Reducing Your Business Operating Costs
There are two types of expenses you have as a business owner, fixed, and variable expenses. A great way to grow 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, however, can be reduced as well. Although this is a bit more difficult, entrepreneurs can reduce these costs by spending a few minutes analyzing their fixed expenses. The exercise explained in this blog post will also help artists and business owners in calculating their annual business operating costs.
Gather Your Expenses
Let’s begin by gathering the expense amounts for rent, utilities, and business subscriptions.
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 determined a top rental price I could afford. Once the rent hit that amount, I knew I needed to adjust my plan. Options for creatives is 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 costs
- Memberships to business services or art organizations
- Subscriptions to training, masterminds, and courses
- Marketing or digital subscriptions and applications
- Accounting software
Determine Monthly Costs
Since some of the subscriptions are paid annually, I took the total amount due and divided 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.
Add up your monthly costs for each of these fixed expenses by including monthly rent, utilities and subscriptions to determine your monthly operating cost.
Now that you have your monthly operating costs, ask yourself (honestly and without judgment) if you are bringing in enough revenue each month to cover these costs. 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.
Reducing your Expenses
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.
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 two 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.
During this operating cost exercise, we did not include variable expenses. We determined the base operational costs that your business spends each month to exist.
Variable expenses are the expenses that are not expected each month. Examples of these can include food and drink, shipping, supplies and inventory, and other costs. All businesses will have variable expenses. Emergencies and unplanned expenses happen all of the time, so this is where financial planning, monthly projections, and building small savings will be important.
Since variable expenses shift and change, you can list out variable expenses and determine an average you spend each month. Add your operating costs (fixed expenses) to your variable to get a total business expense amount.