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26 Cost Cutting Ideas for Your Small Business to Reduce Expenses
According to Bloomberg, 8 out of 10 small businesses fail within the first 18 months. While most entrepreneurs focus on increasing sales, lowering expenses is equally important when trying to achieve or maintain profitability.
I’ll show you 26 straightforward ways to cut costs and increase the success of your small business.
This Metric Matters Most
Online accounting software is a great way to track your revenue and expenses, giving you insight into your business’s profit margin. But what is your ideal profit margin?
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, “calculated by taking the company’s total sales for a given time period, subtracting total expenses, and then dividing that figure 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.
Utilities and Overhead
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 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 multi-zone 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 (though 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 $270 to more than $600. 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, the cost can be as little as $15 to $20 per curtain (including rods).
• 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, the entire project can cost as little as $20 or $30, with material left over.
• 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 $8,000 and $10,000. 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, determine whether it qualifies for local, state, or federal energy-efficiency tax credits. Energy-sipping appliances, insulation, and small-scale renewable energy project 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 – for instance, some cellular carriers charge $10 or $15 per 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. Unfortunately, that potential remains largely untapped.
According to Global Workplace Analytics, 50% of the U.S. workforce holds a “telework-compatible job” and 80% to 90% of workers want to be able to telecommute at least some of the time – but only 20% to 25% telecommute at all. Still, the trend is unmistakable: Among non-self-employed workers, the share of workers who telecommute rose 103% between 2005 and 2014.
Studies suggest that 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
7. Use Space More Efficiently
Offices have been getting more efficient for years now. According to CCIM, the average new office lease (as of late 2012) had just 185 square feet of dedicated office space per worker. That’s down more than 20% from the beginning of the century. And the trend may accelerate: In a survey cited by CCIM, U.S. executives revealed plans to shrink their footprints to less than 100 square feet of dedicated office space per worker by 2018.
Mobile device usage, collaborative workstations, and multipurpose rooms (for example, conference rooms that double as break rooms) are all great news for rent-conscious business owners and executives. Redesigning your office around these and other space-efficient principles allows you to do more than less – and, even if you’re growing, forestall a move into a larger, costlier space.
8. Make Sensible Healthcare Changes
Most employee benefits packages include some form of healthcare coverage. Salaried employees expect employers to provide for their healthcare needs, and it’s probably the right thing to do anyway. Unfortunately, it’s also getting more expensive each year.
Paychex offers three strategies for employers to reduce their share of employee healthcare costs without draconian measures such as unceremoniously canceling coverage. Tax-advantaged health savings accounts (described in more detail by the IRS here) are especially useful: They empower employees to take ownership of their healthcare 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.
Equipment and Services
9. Use High-Tech Alternatives to Legacy Systems
Look around your facility. How many legacy technologies do you see? That’s likely to depend on what your company does, as is your ability to address the problem. 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, even if you still use it to send documents to old-fashioned vendors or state agencies, you can probably do away with your fax machine. Ditto for your landline phone service – a cloud-based phone system is likely cheaper and more reliable than its Ma Bell-era predecessor.
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 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
• Furniture
11. Pay Invoices Early
Many vendors offer small but meaningful discounts to clients that 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 non-monetary exchange is completely obsolete. The digital revolution has given rise to a committed cottage industry of barter facilitators such as Business Barter Unlimited and U-Exchange Business. 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
Traditional advertising is expensive – really expensive. According to Ad Age, a prime-time broadcast TV commercial’s average cost per 1,000 impressions (CPM, meaning the cost to serve the ad to 1,000 viewers) was $24.76 in 2014. That works out to about $112,000 per 30-second spot, on average. Needless to say, most small businesses can’t afford that kind of spend.
Paid social media advertising is much cheaper. For instance, according to Ad Espresso, the average U.S. Facebook ad’s CPM cost was $7.19 in the third quarter of 2016 – less than a third the cost of a prime-time TV ad. Social media ads are also less costly to produce – though it’s increasingly common to see slick video spots on your Facebook or Twitter feed, the most cost-effective social ads remain simple, dirt-cheap memes.
And you don’t have to pay for social media advertising at all. If you devote time and personnel to engaging your company’s fans and building your social following organically, you can reach thousands of current or prospective customers without spending a dime.
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 different 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, such as Yelp. Your company’s ideal word-of-mouth marketing strategy or strategies will depend on its audience’s demographic makeup, buying habits, and response to messaging and sales efforts.
Productivity and Human Resources
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, non-work-related 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 inter-organizational messaging tools such as Slack can go a long way toward streamlining functions that, while necessary to your company’s goals, don’t directly add value to its work.
16. Use Freelancers and Contract Labor for Non-core 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, pre-tax 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, as they’re likely to be less loyal and may have other relationships that distract from their work for your company. But for one-off projects and ongoing, non-core 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 the Center for American Progress, replacing a typical employee (not executives or physicians) costs about 20% of the employee’s annual salary. Other studies suggest that this estimate is conservative. Even if you take 20% at face value, that’s a lot of money – for an employee earning $75,000 per year, you’re looking at $15,000 in recruitment and onboarding costs.
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 $75,000 salary to $85,000 is a bargain.
Capital Investments
18. Reward Responsible Spending
As the old saying goes, you have to spend money to make money. Every dollar that 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.
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 that 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 cut your rent costs by anywhere from 10% to 50% (and sometimes more) relative to high-end Class "A" space. 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
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 (at best) once in a great while.
• Partner Networks: Some credit card issuers offer discounts with partner vendors. For instance, American Express OPEN gives American Express cardholders 5% off qualifying purchases with FedEx, Hertz, and other national brands.
22. Remember That 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 small business alliance or network such as American Express OPEN. 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 – often 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 you have to ask.
23. Only Buy in Bulk When It Makes Sense
It sounds counter-intuitive 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 without making so much as a dent, 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 ton 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 cliché 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, they 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 healthcare and retirement accounts).
To boost morale and build camaraderie, substitute expensive perks for cheaper, 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 the company-wide theater outings 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 powwows. And they’re not as expensive as you’d think: GoToMeeting‘s costliest plan, which supports up to 100 users, costs $49 per month, and there’s a free version for small teams. Even at $49 per month, you’re looking at less than $600 per year – likely lower than the per-employee cost of a single business trip.
Final Word
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 in time.
What are you doing to cut your company’s expenses and grow its bottom line?
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