seeing returns from their investment, there’s still a long way to go in realizing these benefits.

2. Outsource Business Functions

Outsourcing secondary business functions can save on operational costs while increasing productivity and customer satisfaction. It lets businesses access high-quality talent and opportunity without the added administrative and employment expenditures associated with a full-time employee.

Moreover, third-party services will provide end-to-end operational support. For example, a managed service will improve the overall customer support experience with the best tools, processes, and feedback. Ultimately, it’ll work as an extension to your business, focused on helping you achieve your business goals.

3. Focus on Smart Hiring Decisions

If outsourcing isn’t your jam, you can cut down on operational costs by hiring the right talent.

Hire employees who can juggle responsibilities: Smaller businesses usually expect employees to wear multiple hats. Recognizing these expectations from the hiring process lets you focus on hiring talent with multiple skills. For example, you can hire an in-house web designer to also help with occasional graphic design tasks.
Hiring contractors, consultants, and freelancers: Bringing on part-time help is another great way to cut down on operational expenses. You get high-quality work without the administrative burden of keeping someone on the payroll. However, finding the right fit can take time.

Keep in mind that there is a limit to the responsibilities contractors and freelancers can manage. For example, contractors might not be the right people for sales but they can manage marketing tasks like web development, copywriting, SEO, and graphic design.

4. Negotiate with Vendors

Regularly checking vendor contracts helps ensure you’re getting the most bang for your buck. As a result, you’re likely to find some unfavorable pricing and contract terms that can be renegotiated, including payment terms, services, discounts, and delivery.

You can bring vendor contracts more in your favor by looking at:

Larger order volumes so you can tap into volume discounts. This works for both raw materials and software. For example, you can get a better price for your ERP for a longer or more comprehensive subscription.
Longer contract terms give vendors the confidence that you’re looking for a long-term commitment. It encourages vendors to offer their services and products at more competitive rates.
Updated contract terms might also be beneficial. For example, you can negotiate faster delivery timelines to ensure you can churn out products or services more quickly. Overall, increasing your revenue by reducing your time to market.

5. Implement Remote and Hybrid Work Plans

Office space on average costs businesses between 5-15% of the total operational expense. Moving to a hybrid or fully-remote work environment can significantly cut down on these costs.

However, a recent Los Angeles Times article found that a fully-remote WFH-approach is known to reduce employee productivity. Instead, I’d recommend a hybrid work setup. That way, you get the best of both worlds: cutting down on operational expenses while minimizing impact on productivity and revenue.

But don’t write off a fully-remote setup either. Companies like Buffer found great success with its full-remote work environment. In fact, they took it a step further by introducing a 4-day work week.

Buffer introduces a 4-day work week policy screenshot — *Buffer introduces a 4-day work week policy (Source:* *LinkedIn*)

6. Review Employee Benefits

Employee benefit costs average about 30% of the employee’s total compensation. This is a huge chunk of the overall cost-to-company (CTC) per employee. However, you can’t cut employee benefits willy-nilly or you may make some employees very unhappy. Instead, take a systematic approach to ensure your employees aren’t rubbed the wrong way.

First, start by reviewing employee benefits usage. Identify the most popular benefits and the most expensive benefits. Next, speak to your employees. Make sure you know which benefits they like and why.

Author's Tip

Some benefits like health insurance should never be on the chopping block. But be ready to negotiate new terms like reducing service levels to reduce the financial burden on the company.

7. Take Advantage of Early Payment Discounts

Vendors are known to offer discounts to businesses that pay their invoices on time, especially small vendors to whom every invoice contributes to keeping the lights on.

If your vendor offers discounts, start paying off your invoices early to leverage it. If they don’t offer any early payment discounts, add a clause during contract renegotiation. They’ll most likely agree if you’re a long-term customer with a good credit history.

8. Identify and Eliminate Redundancies

Map out your employee’s day-to-day to identify the specific areas where they’re being wasteful. For example, are employees taking business trips for conversations that can be done over a video call? Are they using software efficiently?

Also, speak to the employees themselves to identify any inefficiencies that can be smoothed out to reduce operational costs and offer them an incentive to encourage feedback.

9. Take a Sustainable Outlook

There are many sustainable initiatives that can help the planet. But since we’re looking at solutions that directly cut down on business costs, I’ve drilled it down to two practices:

Go paperless: When you also consider the cost of using the paper, the total cost can easily double or triple cost of the paper itself. Businesses can completely eliminate this cost by going digital. Instead, store documents and files on the cloud. They’ll be more easily accessible, take up less space, and maintenance is cheaper.
Become energy-efficient: Business owners can invest in technology like solar panels to generate power in offices, factories, warehouses, etc. It’ll save you money over time. Moreover, you may be eligible for state or local tax credits for implementing sustainable practices.

10. Stop Paying for Unused Subscriptions

Though forgotten subscriptions might not be a big problem, businesses may be paying more than necessary or expected (i.e. paying for extra seats or services that they’re not using in their current accounting software stack).

Businesses can opt to downgrade their service to a more appropriate plan, negotiate a better deal, or move to the free version. Another viable solution is consolidating vendor services. For example, instead of using Zoom for video meetings and Google Drive for files, you could consider using Microsoft Teams that offers both.

11. Use Data-Driven Insights

Cutting costs isn’t throwing ideas at the wall and hoping they stick (well, you can do that but it isn't recommended). A better approach is using existing cost data to identify and optimize expenses. However, it may be complex if your business is large with many moving parts.

This is where an ERP can help. It connects individual business processes to provide insights into the entire landscape from sales and marketing to inventory and delivery. ERPs also offer predictive analytics tools to assess any future requirements in supply chain, maintenance, workforce, etc.

12. Don’t Be Afraid to Shop Around

We’ve already covered this earlier under vendor contracts and waste reduction. But looking for alternatives shouldn’t be restricted to a yearly review.

Humans are creatures of habit. We like to stick to what’s working right now. But sometimes there’s better options out there — new technologies, cheaper options, better deals, etc. Keep an eye out for cheaper alternatives to what you are using currently. You can either move to the new product, or use the move to negotiate a better deal with your current provider.

13. Set Clear Expense Policies

If your company reimburses employee expenses, consider setting clear guidelines on daily card limits, travel expenses, and reporting formats. Clear boundaries will ensure employees don’t misuse the company credit card while cutting down on any unnecessary expenses.

14. Streamline Customer Interactions

Customers still prefer human interactions while dealing with a business. But delivering human experiences can be expensive.

Businesses can reduce these expenses by qualifying customer queries. They can use technology like AI chatbots to answer simple questions while pushing more complex requirements to a customer service rep.

Another approach is investing in setting up a help-center with detailed documentation to resolve various scenarios. Customers can use it to find solutions themselves, while reps can use it to resolve any issues.

15. Continually Analyze and Adjust

You’ve put everything in place to reduce your operational costs. But this doesn’t mean everything is perfect. There may be areas and processes that require optimization to reduce costs even further.

To pinpoint these areas, you need to continuously monitor existing and new processes, compare with historical data, and make adjustments to get the most out of your updates. Implementing an ERP can help you with that. It offers modules to measure your business processes and identify excess spend.

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