When you calculate all of the costs associated with running your business, it can add up quickly. For your business to grow, you need to find ways to increase profitability – and doing so at the unit level can significantly improve the overall financial health of your business. This article is focused on how to lower business expenses, so you can protect your profit on every sale and generate enough to sustain your business with confidence. 

---

How to Lower Business Expenses Before They Get Out of Control 💰

When you’re starting and growing a business, it’s normal for costs and expenses to be a bit of a mess – because the startup process is messy. It’s trial and error. 

You’re figuring things out and that’s okay. 

But, once you’ve proven the business can work – that people want to buy what you’re selling – it’s time to shift your attention to sustainable profitability. 

That means getting organized: cleaning up your expenses, finding efficiencies, and cutting costs if needed to ensure every sale is profitable. 

After all, the lower your costs, the higher your profits. 

Immediate profitability might not matter to a Silicon Valley startup with big backers and plenty of cash to burn. 

But, as a small business owner at the local level, it’s essential that you find ways to increase profitability – something you can learn more about with my FREE Business Financial Health Checklist.

| FREE CHECKLIST: You Absolutely Need This Simple Business Financial Health Checklist

Sure, there are always unnecessary costs to cut as you manage the overall business. 

However, I recommend focusing your attention on the profitability of every sale – at the unit level of each individual transaction. 

It doesn’t matter if you’re selling products or services – if you’re losing money on every sale, you limit your ability to grow or even sustain your business. You need to protect your profit margin. 

| RELATED: How to Manage Business Money Starts with the Difference Between Sales & Profit

So, how do you make sure every sale is profitable? Focus on COGS – Cost of Goods Sold. 

Looking at Cost of Goods Sold in detail will help you learn how to lower business expenses and eventually increase your profitability. 

Profitability is a common financial growing pain for new small business owners – something you can learn to deal with in my Small Business Money Management Email Course.

| EMAIL COURSES: 4 Amazingly Simple Email Courses For Small Business Owners

The goal here is to get to a sustainable cost structure. 

But, stick with me here – we have to get into the weeds to find ways to cut costs in business.

The reason is quite simple: to make a meaningful change in your cost structure, you have to first isolate the variables that aren’t serving you. 

---

If You’re Looking For Ways to Cut Costs in Business, Start with Cost of Goods Sold

Regardless of your business model, whether you sell a product or service, to find your Cost of Goods Sold (COGS) you first need to name the total cost per unit (item sold). 

• If you make and sell candles, you’ll probably want to determine the cost per candle. 
• If you’re a physical therapist, you might choose every client appointment. 
• Choose a unit of measure that makes the most sense for your business. 

For this example, let’s consider a baker that makes cupcakes. 

So, what we need to do is calculate the total cost per cupcake. And, to do that, we need to identify the Fixed Costs and Variable Costs per cupcake.  

Wondering How To Lower Business Expenses? Consider Fixed Costs

Fixed Costs do not fluctuate – they are stable and do not change, no matter how much of a product or service is produced or provided. 

For our baker example, this might include things like the cost of baking equipment and tools or the cost of renting professional kitchen space. 

Those are specific, unchanging costs that have to be incurred in order to produce their cupcakes. 

Let’s say our baker buys a commercial kitchen mixer that costs $3,000 and the machine lasts about 8 years. 

To calculate fixed costs per cupcake, you spread the cost of that mixer over time. 

Let’s assume our baker works 4 days a week and only 48 weeks a year, because she understands the importance of a sustainable work pace. 

| RELATED: 1 Simple Strategy You Need To Boost Your Creative Energy

4 days a week x 48 weeks a year = 192

$3,000 / 8 years = $375 per year

$375 per year / 192 days per year = $0.55 per day  

So, the fixed cost of operating that machine is roughly $1.95 per a day’s worth of operations. 

If they produce 5 dozen (60) cupcakes each day while in operation, the fixed cost per unit is about $0.04 per cupcake driven by the mixer.

If she did the same math with all of her other supplies, like tools, bowls, an oven, etc., then that number gets bigger – you need to do the math separately, then add them up. 

