According to the Small Business Administration, about half of all new businesses fail within the first five years. While most entrepreneurs focus on increasing sales to stave off collapse, lowering expenses is equally or perhaps more important when trying to achieve or maintain profitability.
Cutting business expenses requires some tough choices and trade-offs, but it doesn’t have to be a painful process, nor one that fundamentally alters your business plan. Many, many business owners before you have put to use these straightforward strategies to trim overhead, streamline operating expenses, and ultimately increase profitability.
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Why Business Profit Margin Matters
Online accounting software like Freshbooks is a great way to track your revenue and expenses, giving you insight into your business’s profit margin. But how do you find your ideal profit margin in the first place?
Many business owners have no idea what their profitability should be. That’s partly because profit margins come in multiple flavors and are often presented in overly complex ways. Which margin is the most relevant to your needs?
Intuit argues that small-business owners should pay most attention to net profit margin, which is the total sales over a particular time period, minus total expenses, divided by total revenue. Net margin illuminates sales and revenue trends, helping you uncover weaknesses that aren’t apparent from top-line numbers.
Variables that affect net profit margin can be controlled — or at least influenced — by business owners. Expenses are arguably the easiest of the three. While you can’t force your customers to spend more of their hard-earned money, you can trim unnecessary costs. The trick is knowing which costs are safe to cut, and by how much.
Here’s a look at some easy ways to expand your small business’s net profit margin by reducing common expenses without hampering mission-critical activities or crippling your company’s ability to grow.
Tips to Cut Overhead Expenses and Utilities
Many business owners see overhead expenses, such as rent, utilities, and office supplies, as basically nonnegotiable. Accordingly, they overlook them in favor of expenses that occupy more mental attention and, perhaps, more of the bottom line, such as labor and business services.
This is a mistake. Targeted overhead expense reductions, like passive energy-saving measures, can significantly increase productivity. Bolder moves, like encouraging or mandating telecommuting, can save even more.
1. Use a Programmable or Smart Thermostat
Heating and air conditioning aren’t negotiable expenses. Even small changes in your facility’s ambient temperature can adversely impact your customers’ comfort and employees’ productivity, threatening your top and bottom lines. But that doesn’t mean you can’t do everything in your power to save money on air conditioning.
Programmable and smart thermostats from companies like Honeywell can cut your climate control costs without compromising comfort. Use a programmable thermostat to customize your facility’s climate control schedule.
At a 9-to-5 office, that probably means increasing the heat or AC in the morning and dialing it back or turning it off completely in the evening and overnight. In larger facilities, you’ll need multizone thermostats or multiple thermostats to handle climate control needs on different floors or suites.
If your climate control needs are more complex or variable, or you doubt your ability to keep your programmable thermostat set at the right level, use a smart or learning thermostat instead. Smart thermostat technology remains relatively new, but its promise is tremendous.
Once installed, it learns your climate control preferences, gauges your building’s energy profile, and automatically adjusts itself to maintain a comfortable temperature as efficiently as possible.
According to Nest, the United States’ leading smart thermostat manufacturer, Nest users saved an average of 10% to 12% on heating and 15% on cooling — $131 to $145 per homeowner.
However, retail smart thermostats are appropriate only for homes and small commercial spaces. If you have a larger facility, you’ll need to invest in commercial climate control systems from companies such as 75F, which are significantly more expensive but potentially even more cost-effective.
2. Use Passive Energy-Saving Measures
Complement your programmable or smart thermostat with passive energy-saving measures that reduce your climate control and lighting systems’ workloads and carbon footprints:
- Double-Pane Windows. Double-pane windows are better insulators than old-school, single-pane windows. They’re expensive — anywhere from $385 to $850, on average, per Modernize. However, they last for many years, so they’re likely to pay for themselves and then some.
- Light-Blocking Blinds and Curtains. Use blackout curtains on south- and west-facing windows (in the Northern Hemisphere) to minimize light intrusion and passive heating on warm days. Throw open those curtains on cold days to maximize passive heating. On single- or double-wide windows, expect to pay about $20.
