Operating costs — also known as operating expenses, recurring expenses, overhead or operating margins — are the day-to-day costs of operating a business. Another term for these expenses is operating margin as it is the difference between a business' operating costs and its gross income that constitutes its profit. Operating expenses are classified as either fixed or variable and the greater the number of fixed expenses, the easier it is to establish a monthly business budget. Especially in times where economic reports and discretionary consumer spending are less favorable, business specialists recommend establishing a budget and interventions to reduce operating costs in order to increase profits. Reexamination of expenses, evaluation of business methods and good old-fashioned frugality are among the recommendations to reduce operating costs.
The first step to take to reduce operating costs is to review operating expenses one by one and determine whether or not less expensive options are available. The business space leased for the company under review should be assessed to determine if smaller quarters could be utilized or a less expensive rental amount negotiated when the current lease is over. Depending upon the business type, less space may be required if less inventory is kept onsite. Establishing a shipping agreement with a delivery company to deliver supplies on an as-needed basis may actually reduce operating costs by reducing required space and the man-hours previously spent in accounting for this inventory.
Business experts also recommend evaluating utility expenses to reduce operating costs. Review of the company's telephone service against those of competitors might locate less expensive calling or telephone plans. Most electric companies offer an averaged monthly cost that allows a business to count its electrical bill as a fixed expense. Energy savings tips such as turning off unused lights, installing less expensive fluorescent lighting, changing the thermostat by a few degrees or eliminating unnecessary electrical appliances or machines are more ways to reduce operating costs.
Decreasing office supply expenses and paper usage constitute other steps to take in reducing operating costs. Documents formerly filed in filing cabinets can now be electronically scanned and saved for later retrieval online or from a DVD. Many customer and vendor invoices and bills are now accepted via email, as are many types of customer correspondence. All of these interventions save time, space, postage, supply costs and man-hours.
Another method used to reduce operating costs is evaluating the business banking use. Depending upon the specific business and its financial needs, consideration of other banking options may reduce operating costs, particularly if the bank charges a monthly fee for the business account. Competing banks and particularly credit unions often offer business-banking services at no cost. Utilizing online bill pay can also save operating costs by eliminating check charges and postage.