For simplicity, let’s assume it all adds up to $1.25 in total fixed costs.  

Take a moment to make a list of your fixed costs – you don’t even have to do the math right now, just make a list of the expenses that might drive your fixed cost per unit. 

Wondering How To Lower Business Expenses? Consider Variable Costs

Variable Costs fluctuate based on the quantity produced or provided. 

In our bakery example, this might include things like flour, sugar, eggs, other ingredients.

To calculate variable costs per cupcake, you would take the prices of the ingredients, dividing them out by the proportion used in the recipe, getting a total and then dividing that by the number of cupcakes produced. 

Just for a quick example, let’s look at baking powder: $2.79 for 8 oz., which is roughly 48 teaspoons. 

Her recipe to make 60 cupcakes requires 5 teaspoons of baking powder. So: 

$2.79 / 48 teaspoons = $0.058 per teaspoon

$0.058 per teaspoon x 5 teaspoons = $0.29 per batch of 60 cupcakes

$0.29 per batch of 60 cupcakes / 60 cupcakes = $0.0048 per cupcake driven by baking powder

It seems small, but this is just for one ingredient. It all adds up quickly and every expense counts – reducing costs in business requires going to this level of detail. 

Without getting into the math of every single ingredient, let’s keep it simple and say the variable cost from all ingredients is $1.00 per cupcake. 

Labor Costs

To calculate variable costs, we also need to include any labor costs associated with production, which falls within variable costs. 

If our baker hired an assistant and paid them an hourly wage, you could: identify the total hours worked per day, divide that by the number of cupcakes produced per day, getting the total labor cost per cupcake. So, for example, let’s say it takes 6 hours to produce all 60 cupcakes: 

$15 per hour x 6 hours per day = $90 per day

$90 per day / 60 cupcakes produced per day = $1.50 per cupcake in labor cost.  

Keep in mind, if production changes and our baker can now make 90 cupcakes per day, labor cost per unit goes down to $1.00 per cupcake. 

If our baker was a solopreneur, managing this business on her own, you can skip labor costs completely. 

Adding the cost of her ingredients per cupcake and her total labor cost per cupcake, we get: 

$1.00 per cupcake from ingredients + $1.50 per cupcake in labor cost = $2.50 in total variable costs. 

Take a moment to make a list of your variable costs – again don’t rush to do the math right now, just make a list of everything that might drive your variable cost per unit. 

Do The Math

After you’ve named your fixed costs and variable costs, you’re ready to calculate COGS:

• Fixed cost per unit: $1.25
• Variable cost per unit (including labor costs per unit): $2.50
• Therefore, the total cost per unit for our baker is: $1.25 (fixed cost) + $2.50 (variable cost) = $3.75 per cupcake

Cost of Goods Sold is total cost per unit multiplied by the number of units sold (not the units produced). Let’s assume she sold 58 of 60 cupcakes: 

Cost of Goods Sold is: $3.75 (total cost per cupcake) x 58 (total cupcakes sold) = $217.50 

So, the Gross Profit for a day of operations is the total revenue generated by the sale of 58 cupcakes, less the COGS. Let’s assume every cupcake is $8.00: 

Revenue from the day: 58 cupcakes x $8.00 per cupcake = $464.00

Gross Profit is: $464.00 (revenue) – $217.50 (COGS) = $246.50

By the way, these are critical steps in making an Income Statement. From here, you can easily get to Net Income by subtracting operating expenses, interest, and taxes. 

| RELATED: How to Manage Small Business Finances And Spark Your Imagination

Reducing Costs in Business Requires Getting Into The Details

Keep in mind, if our baker has multiple types of products (E.g., cakes, cookies, etc.), each of those would have a different COGS and this whole thing gets much more complicated. 

Because of that, there’s a risk of being overwhelmed here – of avoiding all the math and trying to run your business with broader brush strokes. 

That’s a mistake – don’t leave money on the table. 

When you go to this level of detail, you can make sure every single sale is profitable and better sustain your ability to run your business long-term. 