- Tight Seals. If you work in an older structure, caulk and weatherstrip common heat loss points: exterior window and door frames, utility line entries, and air vents. In a small space, a single weatherstripping roll (around $15 for a high-quality product) and one tube of caulk ($2 to $5) should do the trick.
- Solar Water Heater. If you’re responsible for your building’s mechanical appliances, invest in energy-efficient upgrades as your budget allows. Top of your list should be a solar water heater, which uses the power of the sun to heat your fresh water supply. A residential solar water heater costs between $2,000 and $5,500 with installation, according to Angie’s List. That’s likely sufficient for home offices and small commercial spaces, such as converted houses. If you occupy a larger space, you’ll need a heavier-duty heater. That’s likely to cost more, but the potential savings will be greater too.
Before you start an energy-saving project, get an energy-efficiency audit to identify the areas of greatest need, then determine whether any work qualifies for local, state, or federal energy-efficiency tax credits. Energy-sipping appliances, insulation, and small-scale renewable energy projects often do.
3. Power Down Nonessential Lights, Appliances, and Machinery After Hours
This is a painfully straightforward way to reduce your company’s electricity bill without affecting its operations. And once you and your team get in the habit of following through, it’s painfully easy too.
In a white-collar office, personal computer workstations comprise the single biggest nonessential energy suck, so make sure everyone powers theirs down before heading out. Shut off overhead and desk lights too, or leave instructions for building cleaning crews to do so when they’re done.
In restaurants and light industrial facilities that don’t run overnight, power off machinery and appliances not required for safety or storage — in other words, turn off the oven, not the freezer.
4. Reduce Paper Use
Like reducing energy and water usage, cutting down paper waste is good for your company’s bottom line and the environment. And there are myriad ways to do it, including:
- Print and copy double-sided by default
- Use secure electronic file exchange services such as Delivered Secure, rather than traditional courier services
- Reuse waste paper for scratch or notes
- Tighten margins and shrink fonts on printed reports
- Inform vendors and other sources of postal mail when employees no longer work for your company
- Take your company’s name off direct mailing lists wherever legally and practically possible
5. Align Plan Costs With Usage
Your company probably pays for a lot of essential services — telecommunications, cloud storage, bookkeeping, perhaps even legal support — via monthly or annual plans. At a minimum, you should review these plans once per year to determine whether they’re adequate for your needs.
If you’re paying for capacity that you don’t need or use regularly, you can likely downsize to a cheaper plan without hurting your business. Conversely, if you’re routinely exceeding the limits of a lower-capacity plan, you could be paying a lot to run over those limits, as some cellular carriers charge by the gigabyte for data overages.
Upsizing to a more generous, higher-capacity plan might result in a higher monthly fee, but it could save you hundreds in the long run.
6. Encourage Telecommuting
For millions of employers, telecommuting has tremendous cost-cutting potential. During the coronavirus pandemic of 2020 and 2021, many employers saw this firsthand.
According to data from Stanford University economist Nicholas Bloom, more than 40% of the U.S. workforce was working from home full-time by June 2020. That figure decreased as temporarily laid-off service workers returned to on-premise jobs and white-collar offices relaxed work-from-home requirements. But it’s clear that one of the long-lasting impacts of the pandemic will be higher rates of remote work.
Studies suggest telecommuting allowances and other types of flexible work arrangements have positive implications for employee morale and job satisfaction, both of which are positively correlated with productivity.
Telecommuting also directly impacts companies’ and employees’ bottom lines by:
- Reducing utility costs through lower electricity and water usage
- Reducing the amount of space required to house employees in a central location — for instance, by replacing dedicated desks with collaborative workstations that home-based employees can use when they visit the office
- Reducing travel and commuting costs for employees
- Reducing time lost to commuting and travel
If your business didn’t embrace telecommuting during the pandemic, or you’re unsure about whether to continue your pandemic-era remote work policies, look carefully at how these potential savings could positively impact your bottom line and your employees.
