How to decrease operating costs

When margins feel tight, the first instinct is often to cut costs fast. Maybe sales have slowed, supplier prices are creeping up or you’re preparing for an uncertain quarter. Whatever the reason, most small business owners (SBOs) reach a point where they know they need to decrease operating costs—but they worry that doing so will lead to layoffs, burned-out teams or lower-quality products or services.

Here’s the good news: Reducing operating expenses doesn’t have to be drastic. When you know where your money goes and which costs truly drive value, you can make smarter, targeted decisions that protect both your customers and your company culture. 

Keep reading to learn how to break down your operating costs and take practical steps to reduce them—while freeing up capital you can reinvest in growth.

What you’ll learn:

• Reducing operating costs starts with understanding what they include—from fixed and variable expenses to your cost of goods sold (COGS).

• Conducting a simple cost audit using your recent profit and loss (P&L) statements can help you spot patterns and areas of overspending or wasteful spending.

• You can find practical ways to lower costs across your tech stack, physical space, workforce and nonessential spending—helping you reduce expenses without resorting to layoffs or disrupting service.

• Strategic, thoughtful adjustments can reduce operating costs without weakening the parts of your business that create the most value.

To reduce your operating costs, you first need to understand them and identify where they show up in your business. A simple way to think about it is:

Operating costs = COGS + Operating expenses (excluding items like interest and taxes)

Breaking out these costs into buckets helps you see where you have room to adjust. Start by understanding your fixed and variable costs.

Fixed and variable costs are the foundation of your operating expenses. If operational cost reduction is your goal, it helps to start by understanding what these costs are. That way, you can see which levers are easier to pull in the short term and which require a longer-term plan.

Here’s a breakdown of these two types of operating costs:

• Fixed costs: These are costs that stay relatively the same month to month, no matter how much you sell. Examples include rent, insurance, salaried wages and software licenses.

• Variable costs: These are costs that rise and fall with your business activity. Examples include hourly labor, shipping, packaging, raw materials and payment processing fees.

Variable costs often provide quicker, month-to-month savings, while fixed costs—like rent or long-term contracts—tend to unlock larger, longer-term savings when you renegotiate or restructure them.

Once you’ve broken out your expenses into these buckets, you can stop treating costs as a single line item and start targeting specific parts of your business model where efficiency gains can have the biggest impact.

COGS includes the direct costs of making your product or providing your service—such as materials, direct labor and manufacturing or fulfillment expenses. In other words, it captures the actual cost of creating what you sell, making it one of the most important levers for improving your profit margins.

A simple formula is:

COGS = Beginning inventory + Purchases during the period - Ending inventory

Even small improvements—like reducing waste, improving purchasing terms or consolidating suppliers—can meaningfully improve your margins.

Before you start cutting costs, a simple cost audit can help you move from a gut feeling to concrete data you can act on—showing you exactly where your money is going. Here are the steps to get started:

• Pull your recent profit and loss (P&L) statements to see your revenue and all major expense lines together.

• Group your expenses into categories.

• Flag expenses that stand out, such as those that are:

  • Higher than expected

  • Increasing month over month

  • Underused or no longer essential

Allow this snapshot to serve as your road map—it can help you decide where to automate, renegotiate or reduce spending with minimal disruption.

Software and digital tools can make your business more efficient—but they can also quietly inflate your operating costs if you’re not careful. A quick review of your tech stack can help you keep what’s working and cut what isn’t. Consider steps like:

• Auditing subscriptions: List every tool you’re paying for. Cancel those you no longer use and downgrade plans that are more than you need.

• Rightsizing your licenses: Check how many seats you’re actually using. Remove access for former employees and shift occasional users to shared or lower-cost roles where it makes sense.

• Consolidating tools: If multiple platforms handle similar functions—like chat, project management or file storage—choose the one that best fits your needs and retire the rest.

• Negotiating vendor contracts: Ask about discounts for annual billing, product bundles or longer-term commitments. If you’ve been a customer for a while, use that vendor relationship to your advantage.

These moves help you keep the efficiency benefits of technology while trimming recurring costs that don’t deliver enough value.