Critically, the decisions you may need to make from here will require objectivity – one of three essential entrepreneurial skills you’ll learn about in my workbook:

| WORKBOOK: How to Run a Business Successfully with These 3 Essential Entrepreneurial Skills

---

How to Lower Business Expenses & Increase Profitability with a New Lens 👀

Alright, now that you have a basic understanding of the math, we can start to consider how to lower business expenses related to our Cost of Goods Sold. 

Think back to the math we walked through, by lowering COGS, you’ll increase your gross profit. 

As long as you keep other business expenses manageable, a strong Gross Profit Margin will ensure you’ve got a healthy and sustainable business model. 

So, how can you lower COGS for your products or services? 

Well, of course, the details will vary based on your business. So, rather than give you a list of ways to cut costs in business, I’m going to teach you how to think. 

That way, you can continually analyze your costs in the long-run. 

I believe the key to reducing costs in business is essentialism. 

As Greg McKeown describes in his masterful book, Essentialism: The Disciplined Pursuit of Less, “Essentialism is not about how to get more things done; it’s about how to get the right things done. It’s about making the wisest possible investment of your time and energy.”

Essentialism requires a shift in consciousness – in the way you think… 

For example: 

Shift From…	Shift To…
“I have to…”	“I choose to…”
“It’s all important…”	“Only a few things really matter…”
“I can do both…”	“I can do anything, but I can’t do everything…”

It’s the difference between taking one step in twenty directions or taking twenty steps in one direction. The idea is to pursue only what really matters and let go of the rest. 

Well, the same must be true of how you manage the costs of your products and/or services. 

Therefore, you need to learn how to lower business expenses through the lens of essentialism. 

McKeown explores 3 steps to practicing this philosophy

Critically, each step builds on the previous step:

How to Lower Business Expenses With Essentialism

In my view, you can use the same steps to increase profitability in your business. 

Steps…	Ways for Companies to Save Money…
Evaluate	Analyze every cost or expense in your business – and specifically anything driving your cost of goods sold. What value does each cost or expense provide?
Eliminate	Consider which of those costs or expenses truly add value to your product or service. What do your customers really care about? Eliminate non-value-added costs.
Execute	Establish regular routines to revisit and re-evaluate costs driving cost of goods sold and other business expenses. Pruning your expenses must be an ongoing effort.

This is what it looks like to sustain your business with confidence – it requires active controls that ensure profitability at the unit level. 

Essentialism offers a critical lens through which you can see the costs eating away at your profit margin.

In other words, the question of how to lower business expenses is answered by essentialism.

By the way, reducing costs in business also requires getting into the right mindset. 

| RELATED: How to Manage Money in Business Always Starts with a Mindset Boost

This is also a key lens we can cultivate together through 1:1 coaching.

Use Essentialism to Increase Profitability

Consider essentialism through the eyes of our baker friend in the examples earlier.

Perhaps, her customers love her frosting – it’s the thing they keep coming back to her for. They’re obsessed. Well, that element of her product is essential. 

So, while you could examine each ingredient for cost savings, it’s less risky to optimize expenses on something customers care less about. 

For example: 

• The brand of Kosher salt used in the batter – is there a cheaper brand she could use to achieve the same result? 
• The packaging – maybe there’s a less expensive option out there that’s better for the bottom line?  

Don’t just cut. First, pause to consider what matters through your customer’s eyes. 

---

How to Lower Business Expenses – Start Here 🤓

Reducing costs in business and trying to increase profitability are a normal part of managing a financially healthy business. 

But, it’s a problem when you view this activity through the lens of fear – of cutting because you feel like you have to or cutting in a way that sacrifices quality. 

You need to flip your cost-cutting activities into a more positive frame of mind. Instead of hunting around for ways to cut costs in business, try ensuring that every cost truly adds value to your end product. 

For example, if it meaningfully differentiates you from the competition and your customers care about it, then it might be something to keep and not cut. 

Name the costs worth protecting and use those as design constraints to work around.