7. Use Space More Efficiently or Downsize Your Office
There’s a natural tension between efforts to maximize office space efficiency and ensuring employees can do their jobs comfortably. According to JLL, workplace studies typically peg the optimal amount of space per employee between 75 and 150 square feet, far lower than the typical 325-square-foot average.
At the same time, social distancing measures necessitated by the pandemic could prove difficult to undo, not least because workers do like their space. And widespread adoption of remote work and flexible scheduling could mean fewer employees working together simultaneously in shared spaces.
When your office lease is next up for renewal, carefully consider your space needs and consider downsizing to a smaller space or switching to a more flexible coworking space.
8. Make Sensible Health Care Changes
Most employee benefits packages include some form of health insurance coverage. Salaried employees expect employers to provide for their health care needs, and it’s probably the right thing to do anyway. Unfortunately, it’s also getting more expensive each year.
One reliable strategy for employers to reduce their share of employee health care costs without draconian measures such as unceremoniously canceling coverage is to offer tax-advantaged health savings accounts (HSAs), described in more detail by the IRS here. These accounts empower employees to take ownership of their health care choices while shifting risk and cost away from the employer.
When combined with high-deductible health insurance plans that cover catastrophic expenses, they may serve as suitable replacements for traditional health insurance plans whose generosity often comes at a substantial cost to employees and employers alike.
Pro tip: If you’re thinking about adding a health savings account, look into Lively. It’s simple and transparent, and you can get signed up in just five minutes.
Tips to Save on Business Equipment and Services
Just about every business uses some combination of physical business equipment — including technology like laptops and printers — and business services.
These can quickly get expensive, particularly when you buy new equipment or invest in pricey legacy systems that might not make sense for your business.
9. Use High-Tech Alternatives to Legacy Systems
How many legacy technologies your business uses depends on what your company does and how much you’ve invested in upgrades to date.
To some extent, your ability to address the problem of costly, underperforming legacy systems also depends on what your company does and how much it can afford to spend on modernization.
For example, established manufacturing and light industrial companies are often saddled with dozens of old machines and systems that they lack the capital or will to replace, even if doing so would reduce costs and boost productivity in the long run.
In the service industry, the drag from legacy systems isn’t always as clear-cut, but that doesn’t mean it’s not real. For instance, you can probably do away with your fax machine even if you still use it to send documents to old-fashioned vendors or state agencies.
10. Buy Gently Used
Nowhere in your company bylaws does it say that you must buy only shiny new equipment. So why not buy gently used items when it makes sense to do so?
Depending on what your company does, your used product buys might include:
- Office technology, such as printers and copiers
- Personal technology, such as refurbished smartphones, tablets, and laptops
- Vehicles, such as delivery vans and company cars
- Storage equipment, such as liquid vats and bins
- Assembly and packaging equipment
- Glassware and cutlery
You don’t need to sell or trade newer equipment for used alternatives right away. Just keep “buy used” in mind whenever it comes time to replace an aging piece of technology or machinery.
11. Pay Invoices Early
Many vendors offer small but meaningful discounts to clients who pay invoices ahead of schedule. For instance, it’s common for vendors to knock 2% off the invoice total when clients pay in full within 10 days, instead of the usual 30 days — an arrangement that’s typically represented as “2/10 net 30.”
As long as paying early doesn’t negatively impact your cash flow, it usually makes financial sense to do so. This is doubly true in a low-interest environment, where the cost of short-term borrowing to bridge any shortfall is unlikely to exceed the value of the discount.
12. Barter or Make In-Kind Exchanges
Thousands of years ago, the global economy — such as it was — depended on bartering. Today, most transactions use a currency backed by central banks, but that doesn’t mean nonmonetary exchange is completely obsolete.
The digital revolution has given rise to a committed cottage industry of barter facilitators such as Barter Business Unlimited. There are limits to what and how much you can barter, but it’s worth looking into these arrangements if cash is extremely tight or you think your products or services make valuable trades.
13. Leverage Social Media Advertising
According to Ad Espresso, the average U.S. Facebook ad’s cost per click (CPC) was $0.40 in the third quarter of 2020. That’s how much the ad buyer pays every time a Facebook user clicks on your ad — a signal that they’re interested in whatever you’re selling, if not quite ready to buy.
