How To Cut Costs In Small Business

If you run a small business, you’re probably feeling the pinch of rising costs. According to data from the MetLife and U.S. Chamber of Commerce Small Business Index from the close of 2024, 55 percent of small businesses point to inflation as their biggest challenge. Whether you’re concerned about paying higher wages to retain your top employees or budgeting for an increase in your office lease, now is the time to take a close look at every expense on your list and develop ideas for reducing it – or eliminating it altogether.

How to evaluate your business spending

Every business is different. If you run a graphic design firm with three employees who work remotely, your costs are going to look a lot different than a spice company with twenty-five employees and a manufacturing facility, for example. Regardless of what your business does, though, you’re going to want to put every expense under the microscope on a regular basis to build a budget.

Categorizing essential versus nonessential costs

The essential costs are the ones that you have to pay or you’re going to wind up no longer being a business: the salaries for your employees, the invoices from your suppliers (who won’t keep supplying you if your bill remains past due), the internet bill and the monthly rent for your office.

Look at the outgoing cash from your account over the past six months and ask yourself which items are must-haves. Everything else will fall under the non-essential category. Do your employees have to travel each week to see clients? It’s possible that can change. Do you have to plan a summer party for your team? It may help morale, but life would certainly go on without it.

Understanding essential versus nonessential costs may sound easy, but it will require some careful deliberation. For example, advertising your business’ services may sound nonessential, but what would happen if you pulled the plug on all your social media promotion? If you don’t have overwhelmingly loyal customers, it could mean you’ll pull the plug on your revenue too.

Fixed versus variable costs

As you’re reviewing each of your expenses, take note of which are fixed costs that stay the same every month and which are variable.

While your fixed costs are helpful for budgeting, it’s easy to start spending on autopilot. Don’t assume that you always have to pay that same hefty tab for your ren. For example, is there a space in another part of town where you can slice your overhead by 30 percent?

When it comes to your variable expenses, take note of the months when they skyrocket. Was it worth it to pay for flights for four employees to attend that conference? Did doubling your advertising spend for a holiday push deliver the return you expected?

Small business cost-saving strategies

There are things small businesses can do to help save costs.

Reward employees for lower expenses

Instead of having the CFO handle all the expense management, empower your team members to be part of the solution. If your company spends a sizable amount of money on travel, there are travel management solutions like Navan that offer rewards to employees who book more affordable reservations.

If an employee opts for a hotel room priced $100 less than the average rate, for example, you might offer them the ability to rack up points to put toward their own personal travel.

Avoid unnecessary banking fees

Every business needs a checking account to manage its cashflow, but take a close look at the fees you’re paying to manage your money.

How much are your ACH fees when you have to pay your vendors and employees? With some business checking accounts, you can easily wind up paying upwards of $25 per month just for paying invoices. Pay close attention to wire transfer fees too. These can easily cost up to $50. No matter who you’re paying, try to find the most affordable route to get them the money.

If your bank’s fee structure seems excessive, be sure to shop around for a new home for your business’ money.

Embrace digital payment solutions

PayPal, Stripe and Square are just a few of the convenient digital options for accepting digital payments from customers. You’ll save processing time and reduce costs of dealing with checks, and you may even be able to give your customers more flexibility to spend more.

For example, Paypal offers a built-in installment plan option that lets customers create longer payment windows. The upside for businesses is simple: Those customers spend around 30 percent more, according to PayPal.

Analyze your storage needs – both physical and digital

If your business deals with physical products, it’s smart to consider how much inventory you need on hand at all times. If you’ve been sitting on a mountain of unsold products, you’re paying a lot of money for the storage space to keep all those goods.

When it comes to digital storage, think about how much you’re paying to preserve all your files. You may be able to reduce your digital storage capacity and lower your annual subscription costs for holding on to all those online folders.

Get group power

You’re not the only small business looking to shrink your overhead. Are there other businesses that might want to rent out part of your office space? By subletting a portion of your space, you can offset some of your biggest monthly expense. Can you look for a group purchasing organization to score discounts on office supplies, food or other expenses? By joining forces with other similar businesses, you can gain extra bargaining power with suppliers.

Take advantage of every tax credit available

One of the best ways to cut costs is to figure out a way to cut your tax bill. Around the country, loads of places are looking to be very welcoming to businesses. In Kentucky, for example, businesses can take advantage of anywhere between $3,500 and $25,000 of tax credits just for hiring new employees and investing in equipment. Consult with a tax professional to learn the nuances of your state and local tax code to figure out if you can make some other small operational changes to qualify for additional savings.

Invest in long-term customer loyalty

Past customer research estimates that it costs around five times more money to acquire a new customer than it does to retain an existing customer. Rather than constantly spending money to attract a wider audience, focus your efforts on giving the audience who already knows your business a reason to return again and again. You’ll reduce some of your marketing expenses, and if you deliver a top-notch customer experience, your loyal customers will become your biggest ambassadors that spread the word about your business on their own.

Bottom line

When you’re trying to turn a small business into something bigger, every dollar counts. As you review the money going out of your business bank account, it’s critical to ask yourself one key question: What is this expense getting us in return? The adage of “it takes money to make money” has plenty of truth, so this isn’t about trying to eliminate all your costs. Instead, it’s about trying to make sure that all of your spending is paving a pathway to growing your company.

Frequently asked questions

• How many small businesses pay for office spaces?
  

  Only 25 percent of small companies rent physical office spaces, according to a survey from Clarify Capital.

  Since rent can be one of a company’s biggest line items, it’s important to think about the setup of your team to determine if it’s worth it to pay for a work environment. Don’t just cut it to save money, though. Ask your employees whether they get more value out of in-person meetings. Those physical spaces can make a big difference when it comes to building team morale.

• Can AI help small businesses cut costs?
  

  It’s possible that AI can help save money. Time is money, and AI is helping plenty of businesses save a lot of time. According to a survey from the Small Business & Entrepreneurship Council, small business owners who are using AI tools report a median savings of 13 employee hours per week.

  If you’re a small business owner, think about what you could have employees do during those extra hours.