Physical space is often one of the highest operating costs—but it’s also one of the most overlooked. Instead of treating rent and utilities as fixed, look for ways to align your space with how your team actually works today. Here are a few ways to make your physical space more cost-efficient:

• Downsize office space. If your team doesn’t need to be in the office five days a week, consider a hybrid model with shared desks or hoteling. You may be able to move to a smaller space, sublease unused square footage or shift to flexible coworking options. Even a modest reduction in square footage can meaningfully lower monthly overhead.

• Negotiate rent. If your lease is up for renewal—or vacancy rates are high in your area—take some time to revisit the terms of your lease. You may be able to negotiate a lower rate, free months, tenant improvement credits or more flexible conditions. If moving is an option, comparing offers from multiple landlords can strengthen your position.

• Increase energy efficiency. Small upgrades can add up over time—think LED lighting, smart thermostats, motion sensors, better insulation or even simple policies like turning off equipment after hours. If your business operates in a larger space, consider an energy audit to identify waste and prioritize the highest-impact changes first.

Your team is central to how work gets done—and how efficiently. Instead of turning to layoffs, focus on helping employees do their best work, spend time on the right tasks and stay with your business longer.

Start with these simple steps:

• Automate repetitive tasks. Look for daily or weekly activities your team repeats—like invoicing, data entry, follow-up emails, scheduling or basic reporting. Tools such as workflow automation, templates and integrations between your CRM, accounting systems and project systems can reduce manual work. The goal isn’t to replace people but rather to free up their time for higher-value work like sales, service or strategy.

• Prioritize work culture to reduce turnover. Replacing employees is often expensive—recruiting, onboarding and ramp-up all carry real costs. Invest in clear career paths, regular feedback and recognition for strong performance. Make sure workloads are sustainable and that managers are equipped to support their teams. A healthy company culture can help you retain your best people, reduce hiring costs and maintain service quality.

• Outsource noncore functions. For work that’s important but not central to your value proposition, outsourcing can be more efficient than staffing in-house. The right partners can bring specialized expertise and flexible pricing, allowing you to scale support up or down without adding full-time salaries and benefits to your books.

Not every expense contributes equally to your bottom line. Some are nice-to-haves that made sense at one point but no longer deliver enough value—especially when you’re focused on reducing operating costs. Trimming these areas can free up meaningful cash without disrupting core operations. Consider these practical ways to cut nonessential spending:

• Use videoconferencing instead of business travel. In-person meetings can be valuable, but flights, hotels, meals and ground transportation add up quickly. When possible, replace routine check-ins, status meetings and vendor touchpoints with video calls. Save travel for high-impact moments—like major negotiations, conferences or key customer visits—where face-to-face interactions truly move the needle.

• Reduce expensive marketing. If you’re spending heavily on paid campaigns with unclear ROI, it may be time to rebalance. Shift more attention to organic channels—such as SEO, content, email and social—where a strong strategy can compound over time. At the same time, invest in customer retention efforts like loyalty programs, proactive outreach and better onboarding. Keeping existing customers engaged is often far more cost-effective than constantly searching for new ones.

• Limit employee spending. Create clear, simple guidelines for expenses like travel, meals, subscriptions and team events, so employees know what’s reasonable. Use spending limits, pre-approvals for larger purchases and periodic reviews of employee credit card statements to spot patterns—and make sure discretionary spending aligns with your current priorities and financial reality.

Reducing operating costs starts with seeing the full picture of how money moves through your business—not with across-the-board cuts. When you map your operating costs and run a simple cost audit, clear patterns often point to a few key categories—like tools, space, staffing and discretionary spend—where thoughtful adjustments can make a real difference. 

Tightening your tech stack and rightsizing your physical footprint can lower recurring expenses while keeping the systems and setup your team depends on. Rethinking how work gets done—instead of just how many people you employ—helps you manage labor-related costs through automation and selective outsourcing. And when you scale back nonessential travel or high-cost campaigns, you can create room in the budget for growth, reserves or strategic investments.

As you reshape your operating costs, how you pay for day-to-day expenses matters, too. A business credit card can help you centralize spending, track it by category and earn rewards on the purchases you continue to make. Compare Capital One Business cards to find an option that fits your business’s spending. The best part? You can see what you’re pre-approved for before applying—with no impact to your credit scores.