That’s much cheaper than legacy ad types like TV spots, which cost thousands of dollars and reach lots of passive viewers not interested in — or actively fast-forwarding through — what’s on screen during commercial breaks.
Meanwhile, organic social media marketing, fueled by free posts and tweets, costs nothing but your time and whatever labor’s needed to produce it. (In small enterprises, that labor might be your own.)
14. Encourage Word-of-Mouth Marketing
Organic social media conversation is but one form of word-of-mouth marketing, a cost-effective and potentially powerful form of outreach that essentially outsources part of your marketing department to your customers.
Word-of-mouth marketing comes in many flavors: referral programs that pay existing customers to refer new customers, college brand ambassador programs that pay young people to evangelize about their employers’ products on campus, social sharing communities on Pinterest and other digital media, and online review directories like Yelp.
Your company’s ideal word-of-mouth marketing strategy or strategies depend on its audience’s demographic makeup, buying habits, and response to messaging and sales efforts.
Tips to Increase Productivity and Reduce Labor Expenses
But it’s possible to increase employee productivity and reduce wage and benefit expenses without abusing employees or choking your company’s growth.
15. Disincentivize Procrastination and Encourage Effective Time Management
Time is money. That means wasted time is wasted money. Every minute you and your team spend procrastinating is a minute that’s not being spent on value-producing work.
Procrastination can be as innocuous as stopping by a coworker’s desk for a brief, nonwork chat, or as problematic as ducking out of the office for hours at a time to run personal errands.
If chronic procrastination is a problem at your office, figure out why it’s happening and take appropriate steps to address it — for example, by breaking overwhelming tasks into chunks.
Procrastination isn’t a catch-all culprit for office productivity woes. Some people are better at time management than others. Before singling out easily distracted or apparently inefficient employees for coaching or discipline, implement scalable systems that hold everyone accountable, such as time-tracking requirements (with the requisite software programs) and benchmark time frames for standardized task completion.
Sometimes, inefficiency doesn’t have a human cause at all. It might be the fault of poor communication systems or outmoded project management practices. Project management apps such as Basecamp and messaging tools such as Slack can go a long way toward streamlining functions that — although necessary to your company’s goals — don’t directly add value to the work.
16. Use Freelancers and Contract Labor for Noncore Work
Freelancers and independent contractors are easier to hire and cheaper to keep employed than traditional employees, provided you have an enforceable freelance contract to set expectations and mitigate risk on both sides of the relationship.
You aren’t expected to provide freelancers with health insurance benefits, pretax retirement accounts, family leave or paid time off, or other pricey benefits. You just need to pay them for completed work.
It’s important not to over-rely on freelancers and contractors because they’re likely to be less loyal and may have other obligations that distract from their work for your company. But for one-off projects and ongoing, noncore activities, they can serve as the secret sauce that keeps your company’s labor costs under control.
17. Invest in Your Employees and Long-Term Contractors
It costs more than you think to hire an employee, especially one with in-demand skills or specialized knowledge. According to Gallup, replacing an employee can cost anywhere from one-half to two times the employee’s annual salary. That’s $40,000 to $160,000 for an employee earning $80,000 per year.
With this in mind, it makes sense to do everything in your power to retain talented employees, even if it requires you to spend a bit more on salaries and benefits. If it keeps a high-potential worker in the fold for an extra year, upping that $80,000 salary to $85,000 or $90,000 is a bargain.
Tips for Smart Capital Investments
Sometimes, the best way to reduce business expenses in the long run is to make smart capital investments right now. Make sure your spending is as intelligent as you are by looking for opportunities to earn meaningful returns on credit card spending, limiting high-interest leverage, and managing location costs.
18. Reward Responsible Spending
As the old saying goes, you have to spend money to make money. Every dollar you invest in your business has a rate of return. But it can sometimes take years for that return to materialize. Why not pay yourself to wait?
If your credit is good enough, you can use a small-business credit card to reward responsible spending on inventory and equipment you’d purchase anyway. The best business cards reliably return 1.5% to 2% on spending, either in the form of cash back or miles that can be used toward free travel. In some cases, the rate of return is even better.
As long as you pay your balance in full each month and only use your card for purchases that you would have made anyway, you’ll come out ahead.
Keep in mind that some cash-back credit cards and travel credit cards carry annual fees, but you can offset those (and then some) with moderate to heavy use. Plus, using a business credit card builds credit, which comes in handy if you need larger loans or lines of credit down the road.
Pro tip: Did you know your business has a credit score that differs from your personal credit score? With Tillful, you can monitor your business’s financial health and make changes when needed.
19. Avoid Leverage and Interest Charges Wherever Possible
Judicious use of small-business credit cards notwithstanding, debt is generally your enemy. Before embracing small-business financing options that put you in hock to big banks or venture capitalists, tap your personal finances and friends-and-family networks for interest-free startup capital.
Every dollar of interest you pay is a dollar that won’t accrue to your bottom line.
20. Understand and Control Your Location Costs
Not all economies are created equal. Some cities and states are wonderful places to start and grow a business. Others aren’t so nice.
Collectively, location costs play a decisive role in sorting the former from the latter. The best way to reduce high location costs is to relocate to a lower-cost region, but that’s not always practical or even possible, especially if you’re an independent professional with deep family roots in your current backyard.
If moving isn’t an option, you need to understand your location costs, identify acceptable ranges for each major line item, and learn how to tweak the numbers in your favor:
- Commercial Rent. If your business occupies a space of its own, you have to pay rent on it. To save money in a rising rental market, try negotiating a lower rental rate on a longer-term lease. In the white-collar world, settling for Class B or C office space can significantly cut your rent costs relative to high-end Class A space, per 42Floors. If you have limited space needs, consider a usage-based coworking plan.
- Taxes. You have limited control over your local sales, income, and property taxes. However, you can educate yourself about local and state tax deductions and confirm your findings with a licensed tax professional.
- Labor Costs. If you run a low-margin, labor-intensive business such as a restaurant, labor is likely to be a huge cost consideration for you. Restaurant and retail operators must pay careful attention to local minimum wage and overtime regulations. Prevailing wages often matter — for instance, if the local minimum wage is $10 per hour, but the starting hourly wage at comparable restaurants is $12, you probably need to set your starting wage at the latter mark.
Other Ways to Save Money at Your Small Business
Great entrepreneurs tend to think outside the box, especially when it comes to cutting costs. You haven’t exhausted your money-saving options until you’ve considered measures like pooling resources with other businesses, negotiating things that aren’t typically seen as negotiable, and aggressively shopping for essential business services.
21. Pool Resources With Other Small Businesses
When it comes to buying supplies, inventory, and equipment, there’s strength in numbers. Many businesses reduce recurring costs by pooling resources with other small businesses in their trade areas, or with like-minded companies across wider geographies.
Depending on your company’s size and function, you can consider:
- Buying Groups. If your business is higher up in the supply chain, it’s likely to benefit from membership in a buying group. Buying groups negotiate better pricing and terms on behalf of their members, reducing collective outlays for inventory and supplies. In certain cases, they may help generate leads, boosting revenues as well. Ohio-based DPA Buying Group is a good example — it serves suppliers and distributors of janitorial supplies, safety equipment, packaging, and similar items.
- Trade Associations and Local Business Networks. Trade associations and local business networks can be industry-specific, such as the Texas Association of Manufacturers, or general — for example, the hundreds or thousands of local chambers of commerce that dot the United States. While they may or may not negotiate better external pricing and terms on behalf of their members, they do offer member-to-member discounts — increasing your financial incentive to buy local.
- Cooperatives. Cooperatives are especially common in the agriculture industry, where they provide small and mid-sized producers with valuable leverage in the market and a stake — through profit-sharing or rebates — in the enterprise’s success.
- Resource Libraries. Why buy when you can borrow? Tool lending libraries offer but one example of the power of shared resources — for a nominal fee, they give their members on-demand access to a professional-grade set of tools and equipment. That eliminates or greatly reduces the need to buy expensive pieces of equipment that you’ll probably only use once or twice, or perhaps once in a great while.
22. Remember Everything Is Negotiable
Unless it’s clearly spelled out in a binding contract, every listed price is negotiable. This is the case even if you don’t leverage a business buying group or trade association. Entrepreneurs tend to look out for each other, and simply mentioning that you own a business is often enough to get a discount.
In some cases, there’s an active quid pro quo at work, like referral or bulk discounts. For instance, when outfitting your new commercial suite or home office, ask the interior decorator if they offer discounts or bonuses for new client referrals. Likewise, if you’re buying 10 or 20 desks or laptops at once, you’ll likely qualify for a volume discount — but only if you ask.
23. Only Buy in Bulk When It Makes Sense
It sounds counterintuitive to advise against buying in bulk. However, anyone who’s made the mistake of purchasing the biggest tub of peanut butter at the warehouse club only to throw it away two years later has firsthand experience with the pitfalls of bulk buying.
Before committing to a bulk purchase, ask yourself a simple question: Does it make sense to buy this much of one thing? If your office goes through a lot of coffee each month, buy a 50-pound bag of whole beans.
On the other hand, if you’ve dramatically cut your paper usage in recent years, maybe it doesn’t make sense to buy hundreds of reams at a time to get a slightly better per-unit rate, especially if you don’t have a ready place to store it all. Everything in moderation.
24. Evaluate Employee Perks and Fringe Benefits on the Merits
In many industries, notably software, competition for talent is fierce. On top of juicy — and often unwise — equity packages and generous time-off allowances, many tech employers offer fabulous perks and fringe benefits in a constant arms race to attract ultra-qualified engineers and designers.
Some cliche perks like foosball tables and beanbag chairs in common areas are affordable in the long run but arguably amount to window dressing.
Others, such as free catered lunch every day, are more practical — employees have to eat, after all. However, over time, these perks can affect profitability. If you’re locked in a fierce battle to attract and retain talent, it’s probably better to offer higher starting pay, juicier performance bonuses, and better benefits packages — particularly health care and retirement accounts.
To boost morale and build camaraderie, substitute expensive perks for cheaper, more social ones. For instance, swap the wet bar in your office kitchen for a weekly happy hour where employees pay their own way, and ditch extravagant company picnics or holiday parties for optional excursions to free or low-cost attractions in your city.
25. Shop Around for Essential Services
Most business service providers operate in competitive industries. Use that to your advantage by shopping around for essential services — or simply threatening to shop around at the right time.
Many insurance companies offer hefty discounts or bonuses to customers who make the leap from competitors. Ditto for credit unions and banks, which use the promise of free bank accounts and bank account promotions to drive new business.
Cutting out that $10 to $15 monthly maintenance fee and then bagging $200 to $300 in free money simply for opening a new account sounds like a pretty good deal.
26. Limit Travel Expenses
Allowing your employees to telecommute reduces their transportation costs, keeping more money in their pockets — and yours, through lower utility costs and, potentially, smaller annual raises.
Limiting company-paid travel is an even better deal for your business. Sure, there’s no substitute for team-building at industry conventions, professional meetups, or annual parties. But that doesn’t mean you need to travel for every client meeting or satellite office check-in.
For larger meetings, virtual meeting systems with telepresence capabilities can easily replace office visits. And they’re not as expensive as you’d think: GoToMeeting‘s costliest small-business plan, which supports up to 250 users, costs $16 per month, or less than $200 per year — lower than the per-employee cost of a single business trip.
Every business is different. For example, you can’t limit travel expenses if your duties don’t require you to travel, and you can’t downsize your office space if you’re working out of a home office.
Still, it’s virtually certain that your business ledgers contain at least some financial fat to trim. Even if you think you’ve plucked all the low-hanging fruit, it may be worth your while to take another look. It won’t cost you anything and it could produce a significant payoff over time.